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Neurones: Why French IT services provider remains a sound long-term play

Publication Date: 15 Oct 2018 - By Manika Premsingh By Manika Premsingh
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Equity Fundamental Equity UK EU ex-UK Technology

As an investor buying shares of the French IT services provider Neurones (EPA: NRO), 2018 has probably thus far been a year of second guessing the decision. The company’s stock price has seen a linear trend decline over the past year, closing at EUR 22.5 on 12 October 2018. 

This is a significant decline of 22.4% from the highest level (of EUR 29) seen in the past 12 months, and a 13% decline from even the average level (of EUR 25.8) over the period. Half-year results released in September this year have likely done little to assuage investor jitters, since they are nothing to write home about. 

For the half year ending 30 June 2018, the company has actually witnessed deterioration in its financials. Revenues are slightly down to EUR 243m from EUR 245m during H1, FY17. The application of new accounting methods is estimated to have shaved off EUR 9m from the company’s revenues, which has artificially lowered them from the previous year.

However, this offers only part explanation. There is also a small drop in operating profit to EUR 20.6m from EUR 21.1m during the previous year, despite the company’s press release itself stating that operating profits have not been impacted by the change.

Further, the company forecasts 2018 full-year revenues to be ‘more than’ EUR 490m Even if we assume that the revenue will be EUR 500m for the year, this represents only 3.1% increase from the previous year. In contrast, revenue increases have been at 8.6%, 11.9% and 12.5% in the three years prior. 

This indicates, that both the current trends and near-term outlook give investors little to be optimistic about for now. However, there could be long-term rewards for more patient investors. 

Consider this: Over the past five years (2012-2017), the average share price has grown by 41.3% annually, indicating that despite likely underwhelming performance in 2018, the company is worth watching out for. 

With usage of information technology poised to only grow overtime, Neurones is in a good position to increase its business in both IT services as well as consulting overtime. The French IT services market is valued at EUR 546.43m (at the time of writing) and is expected to grow at a rate of 3.6% in 2018.

Having a capability of taking on projects of various sizes, Neurones, is the 11th largest consulting firm in its segment, has the ability to grow its business overtime. 

The business model of the company is also a stable one. 48% of the company’s revenues comprise of recurrent services, while only 16% is from consulting.

This potentially, allows for greater security on revenue generation than a more cyclically driven pure consulting business would allow. Neurones can therefore be a good long term bet, despite its recent financial performance. 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Manika Premsingh

 

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