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GFI Informatique: Promising but with a precarious capital structure

Publication Date: 06 Dec 2018 - By Permjit Singh By Permjit Singh
Actionable
Differentiated

Equity Fundamental Equity EU ex-UK USA UK Technology

GFI Informatique – established in 1992 and listed on the Paris stock exchange – is a France-based outfit but with a footprint in the Americas and across Europe in IT service solutions landscape. The company supports multiple business sectors: retail, financial services, transport, energy, public sector, and telecoms.

Services offered include outsourcing, digital transformation, integration, e-commerce, installation, software publishing, and consulting.

International business accounted for almost 30% of revenue in the first half of 2018, and without compromising margin (which actually increased to 4.7% of revenue in the first half of 2018).  Restructuring and increased debt costs however pulled net profit 10% below that in the previous period.

Nearly €220m was spent in the first half of the year on acquisitions, necessitating a restructuring of group debt including new syndicated, bridging, and revolving credit loans. The company’s gearing is very high with debt at 104% of equity at 30 June 2018 (versus 43% at 31 December, 2017). Equity is itself dangerously low after allowing for massive goodwill and other intangibles.

The group’s capital structure has become precarious because it is now over-loaded with debt. To add to the financial risk, massive goodwill could be written down with a downturn in the economy and performance of the companies acquired. Against this backdrop, the group intends to pursue a transformation of its business, improve operating margin, and expand internationally.

Commenting on Q3 2018, Vincent Rouaix, Chairman and CEO of GFI Informatique, said: "Our company has, as expected and in a favourable environment, enjoyed sustained business and recorded a good third quarter, both in France and abroad. Most of the growth comes from acquisitions.”

Based on annualised 2018 figures:

For: Very good revenue generation, positive interest cover (2.4x)

Against: low EPS (€0.22), poor dividend yield, current ratio at the lower boundary of safety, massive goodwill and intangibles resulting in massive negative equity and negative tangible book value, high price:BV (over 2x), very high gearing (over 100% of equity), poor RoE (2.1%), very high PE ratio (47x), share price almost at its 52W high, slow debtor collection

Conclusion: GFI’s meagre return to shareholders is just not commensurate with the risk they face.  

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.

Permjit Singh

 

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