Actia Group Neutral, TP 1.52 (upside +13.4%)

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1 Market data Stock price (closing 04/10/2011) 1,34 Shares nb diluted 20,1 Market value (K ) 26,9 Net Debt adjusted 62,7 EV (mls) 89,6 ISIN Mnémo Market Analysts Actia Group Neutral, TP 1.52 (upside +13.4%) FR ATI Eurolist C Pierre SCHANG Vitalie ERENIA Guy COHEN analyse@nfinance.fr e 2012e 2013e Revenues 246,8 286,6 285,2 311,2 %growth 10,3% 16,1% -0,5% 9,1% EBIT 3,6 12,3 9,1 16,0 %margin 1,5% 4,3% 3,2% 5,2% Net profit -3,2 5,7 3,9 8,4 %margin -1,3% 2,0% 1,4% 2,7% e 2012e 2013e EV/Sales 0,36 0,31 0,31 0,28 EV/EBITDA 7,5 4,3 4,9 3,5 EV/EBIT 25,0 7,3 9,7 5,5 PE -8,3 4,7 6,9 3,2 Calendar: November 15 th 2011: Q3 sales Holdings: LP2C 45.7% Salvepar 15.3% Sidmia International 5.8% SGPFEC 5.2% Scipia 3.5% Pech et Calmels 0.6% Public 23.9% Actia Group is covered by NFinance since October 5th 2011 October, 05th 2011 Actia Group is a France-based company manufacturing equipments for electronic diagnosis, vehicles repairing and testing, on-board systems for commercial, industrial, agricultural and military vehicles, and telecommunication equipments. The company s business is organized into two segments: automotive and telecom, the former accounting for 87% of total revenues in Actia Group has offices in 15 countries across Europe, Asia, Africa and the Americas and employs over 2,600 staff. International sales represent 52% of revenues. Latest press release commentary H1 sales were up by +21.5% to 143.5M. Activity in the Automotive division (89% of group s sales) was high up by +23.4% to 127.6M thanks to the ramp up of new products and new contracts delivering. The telecom branch was up by +9.1% (Q1-11.8%, Q %) lifted up by 1) the delivering of earth stations following the delays in 2010 and 2) a favorable base effect. The EBIT was up to 7.2M vs -1.0M thanks to the the increasing profitability in both business lines. The Automotive branch reached an EBIT margin at 6.0% vs 3.0% due to operational charges optimization (offshoring of work force to emerging countries) and the topline growth while the telecom branch strongly reduced operational losses by nearly reaching the breakeven point. The net profit reached 3.4M vs -4.1M while the net debt was down from 72M to 69M. The management confirmed the guidance to realize 285M of sales in 2011 up by +15% with a increasing profitability. Analysis: The last press release was very encouraging and confirmed the triggers we have identified: Ramp up of the telecom division topline and profitability. After 2 very difficult years the management is currently restructuring the division and expect a positive EBIT in 2011 vs -5.6M in The telecom branch is valorized around 8.5M e in our estimation and could be sold by the group in the near future as the management estimates that the division is not anymore strategic. Nonetheless we estimate that the automotive division topline is at risk in the current economic conditions especially for trucks, special vehicles and the garage equipments. Valuation At 9.7xEV/EBIT2012e, we initiate Actia Group with a Neutral rating and a 12 months target price at 1.52 per share (DCF 1.47 WACC 4.9% terminal growth rate +1%, Peers 1.58 ) taking into account that the low visibility and the cyclical businesses operated by the group put downside risks over the stock price. 1

2 Summary Summary...p3 Group presentation..p4 Group story.. p8 Investment highlights.....p9 Risks... p10 Valuation p12 Peers comparison p12 Discounted cash flows model.p12 Financial overview. p13 2

3 Summary Actia Group is highly exposed to the automotive markets and benefit despite it benefits of a less cyclical activity than most companies in the car industry. This specificity is a small protection in the current economic conditions and does not immunize the group s business against a crisis downturn. In 2009 the automotive fell by -13.8% especially penalized by embedded systems for trucks, special vehicles and garage equipments. This point coupled with a still convalescent telecom division implies for investors to be particularly cautious. Despite very strong H1 results we estimate that the lack of visibility combined with quite high valuation ratios do not let enough upside to the stock price. We therefore initiate Actia Group with a Neutral rating and a 12 months target price at 1.52 per share. 3

4 Group presentation The group s activity includes 2 divisions: 1) Automotive and 2) Telecommunication. A - Automotive (86.6% of group s sales) The Automotive division is focused on 3 main markets: 1. The automotive diagnosis and technical inspections 2. Embedded systems 3. Services 1 - Automotive diagnosis (32.4% of 2010 group s sales) This division designs, develops, produces, distributes and warrants the maintenance of the electronic and technical diagnosis systems for rolling vehicles. Diagnosis computer Communication card Initially designed for car manufacturers, they are used in the engineering services, on assembly lines and by distributors. The group also develops multibranded products dedicated to fast reparation networks and independent garage owners. Multi-diag LD 4

5 The group also markets a multibranded range of diagnosis systems for trucks called Multi-Diag Trucks. These systems include a computer, a communication card and system software. In addition the group develops, produces and markets devices dedicated to technical inspections and vehicles repairing. It also offers systems able to test brakes, headlights and gas emissions. Gas analyzer Geometry Actia Group generally signs multiyear (between 5 and 7 years) contracts with car manufacturers. The group now has around 15 major clients as PSA, Mercedes, BMW, Fiat, SGM, Renault Trucks, Manitou For multibranded products, the group works with clients like Feu Vert, Midas and Euromaster. 2 - Embedded systems (41.2% of 2010 group s sales) Historically the group is a leader in multiplexing solutions for cars and trucks. Actia Group develops a range offer for all vehicles produced in small and mid quantities. These products are dedicated to security, vehicle control and user comfort matters. To optimize all embedded systems the group has designed the Multibus solution which gives a wide range of electronic modules. Actia group also offers the Smartach solution which is designed for trucks and bus in order to respect the European legislation relating to driving time. 5

6 The group also markets modules pluggable to the Smartach solution as GPS, calculators and memories enabling clients to efficiently manage their fleet. Main clients are commercial and industrial car manufacturers for small and mid quantities. Only 4 competitors are bigger than Actia group: Continental, Stoneridge, Blaupunkt and Rey. The others are local competitors with no international footprint which is becoming a major competitive advantage. The business is highly correlated to the trucks market. 3 - Services (12.9% of 2010 group s sales) Actia Group offers services in designing, testing and integrating electronic cards. This business line comes directly from the know-how internally developed in maintaining Actia s own products. B - Telecom (13.9% of 2010 group s sales) The Telecom division is split between 3 business lines: 1. Satcom 2. Broadcast 3. Systems Satcom (7.3% of 2010 group s sales) ACTIA SODIELEC : Satcom Business Unit develops its activity in three strategic domains: Amplifiers and RF Sub-systems for integrators Turn-key Earth Stations for civil and governmental operators RM&C systems for integrators and operators Earth station Amplifiers These products are proposed to military clients as well as to civilian costumers. Broadcast (1.1% of 2010 group s sales) In this business line, the group designs and supplies equipments dedicated to Broadcast signals for radio and TV programs (analogical and digital) as well as associated devises. This business is favored by the current deployment of the TNT network. Systems (5.5% of 2010 group s sales) 6

7 Actia supplies products and systems dedicated to the transmission and the control of secured telecom networks through 4 activities: Transmission equipments Energy : systems focused on the control of the energy network Integration Aeronautic : on-board passenger phone With these products the group offers a wide range of services from the maintenance to the training. 7

8 Group history 1986: Allied Signal acquired Bendix Electronics. Allied sold the Special products department which in turn becomes ACTIA company. 1988: Acquisition of the production unit of Alcyon. 1989: The group created the telecom branch and Sodielec company, becoming Actielec Group in : Merger of Mors S.A. and Actielec S.A. into Actielec Technologies. IPO on the Paris stock exchange. 2002: The electronics division merged with the automotive division. 2008: The company s name is changed to Actia Group, with two subsidiaries: Actia Automotive and Actia Sodielec. 2009: the group suffered from the economic crisis with a topline decreasing -14.4% to 223.7M. 8

9 Investment Highlights Favorable outlook for 2011 Actia expects to register revenue growth in the range of 4%-6% during 2011, fueled by the increased activity in the telecom segment and in the embedded systems sub-segment. The company says it will further implement the costcutting policy in order to find a sufficient level of profitability for the sustainability of activities, while meeting customer requirements. Short-term development plans include: Automotive segment: Diagnosis for 2011 Actia expects to maintain the same level of activity as in 2010, by strengthening its presence on Asian markets and benefiting from the software market evolution. Actia also plans to renew the agreement with Fiat Group for servicing the after-sales networks. Moreover, the company expects to benefit from the new standard regarding technical control of two-wheeled vehicles. Embedded systems the company plans to employ at full capacity the products launched in 2010, which in turn should boost sales of agricultural equipment and industrial vehicles. Fleet systems and services launch of new sub-segment products and services in Services the company plans to make additional investments in order to increase the productivity and return to historical revenue figures. High potential of the Multi diag product due to the obligation for independent garage owners to adapt themselves to new regulations. Emerging countries are setting regulations driving markets toward more technical inspections obligations Telecommunication segment: Satcom dinard Actia expects a good level of sales for 2011, as well as several tenders and pending bids from NATO. Broadcast, Railway, Transport (BRT) the group expects to have a number of tenders during Also it expects to enjoy the results of its marketing efforts for rail products and systems for wireless ads. One of the expected challenges in this sub-segment would be the low manufacturing cost policy implementation. Energy, Aerospace, Defence (EAD) during 2011, the company plans to focus on new product development. Infrastructure, Networking, Telecom (IRT) Actia s main goal in this area is maintaining the market share with a few product developments. Encouraging 2011 developments Actia has reported several favorable developments since the start of the year: Its solutions have been chosen by Tata Motors for in-factory electric testing of the Nano car, allegedly the cheapest car in the world. Given the Nano s mass market focus in one of the most populous countries in the world (and also where the purchasing power remains low, making this cheap vehicle very attractive), production numbers of the vehicle are likely to be large, which may 9

10 help Actia entrench within Tata s operations, expanding the company s revenues from this customer. Actia reported in June that Euromaster España approved the Multi-Diag pocket device for its franchised network of approximately 180 centers across the country. This deal may pave the way for other Euromaster territories, strengthening Actia s market presence and revenues. Importantly, during H Actia for the first time released a solution for the medical sector, expanding its sector reach beyond automotive, military and telecommunications. This could allow the company branch out into the healthcare sector, diversifying its revenue base and expanding revenues. Offshoring strategy The group is engaged in an offshoring strategy hiring engineers in low cost countries as Tunisia. During H1 11, personal charges were down by -0.7% while the employees number were up by +9%. It will give upside to group s margins over the next years. Investment Risks Cyclical business exposed to the car industry Despite garage owners and repairing entities still need testing equipments in crisis period we estimate that 51% of the group s turnover is more correlated to the car fleet currently in circulation instead of car sales. It implies a lower cyclicity than average company in the car industry. This is a positive aspect of the Actia Group as the upcoming economic condition could less favorable for the whole car industry over the next quarters. Telecom segment risks Over the last years the telecom branch have profited from the TNT development in France. At the end of 2011, 95% of the French territory will be covered. It implies that the deployment emission/reception equipment in France will be ended soon. There is now a question mark over what growth driver the branch will activate over 2012/2013. The international expansion could be an opportunity but it will be more expensive for Actia Group and will put more pressure on margins. Secondly, the management does not hide its willingness to spin off the division. We estimate that a sound valuation of the branch would be around 8.5M e. As the upcoming economic conditions will be difficult over the next quarters we estimate that there is a material risk that the management decides to sell the division at a discounted price in order to reduce the indebtedness and secure the group s margins. Location risks The company does not state the amount of revenue registered in each country where it does business, but at the end of 2010, 857 employees worked in Tunisia, accounting for approximately one-third of Actia total workforce. Since the number of employees working in Tunisia is significant, the recent unrest in the country may represent a substantial threat to Actia s 10

11 business. The company reports the Tunisian business profitability did not suffer in 2010 from the political unrest. However the company acknowledged that it had difficulties with the supply of certain components and expected the difficulties to continue during the first half of 2011 until the opening of new production sites in Asia. Moreover, in late 2010 and early 2011, Actia s sites were closed for four days and then later adapted to various activity restraining conditions which resulted in production disruption for several weeks with less than 70% capacity realization. The company expects to recoup the setbacks by the end of 2011, provided that the political unrest wanes. Supplies disruption Another risk to Actia s business emerged after the March 2011 Japanese earthquake, which may have impacted the market for supplies and components. Actia reports that it has no clear assessment on this matter to date. There is a significant risk to notice supplies disruption over the next quarters especially in the electronic components. Revenue concentration Actia reports the revenue from the top ten customers represented 27% of total turnover during In case the company loses one (or more) of these customers, it will suffer a significant revenue decline and fail to achieve its development goals. As a result, it may fail to meet our expectations, on which we based our valuation. 11

12 Valuation We use 2 methods (Discounted cash flows and Peer comparison) to value Actia Group. We get a target price of 1.52 per share: Methods Stock price DCF 50% 1,47 Peers 50% 1,58 Average 1,52 PEERS COMPARISON We use 6 peers and 4 multiples to compute a stock price at 1.58 /share: 1) From a median of 0.36xEV/Sales for the Peers we find a stock price at 2.02 per share 2) Taking the EV/EBITDA median multiple we get a stock price at ) The EV/EBIT peers multiple let us calculate a stock price at ) On the basis of a PE peers multiple at 6.7x we calculate a stock price at 1.90 Peers EV/Sales EV/EBIDTA EV/EBIT PE BARCO 0,47 3,8 6,6 6,4 LACROIX SA 0,29 3,9 5,8 6,5 MICROWAVE VISION 0,46 3,9 4,5 6,2 Neways Electronics Int.NV 0,28 5,3 7,6 9,6 NEXEYA 0,36 4,5 4,8 7,0 NV Nederlandsche App 0,36 4,5 17,7 7,0 Median 0,36 4,2 6,18 6,7 DISCOUNTED CASH FLOWS: Based on this DCF, we get a stock price at 1.47 per share (WACC 4.9%, terminal growth rate +1%) e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Revenues 246,8 286,6 285,2 311,2 327,9 339,8 350,7 360,6 367,5 372,7 377,1 revenue growth % 10,3% 16,1% -0,5% 9,1% 5,3% 3,6% 3,2% 2,8% 1,9% 1,4% 1,2% EBIT 3,6 12,3 9,1 16,0 19,2 20,5 21,3 21,7 20,8 19,2 17,0 margin % 1,5% 4,3% 3,2% 5,2% 5,8% 6,0% 6,1% 6,0% 5,7% 5,1% 4,5% Net profit -3,2 5,7 3,9 8,4 10,6 11,6 12,3 12,8 12,5 11,6 10,4 Dep & Amort 8,4 8,6 8,9 9,2 9,5 9,8 10,1 10,4 10,7 11,1 11,4 CapEx -10,0-11,5-11,8-12,2-12,6-12,9-13,3-13,7-14,1-14,6-15,0 WCR change 3,0 3,5 0,3-4,9-3,2-2,3-2,1-1,9-1,3-1,0-0,8 Free Cash Flow -1,9 6,3 1,2 0,4 4,3 6,2 7,0 7,6 7,8 7,1 6,0 Discounted cash flow 0,0 6,3 1,1 0,4 3,7 5,1 5,5 5,7 5,5 4,8 3,9 Discounted terminal value 48,2 12

13 Financial overview Profit and Loss account: P&L Group's sales 217,6 222,1 250,6 261,3 223,7 246,8 %var 2,1% 12,8% 4,2% -14,4% 10,3% AUTOMOTIVE 177,5 184,8 211,8 219,4 189,1 213,7 %var 4,2% 14,6% 3,6% -13,8% 13,0% - diagnosis 98,5 101,1 88,8 80,0 - embeded systems 88,4 91,2 77,0 101,7 - services 24,4 26,7 22,8 31,8 TELECOM 40,0 37,5 40,0 42,9 35,9 33,8 %var -6,4% 6,6% 7,4% -16,3% -6,0% - Satcom 10,7 16,2 20,8 18,1 - Broadcast 11,6 8,8 2,9 2,8 - telecom systems 17,0 17,3 11,4 12,3 OTHER 0,1-0,2 0,3 4,1 3,6 3,1 Éliminations 0,0 0,0 4,0-5,1-4,9-3,7 EBITDA 9,7 13,9 22,2 19,3 9,0 12,0 %margin 4,5% 6,3% 8,9% 7,4% 4,0% 4,9% EBIT 2,1 6,1 13,5 11,8 0,4 3,6 %margin 0,9% 2,7% 5,4% 4,5% 0,2% 1,5% AUTOMOTIVE 2,2 7,7 13,9 10,7 3,9 9,5 %margin 1,2% 4,1% 6,6% 4,9% 2,1% 4,4% TELECOM 0,1-0,5 2,0 1,7-2,7-5,6 %margin 0,3% -1,2% 5,0% 4,0% -7,5% -16,6% OTHER -0,2-1,1-0,1-1,3-1,3-1,1 Net Profit -1,6 1,6 5,6 4,6-2,4-3, has been the worst year for Actia Group in the decade. As 84% of group s sales were realized in the Automotive division, the group experienced during the 2008/2009 crisis a correlation with the car industry especially in the embedded systems branch. At the same time the Telecom division suffered from the bankruptcy of a client in the broadcast branch. Satcom benefited from the deployment of TNT antennas in France. In 2010, the automotive division recovered its 2007 topline level thanks to the strong growth in the embedded systems division. Basically we estimate that the Telecom division is no more strategic for the group. Margins are historically higher and less volatile in the automotive division than in the telecom division. This is due to the recurrence and the niche strategy in the automotive division. Indeed the embedded systems branch is focused on small series which are not interesting for big operators like SIEMENS. Moreover the diagnosis branch is very recurrent and is more correlated to the car fleet in circulation than new cars sold each year. In 2010, the telecom division had a negative EBIT about -5.6M mainly due to discrepancies in deliveries. The group s EBIT margin bottomed in 2009 for the reasons explained before. 13

14 Balance Sheet Balanc Sheet in M Cash and cash equivalents Inventory and work-in-process Trade and other receivables Other current assets 11 7 Total current assets Goodwill Development costs Total property, plant and equipment Other non-current assets Total assets Current financial liabilities Trade and other payables Long-term debt and other financial liabilities Other non-current liabilities Equity Trade and other receivables accounted for 30% of total assets as of December 31, 2010, and amounted to 74M, increasing by 6% during the year. Inventory and work-in-process accounted for 27% of total assets at the end of 2010, amounting to 6M, while cash amounted to 18M (7% of total assets). The balance sheet structure did not change significantly since the end of Debt financed 37% of total assets, at 90M as of December 31, 2010, with approximately two-thirds being short-term. The share of debt financing did not change since the previous year end. Equity financed 23% of total assets as of December 31, 2010, down from 25% a year earlier. Net working capital amounted to 27M as of December 31, 2010, decreasing by 9% since the previous year end due to an increase in trade payables. A brief analysis of Actia s current assets and liabilities shows that the company s cash conversion cycle has been lengthening as payables turnover has declined, while inventories turnover has lengthened. In other words, Actia has been keeping more stocks per unit of sales (or has been keeping stocks for longer) and has been paying its liabilities increasingly sooner than before. In 2010, turnover of inventories and receivables improved somewhat, but the turnover of payables also grew, offsetting these improvements. These trends are cash flow-negative, and investors are encouraged to watch the evolution of the company s balance sheet liquidity closely. 14

15 Cash Flow statement Cash Flows M Net profit -1,6 1,6 5,6 4,6-2,4-3,2 Amortization 8,0 8,7 10,0 9,7 9,3 11,3 Other -8,3-6,3-1,8-5,6 7,1-3,0 Working capital change 2,3 2,1 4,6 2,2 4,7 3,0 CFO 0,4 6,1 18,3 10,8 18,8 8,1 Capex -6,5-2,2-7,5-11,5-9,6-9,6 Free Cash Flows -6,2 0,3 10,7-0,8 8,8-1,9 Actia generated positive operating cash flows since 2006 despite losses registered in 2009 and 2010, due to both positive changes in net working capital and non-cash items. Cash outflows for investing activities were mostly represented by purchases of fixed assets. Cash flows from financing activities mostly consist of borrowings and repayments. During 2010, the company repaid 15 million of loans and borrowed another 19 million. 15

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