Micropole BUY, TP 1.57 (upside +24.6%)

Micropole BUY, TP 1.57 (upside +24.6%) July, the 19th 2011 Market data Stock price (closing 18/07/2011) 1,26 Shares nb diluted (M) 27,1 Market value (M ) 34,1 Net Debt adj (M ) -4,4 EV (M ) 29,7 Mnemo ISIN Market Analyst MUN FR0000077570 Eurolist C Pierre Schang pierre@nfinance.fr 01-53-05-92-87 2010 2011e 2012e 2013e Revenues 102,5 122,4 144,0 152,4 %growth 8,9% 19,4% 17,7% 5,8% EBIT 5,1 7,3 8,9 9,7 %margin 5,0% 6,0% 6,2% 6,4% Net profit 4,2 4,9 6,0 6,5 %margin 4,1% 4,0% 4,2% 4,3% 2010 2011e 2012e 2013e EV/Sales 0,29 0,24 0,17 0,13 EV/EBIT 5,8 4,1 2,8 2,0 PE 8,1 7,0 5,7 5,2 Calendar: 26 th of July 2011: Q2 sales 20 th of September 2011: H1 results 8 th of November 2011: Q3 sales 7 th of February 2011: Q4 sales Holdings: M.Puyau 10.4% M.Letoffé 9.0% Neminvest 6.8% FCPI Science Innovation 4.4% FCPI CA AM 3.5% Public 65.9% Micropole is covered by NFinance since 19 th of July 2011 Micropole Group is a company involved in Business Intelligence, ERP, CRM, e-business, WEB/IT and training consulting services. The group was created in 1987 by M.Puyau and M.Letoffé as a consulting and IT integration company. Micropole currently operates subsidiaries in France, Switzerland, Belgium and China with a work force counting more than 1300 employees. The group has recently acquired 2 companies in Belgium (Oasis) and in China (Easted) confirming the management s international expansion strategy. Thanks to organic growth and build up strategy the group s turnover was up from 69.1M in 2005 to 102.5M in 2010 (CAGR +8.2%) with an average EBIT margin at 3%. Today around 50% of group s sales come from the Business Intelligence division and the management targets to hire 450 new employees in 2011/2012. Latest press releases commentary 2010 annual sales were up +8.8% (+6.8%org) at 102.5M and an EBIT margin at 5.0% vs 3.2%. Group s sales have mainly benefited from 1) the management s anticipation of the sector recovery and the 2) the innovation strategy. The activity was boosted by dynamic business intelligence, Web/IT and training (+10%) divisions sales while the ERP branch suffered from a difficult H1. Group s EBIT margin was negatively impacted by a -0.9M non recurrent charge due to the merger of the Parisian subsidiaries into one geographic site in Levallois-Perret. Q1 sales were up +14.7% (+9.6%org) at 28.8M. The company points out that Q1 revenue growth continued the momentum of the previous quarter. Micropole also notes that business is strong in all areas of Business Intelligence and ERP segments, while geographically, growth has been strong in Belgium and Switzerland. Moreover, acquisitions are expanding Micropole s geographic presence, diversifying the company s market exposure and giving it access to new markets, including high-growth emerging markets, such as China. In 2011 we expect a strong growth of the EBIT margin from 5.0% to 6.5% at 7.3M thanks to the end of non recurrent charges (+0.9M ), organic growth (+0.5M ) and acquisitions (+0.8M ). The topline should be up +19.4% due to acquisitions (Oasis, Easteq and Wide) at 122.4M. Valuation Since mid of June 2011 the stock is down -18.7% due to high risk aversion on the financial markets. At 4.1x EV/EBIT2011 vs 5.8x in average during the last 3 years we estimate that Micropole is undervalued. We initiate the stock with a buy rating and a target price at 1.57 per share (50% DCF 1.58 WACC 12.1% terminal growth rate +1%, 25% Peers 1.75, 25% Historical ratios 1.37 ). 1

Summary Summary...p3 Group presentation..p3 Group story.. p4 Investment highlights.....p5 Risks..... p6 Valuation...... p7 Historical ratios....... p7 Peers comparison...... p7 Discounted cash flows model... p8 Financial overview...p8 2

Summary Micropole is a France-based consulting and engineering company specialized in business intelligence (about 50% of revenues), web and IT, customer relationship management (CRM) and enterprise resource planning (ERP) fields. The company was founded in 1987 by its present directors Christian Poyau and Thierry Létoffé, and has grown to employ 1300 staff at the end of first quarter 2011. The company does business in France, Switzerland, Belgium, Netherlands and China, and is focused to expand its global presence. Micropole has ambitious growth plans, by hiring 450 new employees on the short term (vs 1200 at the end of 2010) and acquisitions in order to profit from market growth in the merging areas. The company reported improving financial performance in 2010, characterized by accelerating revenue growth and increasing margins. The group published a strong organic growth during the Q1 2011 confirming the positive momentum observed during the H2 2010. The management is now focused on 1) the international development mainly by acquisitions and 2) an ambitious hiring plan targeting 450 new employees on the short term. Group presentation Micropole is a 20-year old France-based IT services, consulting and engineering company, which provides business intelligence, e-business, customer relationship management (CRM) and enterprise resource planning (ERP) services. At the end of 2010, Micropole had nine sites in France, three in Switzerland, one in Belgium and one in Netherlands, and employed around 1,200 staff. During 2011 to date, Micropole has added three subsidiaries (France, Belgium and China) and 100 new employees. Micropole has over 800 customers from various industries: banks and insurance companies, industry, public services, telecommunications, transportation and others. The company reports that it serves 85% of companies listed in the CAC 40 index. The company s business is divided into the following segments: Business Intelligence (BI), Enterprise Performance Management (EPM) and Enterprise Information Management (EIM). In the BI division the group helps costumers to take decisions regarding the 3

information system. Micropole will use existing platforms and tools (if any) as ETL, Datawarehouse, Datamarts, OLAP, Datamining, Reporting, SBA The EPM division is involved in building performance management information through key management indicators as financial reports, budget planning The EIM activity brings expert skills to leverage the information capital value. Web and IT. The business unit provides collaborative portals for corporate web sites, e-commerce, know-how, content management, open source and repository management for improving the contact between the inside and outside members of a firm; Enterprise resource planning (ERP) management of all processes in an enterprise: human resources management, accounting and financial management, sales, distribution, procurement, e-commerce, etc. Micropole helps its customers in partnership with SAP and Qualiac to implement ERP projects. Customer relationship management (CRM) provides tools for sales management, promotion campaign management, analytics etc. the division helps client to manage costumer data and to implement data processes. Revenue is fairly well diversified across industries and fields of expertise. Group history 1987 Creation of a consulting and IT integration company by a former senior consultant at Deloitte and an engineer of laboratory studies from DASSAULT. 1997 Introduction of customer relationship management (CRM) business unit. 1999 Introduction of mobile internet and multi-access services. 2000 IPO on «Nouveau Marche» on the Paris Stock Exchange. Acquisition of Spheris, an internet services company. 2001 - Acquisition of Univers Informatique a consulting and e- business engineering company, and creation of Micropole-Univers with 59.2M in pro-forma revenues and 700 employees. 2002 Acquisition of Swiss-based Netvertis - a consulting and internet solutions company mainly serving the banking and insurance sectors. 2003 Acquisition of Cross Systems. 2005 Creation of Universe Micropole-Consulting. 4

2007 Creation of ERP services by purchasing APSALYS, which provided services in the field of Life Sciences. 2009 Acquisition of Isartis, a SAP ERP projects company providing consultancy services in the industrial management and new technologies field. 2011 Acquisition of Oasis, a Belgium-based ERP consultancy firm and a SAP Gold Partner, providing services in e life-science and pharmaceutical, real estate, high-tech, manufacturing, public and telecom market. Purchase of a 51% stake in Easteq a China-based IT consulting company. Acquisition of a majority stake in Wide a France-based company providing e-commerce and CRM e-marketing services. Investment Highlights Ambitious expansion plans During 2011 Micropole expects to register significant organic growth and strengthen its presence on international markets thanks to: M&A strategy toward international markets: recent acquisitions already illustrate the company s strategy. During 2011 it acquired Oasis in Belgium, Easteq in China and Wide in France. The acquisition of Oasis, a SAP Gold Partner 1, gives Micropole access to the Benelux market. Oasis is based in Belgium, employs 40 consultants and registered revenues of 4M in 2010 with an operating margin at 14% (vs 5% for the group stand alone in 2010). Acquisition of Easteq, a Chinese IT consultancy company, provides Micropole a foothold in Asia. Easteq was founded in 1998, and employs about 50 staff. Wide specializes in the e-business services field, employs a dozen employees and has about 1M in annual revenues. Ambitious hiring plan: Micropole s plans envisage hiring 450 additional employees, which would represent a 38% increase in workforce over the 1,200 staff at the end of 2010. Micropole plans to grow its annual revenues to 150M by 2013, which is almost 50% higher than in 2010. Increasing profitability In 2010, group s EBIT margin went up from 3.2% to 5% thanks to a strong purchases and employees salaries control. This performance has been realized despite a -0.9M non recurrent charge due to the merger of the Parisian subsidiaries into the same geographic site in Levallois-Perret. 1 SAP Gold Partner status is awarded by SAP to its most high-performing partners. 5

In 2011 we expect EBIT at 7.3M : Improving financial position Micropole has a healthy balance sheet structure with a net cash position at 0.7M at the end of 2010. During 2010, the company reduced its debt by 8% to 15.9M, while cash increased by 2% to 16.6M, bringing the net position from net debt of 1.1M to net cash of 0.7M. In 2011, the group will generate 3.7M of Free Cash Flow enabling the net cash position to reach 4.4M. This strong balance sheet will enable the group to catch M&A opportunities and to avoid dilutive operation as capital increase. Investment Risks Too ambitious plans may hurt the company s stability As we mentioned above, the company wants to grow its revenues by half in three years and significantly expand its international presence. Much of this growth is likely to come from acquisitions. The main risk here is that in chasing this goal, management may engage in transactions that may not be in the best interest of the company and its shareholders. For example, management may fail in finding high quality acquisition targets. In this case management may be reluctant to admit that 50% growth was too ambitious and may decide to carry out takeovers just for the sake of reaching 150M in revenues, while margins may be sacrificed. At the same time, Micropole may have overestimated its growth potential and may hire too many new people, who may turn out to be a burden if operations do not grow in line. Alternatively, new staff may not match the quality requirements of the company, affecting its efficiency, customer service and product quality, which may ultimately hurt sales. Management will need to find a balance between top line growth and shareholder value and not let personal ambitions hurt the latter. 6

Customer concentration According to Micropole, its 10 largest customers account for 30% of total revenues. Should the company lose one (or more) of these customers, it may suffer considerable revenue reduction and/or fail to achieve its growth goals. Valuation We use 3 methods (Discounted cash flows, Peer comparison and Historical ratios) to value Micropole. We get a target price of 1.57 per share: Methods Weight Stock price DCF 50% 1,58 Peers 25% 1,75 Historical ratios 25% 1,37 Average 1,57 HISTORICAL RATIOS: We calculate a median of the Micropole historical ratios between 2008 and 2010 and apply it to the 2011 numbers. It implies a stock price at 1.39 per share. Historical ratios 2008/2010 Corresponding stock price EV/Sales 0,24 1,24 EV/EBIT 5,8 1,72 EV/EBITDA 4,1 1,45 PE 7,3 1,30 Median 1,37 PEERS COMPARISON We use 5 peers and 4 multiples to compute a stock price at 1.75 /share: 1) Taking the EV/EBITDA median multiple we get a stock price at 1.81. 2) The EV/EBIT peers multiple let us calculate a stock price at 1.84. 3) On the basis of a PE peers multiple at 9.0x we calculate a stock price at 1.62 Peers EV/EBITDA EV/EBIT PE Sopra Group SA 5,3 6,2 9,6 Devoteam 4,2 4,9 9,0 AUBAY 5,4 5,8 9,0 Cegedim SA 4,9 8,4 9,2 Gfi Informatique SA 5,5 6,8 8,5 Mediane 5,3 6,2 9,0 Corresponding stock price 1,81 1,84 1,62 7

DISCOUNTED CASH FLOWS: Based on this DCF, we get a stock price at 1.58 per share (WACC 12.1%, terminal growth rate +1%). 2010 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e Revenues 102,5 122,4 144,0 152,4 158,0 164,2 170,4 176,4 182,3 187,4 191,8 193,9 growth % 8,9% 19,4% 17,7% 5,8% 3,6% 4,0% 3,8% 3,5% 3,3% 2,8% 2,4% 1,1% EBIT 5,1 7,3 8,9 9,7 9,9 10,6 11,3 12,0 12,8 13,2 13,6 12,4 margin % 5,0% 6,0% 6,2% 6,4% 6,2% 6,4% 6,6% 6,8% 7,0% 7,1% 7,1% 6,4% EBIT*(1- tax) 4,5 4,9 6,0 6,5 6,6 7,1 7,6 8,1 8,6 8,9 9,1 8,3 Dep & Amort 0,6 0,7 0,7 0,7 0,7 0,8 0,8 0,8 0,9 0,9 1,0 1,1 CapEx -1,8-0,7-0,8-0,9-1,0-1,1-1,2-1,3-1,5-1,6-1,8-1,9 WCR change 0,2-1,1-1,2-0,5-0,3-0,3-0,3-0,3-0,3-0,3-0,2-0,1 FCF 4,2 3,7 4,7 5,9 6,1 6,5 6,9 7,4 7,7 8,0 8,1 7,3 Discounted CF 3,7 4,2 4,7 4,3 4,1 3,9 3,7 3,5 3,2 2,9 2,3 Discounted terminal value 21,4 Financial overview Income Statement During 2010, Micropole s revenue grew organically by 6.8% year-on-year and amounted to 102.5M, due to increased sales to new and existing customers, especially from the banking, insurance, industry and telecommunication sectors. According to Micropole, its revenue growth during 2010 outperformed total market growth, which increased by less than 2% year-on-year Revenue and profitability evolution: 120 100 80 60 40 20 0 millions 2006 2007 2008 2009 2010 H1-2009 H2-2009 H1-2010 H2-2010 Revenue Operating income Net income Revenue yoy growth Organic yoy growth Operating margin Net margin 20% 15% 10% 5% 0% Source: company reports, analyst calculations. All business segments witnessed growth during 2010. Business intelligence had an excellent year driven by implementation of new products and 8

services and renewed interest for business management solutions. Web and IT services also showed good performance during 2010 based on new largescale offers and the trend of dematerialization of business processes. The ERP segment grew moderately, despite the French ERP market shrinking. Operating and net margins have been growing steadily since 2005 (except 2009 when margins suffered from the recession). During 2010, operating margin gained 1.8 percentage points (pps.), increasing to 5.0%, due to revenue increase (effect of operating leverage). Excluding the one-off 0.9M charges related to Paris premises, operating margin would have increase by 2.7 pps. to 5.8%. 2011 appears to be promising. During Q1-2011, Micropole registered record year-on-year growth in quarterly revenues 14.7%, increasing to 28.8M. Organic revenue growth was 9.6%, in line with the company s expectations and continuing the growth momentum of Q4-FY10. Business Intelligence and ERP were the segments that contributed most to the overall revenue growth during Q1-FY11. Quarterly revenue evolution: 35 millions 30 25 20 15 10 5 0 Q1-2009 Q2-2009 Q3-2009 Q4-2009 Q1-2010 Q2-2010 Q3-2010 Q4-2010 Q1-2011 Revenue Revenue yoy growth Organic yoy growth 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Source: company reports and press releases, analyst calculations. Balance Sheet The two key items on the company s balance sheet are trade and other receivables and goodwill, which accounted for approximately 40% of total assets each at the end of 2010. At 16.6M, cash and equivalents represented 14% of all assets as of December 31, 2010, with other assets having marginal size. The structure of assets did not change significantly during 2010. Debt financed 14% of total assets, at 15.9M at December 31, 2010, with more than two-thirds being short-term. Micropole reduced its total debt by 8% during the year after repaying a part of the long-term portion. As a result, Micropole replaced net debt of 1.1M with net cash of 0.7M. Equity financed 50% of all assets as of December 31, 2010, up from 45% a year earlier. Net working capital increased by 15% year-on-year to approximately 13M, mostly due to a decrease in payables. 9

Cash Flows Micropole generates solid cash flows from operations, driven by increasing net income. Cash used in investing activities is mostly represented by purchases of fixed and intangible assets and acquisitions. During 2008, investment inflows stand out due to the sale of the Cross Systems subsidiary for 3.4M. Cash flows from financing activities mostly consist of borrowings and repayments. 10

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