RealDolmen is a provider of IT solutions in the Benelux region and France with a focus on the area around Brussels. The company was set up in September 2008 as the result of the merger of two major Belgian IT businesses between Dolmen Computer Applications and Real Software.
As a so-called single source supplier the company is able to support the entire software lifecycle, from the planning phase to the deploy phase and the maintenance phase. RealDolmen provides software solutions, as well as IT services, ranging from software development across infrastructure services, project management right up to training courses. In addition, the company sells various hardware products and software licences in the areas of data centre management, front-end, networking & security, hardware and software procurement and Unified Communications. The company is the market leader in Belgium. The client base mainly consists of medium size companies, regional operations of multinational companies and the public sector. A large component of revenues is generated with existing clients through follow-up projects or maintenance. While technology-independent, the company is a certified partner of suppliers like Microsoft, Oracle, Cognos, IBM and Progress.
In 2012, a large part of the management was replaced with Marc De Keersmaeker becoming the new “General Manager” (CEO). Reason for that seems to be the disagreement about an active role of RealDolmen in the consolidation of the Belgian IT service market, which was not supported by the largest shareholders, the Colruyt family (17%) and the Vyvere family (10%).
Financial Statement Analysis
For the last six fiscal years you can see the company’s operating performance in the table below:
|in million euros||Mar-08||Mar-09||Mar-10||Mar-11||Mar-12||Mar-13|
For the fiscal year ending in March 2013 an operating loss has resulted from lower turnover, one-time restructuring expenses, an overrun in two projects and in particular an impairment on goodwill of two foreign subsidiaries in France and Luxembourg. Apart from that, the company has a high amount of tax losses stemming from unprofitable acquisitions in the US in the former Real Software business in the early 2000s which explains the high fluctuation in net income.
In the latest annual report the company’s CEO comments on last fiscal year’s performance as follows:
“The results of last year are not good even in light of the difficult economic situation. But, as said before, last year is a transition year. A weaker operational performance and important one time hits affected last year’s results. We start this new fiscal year with a fully implemented new organization, a strengthened position in Wallonia, some new solutions ready for roll-out, an improved cost base following an optimization plan, a strong financial structure with limited debts and excess cash giving room for external growth.”
Looking at the balance sheet goodwill makes up approx. 70% of book value. Historically, this is a result of the ongoing consolidation in the market and RealDolmen becoming one of the dominant players. Nevertheless, large amounts of goodwill do not stand for a high quality of the balance sheet. At least the income statement might be negatively affected by further impairments in the future. On the opposite however, management has reduced outstanding debt substantially by paying back a convertible loan which was due in 2012. Current obligations consist of EUR 20.1 m in debt and finance leases, EUR 3.1 m of pension liabilities and EUR 17.0 m of operating lease liabilities for their car pool. The company has a current cash balance of EUR 23.6 m resulting in a net debt position of EUR 16.4 m. In addition, the company owns most of its operational buildings. So despite the large amount of goodwill, the balance sheet looks relatively solid.
From the table below, it becomes obvious that RealDolmen has a cash generative business:
|in million euros except for per share data||Mar-08||Mar-09||Mar-10||Mar-11||Mar-12||Mar-13|
|Operating CF before WC||10.6||17.9||11.1||13.9||13.9||4.6|
|FCF excl WC||7.4||16.9||10.7||13.4||13.0||3.7|
|FCF excl WC/share||1.15||3.16||1.99||2.50||2.45||0.71|
Excluding changes in working capital, average free cash flow for the last six years has been EUR 10.8 m.
Peer Group Analysis
Their major competitors in the Belgian market are the privately owned Cegeka (revenue EUR 214 m), NRB Group (EUR 197 m) and Systemat (EUR 120 m). Interestingly, Cegeka is holding a 4% stake in RealDolmen and there have been some rumours, that Cegeka might be interested in a takeover of RealDolmen. However, public information available regarding these companies is limited.
From my perspective there are at least four other comparable European companies namely Reply, Groupe Steria, Orbis and Osiatis, being listed and providing sufficient public information. In the table below “6yr adj FCF” is defined as average free cash flow for the last six year period adjusted for changes in working capital:
|Company||Market Cap in euro millions||Days sales outstanding LTM||Sales per employee||6yr adjFCF/ avg. Sales||6yr adjFCF/ EV||LTM adjFCF/ EV|
Sales per employee are above average and cash flow generation looks good compared to the peer group except for the last twelve month period.
However, compared to the other companies RealDolmen seems to have an issue with receivables. Therefore, we need to look at the development of receivables over the last few years. The table below provides an overview of the ageing of trade receivables:
|Receivables in million euros||Mar-11||Mar-12||Mar-13|
|Overdue less than 91 days||14.2||13.9||9.2|
|Overdue 91-120 days||1.5||1.2||0.5|
|Overdue > 121 days||2.0||1.2||2.2|
|% of impaired receivables to total receivables||1.9%||1.0%||1.7%|
Though it takes the company relatively long to turn receivables into cash, at least there has been no deterioration in this regard over the last three years. Reason for the long time needed might be that most of the receivables are sold to a factoring company, however I am not sure about that. Overall, from an accounting perspective I am not worried, but management definitely has substantial room for a more efficient handling of receivables.
On the positive side it has to be noted, that the relation of impaired receivables to total receivables is relatively low. In the annual report the management explains that:
“There are no clients who represent more than 5% of the total balance of trade receivables, so the concentration of risks is very limited. An additional advantage of the IT sector is that the budgets for IT-investments and-developments are often being made available before the project starts. Therefore, RealDolmen has very low write-offs on doubtful debtors.”
Most of the work has already been done. At a current market cap of EUR 85.9 m and net debt of EUR 16.4 m the current enterprise value is EUR 102.3 m. This is a conservative estimate as I have included pension obligations and operating leases. In addition, I have ignored any positive impact on valuation stemming from a substantial amount of loss carry forwards in the balance sheet. Apart from that, one could also argue that there is some excess real estate to be divested. The company owns most of its operating buildings and the merger in 2008 might have led to excess capacity. However, so far management has not announced a divestment of parts of its real estate portfolio.
Taking this conservative estimate of the enterprise value and using the normalized free cash flow assumption of EUR 10.8 m from above the share price is currently offering a 10.6% normalized free cash flow yield.
RealDolmen is a well-positioned market leader in a highly competitive market offering an attractive free cash flow yield. As a matter of course, this investment thesis only works under the assumption that last year’s operating performance will materialize as a one-off event. Though I expect still some difficulties in the business year ending March 2014, I believe that the company will be able to return to high cash flow generation over the long term.
I will start with a 2% position with a share price limit of EUR 17.5 for the portfolio. Liquidity is low and it might take approx. 20 trading days to set up the position assuming Wertart Capital trades one third of daily volume. Half year results will be announced on November 21th, 2013 and I expect them to be relatively weak which could then provide for an attractive opportunity to increase the position. Please click here for more information on WertArt Capital and the virtual portfolio.
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