Aubay: Concerns over return on equity but moving in right direction

Aubay (EPA:AUB) is listed on Euronext with a market capitalisation of just around €415m based on a current share price of €31.55. It is a well-established (20 years) company which says its revenue is solely based on the expertise and added-value of its consultants.

Fee-generating consultants make up 93% of its workforce (including around 14% working as subcontractors). Its focus has been and will continue to be the eurozone, split to-date roughly 50:50 in terms of revenue generation between France and other eurozone countries.

Aubay does not wish to be regarded as a re-seller, operate IT systems, or software company. The company says it “intervenes at the same time as a consulting and technology services provider over the entire lifecycle of applications.

"This means that Aubay may be a supplier of innovations, an accelerator of IT scale up, a know-how supplier, Agile coach, a designer of digital solutions, and a supplier of competencies and expertise."

It regards itself in essence as “the most important French digital services company created after 1998.” 

Aubay is acquisitive (30 acquisitions), but says it balances this with organic growth when the economy dictates that route over acquisitions. 

Its core competency is banking but is seeking to balance this with telecom sector expertise. Aubay focuses on major companies as clients, and its top 10 customers generate 57% of revenue.

It also has a consistent record of revenue growth (see above)

For instance, revenue growth and margin in 2017 was surpassed thanks to a customer base undergoing digital investment, adapting to regulatory compliance, and rationalising legacy systems. 

At Q3 2018, Aubay says it is on track to reach its 2018 revenue target of €400m [rising from €292m at end-September 2018]. In light of Aubay’s “excellent” half-yearly results and strong prospects, its board approved an interim dividend of €0.27, up on the interim dividend of €0.23 paid the previous year.

For: it has good revenue generation in relation to its share price, very strong interest cover, low gearing. 

Against: an uninspiring return on equity of 6% (2017), very poor tangible assets (not surprising since its assets are its consultants), low dividend yield (2.3% for 2017).

Conclusion: Aubay has capitalised on robust demand for its services as the financial sector gets to grips with regulatory compliance, digital transformation, and upgrading legacy systems. There is a risk this demand will either plateau as the transformation comes to an end, or will continue to remain robust as new rules and advances in digital services. Aubay is a growth company for now and with little financial risk, however the rewards to equity are on the low side.