In an IT services sector up +15% ytd, Atos managed to lose 50% ytd where Capgemini gained +61% ytd. The Atos share price is currently trading under €40/share which is below the bottom seen in March 2020 (€44.36/share) at the height of the COVID-19 pandemic.
The stock has been impacted by a series of negative events since the beginning of the year 2021. These were the proposal to acquire DXC Technology in the US (January), a $10bn offer finally unanimously dropped by the board of directors (February), a qualified opinion on two US legal entities (11% of group revenue) by the statutory auditors (April) (eventually no material misstatement for the consolidated financial statements after a full accounting review by July) and, lastly, a profit warning and downgrade of 2021 guidance (July) due to the deterioration in legacy infrastructure.
The final high point of this disastrous story was the resignation of the CEO Elie Girard (October) after nearly two years at the head of Atos. The new CEO is Rodolphe Belmer who is currently CEO of Eutelsat Communications. He will take up his responsibilities no later than 20 January 2022. In the meantime, Pierre Barnabé (Head of Manufacturing and Big Data & Cybersecurity) and Adrian Gregory (Head of Financial Services & Insurance and Atos Syntel, have been appointed interim co-Chief Executive Officers.
The only question is whether the 52% upside potential is indicative of a floor to sentiment or whether it is better to wait, notably for the new boss to present his strategy and related costs, before taking a plunge. The contrarian will mention that Atos has recently been kicked out of the CAC40 which is usually a Buy at the bottom indicator.
Pulled down by the legacy activities
The COVID-19 pandemic accelerated the decrease in the legacy infrastructure activities (20-25% of revenue) (-20% yoy estimated in 2021 vs -11% in 2018-20). It was not offset by the growth in cloud migration (15% of revenue), and, on top, the lack of flexibility on staff costs in the short term has a negative impact on the operating margin.
A negative trend is also seen in the legacy applications (24% of revenue) (-3/-5% yoy estimated in 2021). 2021 should be a poor year with stable revenue at constant currency (including acquisitions), an operating margin of c.6% of revenue (vs 9% in 2020, 10.3% in 2019) and low positive free cash flow.
Underlying operating margin (in % of revenue)
Divestment in the agenda
The ex-CEO implemented adjustment measures, still valid for now. It includes the development of activities in digital, cloud, security and decarbonisation (53% of revenue) organically and by acquisition (+12-15% yoy estimated in 2021) (18 companies in 18 months with total annual revenue above €400m).
The reduction of 1,300 positions in classic infrastructure in Germany (a loss-making activity) in 2021-23 is in place (1pt margin improvement targeted in the mid-term). The increase in the offshore headcount shows progress (from c.45% of the total to a target of more than 50% of the total).
Atos is still looking for partners to divest its datacentre hosting (revenue of €1,200m, very low margin) and Unified Communications & Collaboration (revenue of €600m, margin in line with the group average).
New CEO, new roadmap?
There were periodic rumours about the acquisition of Atos. Some mentioned French names (Orange, Thales, Sopra Steria for instance) denied any interest. There is little by way of a catalyst for a rebound of the share price up until the new CEO Rodolphe Belmer takes up his job in January 2022. He comes from outside Atos and has no experience in IT services (early career at Procter & Gamble in marketing, McKinsey, then CEO of Canal+ Group after a role in marketing and strategy, CEO of Eutelsat Communications).
His strategy has yet to be presented. The old project to list the Big Data & Cybersecurity activity could reappear. A scenario similar to the listing of Worldline (2014), i.e. the sale of 30% of the shares could be an option. It would presumably trigger a reappraisal of Big Data & Cybersecurity (leader in Europe in supercomputers with the BullSequana systems, a world-level player in quantum computing, a strong player in cybersecurity services) and Atos would retain the benefits from the contribution of this activity on group earnings.
Can a bottom have been reached?
With an EV of €6.8bn (of which €4.0bn market cap), Atos is trading at a serious discount, based on EV/Revenue (0.73x with revenue of €9.3bn including divestments). The sector EV/Revenue multiple is 1.29x on average (2016-20) in IT services excluding Atos.
The NAV calculation based on EV/EBIT multiples to value the activities stands at more than twice the current share price. It is worth noting that the analytical reporting of revenue and operating margin changed in 2020 from activity to industry and regional business units. Since 2020, the reporting by activity (Infrastructure & Data Management, Business Platform & Solutions, Big Data & Cybersecurity) has been for revenues only. Atos did not disclose the revenue numbers in H1 21. We retained the historic industry breakdown to work out our NAV.
The combination of the other valuation methods reinforces the idea that Atos is massively undervalued. Normally a change in the leading horse is enough to pull the cart from a difficult patch as long as the cash generation is not impaired. That seems to still be the case. The unknown is how much of a spring clean-up of the accounts the new CEO will go for. That will be next spring.