Ingenico : From Conquest to Caution

Source: Pixabay

Ingenico hast lost its mojo. A 7% miss on market expectations on EBITDA for both 2018e and 2020e has been severely sanctioned by investors. Shares of the payment terminal manufacturer lost 16% of their value on Feb 22, leaving the market cap of the company at €4.8 billion. At first glance, the fall looks excessive. But it’s probably deserved.

While management claims that the company is repositioned to capture revenue opportunities and deliver earnings growth, it’s recent acquisitions have been dilutive to earnings and profitability. This means that as the company has grown in size, its ability to convert additional revenue into real cash has diminished.

Comparing the pro forma reporting for 2017 to published financial statements shows that the profitability of the company stands 80 bp lower on its new and larger perimeter (with €204 million of additional sales, EBITDA is just €23 million larger). And this accounts for the savings already generated by the efficiency plan (half the €20-25 million).

Conclusion is that so far, capital allocation has not been a great success. Of course, we should probably wait a couple of years to assess the relevance of recent acquisitions.

But the first impact of external growth has rather been a dilution in return on invested capital, which stands at 8.8% on our calculation against 10.1% in 2016.

Remember that we are in the fintech business. Ingenico is a major player that provides the infrastructure for offline and online electronic payments.

Unfortunatelly, the explanation provided to get a grip on the recent setbacks and disappointing profitability numbers is rather slim. The new reporting used by the company doesn’t help better understand the business and the potential for value creation.

The FY2017 results press release is full of managerial gibberish about how the company is adapting its organization the its markets, but for an investor, it’s very difficult to first understand what has really changed from the past and second how this will improve Ingenico’s finances over the long run.

Source: weeko, company’s reports

If you look at how much you got for 1€ of equity, your return (ROE) has been declining after a peak reached in 2014 (table above). The main reason is that asset turnover, i.e. the ability of 1€ of equity to generate revenue has declined. And that’s something that’s been in place for a long period of time now.

This raises question about the quality of growth and the quality of asset allocation.

Shorter term, this also raises another big question for investors: is the stock price going to decline further? Well there never an easy answer to this question but if you consider the current share price (€77/share), and you assume a 8% cost of capital, Ingenico needs to either dramatically grow or dramatically improve profitability to justify current share price.

Financial track record of the company shows that the market has probably been a bit generous with Ingenico in terms of valuation and share price. This is now ending.

Facts : Ingenico released its 2017 results with forecast for 2018 and 2020. Consensus expected €585 million of EBITDA in 2018. The company targets €545 to 570 million, which takes into account a negative FX impact of €25-30 million. But it’s the same in 2020, where market was expecting EBITDA of €753 million while the co targets « above €700 million », which represents a 7% miss (same as for 2018 EBITDA forecast).

Revenue grew 9% to €2.5 billion (+7% organic), driven by services (+11%) and online payments (+11%).

The real issue for the company is the low cash conversion rate. EBITDA conversion to Free Cash-Flow is only 51% on an adjusted basis.

Following the acquisition of Bambora for €1.5 billion, Ingenico has a high leverage ratio of 2.8x EBITDA vs 0.3x in 2016.

According to some brokers, the company has entered a « period of transition and less virtuous growth ».

Link to earnings release


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