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Dynamic quotes 
OFFON
Stock Pick
An Italian Top Performer
 Reply SpA (REY)
End-of-day quote. End-of-day quote Italian Stock Exchange - 09/22 17:35:50
Price
€207.10
 
Change
+1.52%
 
Capitalization
€1.94B
 
P/E ratio 2017
25.56x
Although Reply’s share price is already up by roughly 50% this year, we believe that there remains significant upside of up to 30%. The company checks many, if not all, of our key investment considerations.

Reply SPA (Reply) is a Turin-based company that specialises in technology consulting, system integration and digital services. In doing so, the company focuses on the invention, design and implementation of solutions based on the new communication channels and digital media.


In plain English, this means that Reply provides consulting services to key industrial groups by helping to (re-) define and (re-)develop business models made possible by the new technological and communication paradigms, such as big data, cloud computing, digital communication, the Internet of Things, mobile and social networking. Many established groups are in dire need of advice as to how to optimise and integrate processes, applications and devices.

As one of the forerunners in this still relatively new area of consulting services, Reply has many years worth of work cut out for it. As shown by the following chart, Reply has a proven track record of transforming this demand into double digit revenue growth.



Source: Company Website

Background Information

Reply was founded by its current Chairman and CEO Dr. Mario Rizzante and current Executive Director Oscar Pepino in 1996. Mr. Rizzante still controls and owns over 50% of the company. In its 21 years of operation, Reply has grown to a company with a market cap of 1.7bn € and over 6,000 employees.

Reply touches on many different domains in relation with new technology, such as blockchain, cloud computing, big data, digital payments, the Internet of Things, Industry 4.0 etc. Though this breadth of service coverage may seem very ambitious at first, it fully makes sense as there is such a high degree of interconnectivity in today’s world. In fact, it is this wide coverage of competence that makes Reply such an attractive partner for its clients. Notably, “old” industrial groups can benefit greatly from Reply’s services in order to manage the transition into the new world of interconnectivity, digital presence and integration.

Reply puts its service offering into three main categories:

➢ Consulting: Strategy, communication, design, process and technology;
➢ System Integration: Making the best use of the potential of technology, combining business consulting with innovative technological solutions of high added value;
➢ Digital Services: Innovative services based on new communication channels and digital trends.

To best understand what Reply’s services comprise, the following provides a few examples as to Reply’s services for certain industries. As can be seen, in many cases Reply offers a number of services to the same industry thus creating significant economies of scale:

Telco and Media: For these two sectors Reply offers a great deal of expertise covering numerous domains. For example, the company provides strategic and technological consultancy to support the design, definition and management of the new generation networks based on SDN (Software Defining Network). In addition, the company works with leading European operators towards increasingly more customer-focused service models and an omni-channel configuration of their offering. With respect to network security, Reply can provide innovative solutions based on Blockchain principles. Finally, Reply is involved in the design and implementation of services and applications for latest generation
mobile devices (on-demand or linear audio/video content, integration with connected products, customer support services and omni-channel customer engagement solutions).

Financial Services: Reply is increasingly active in supporting the digital transformation of Europe’s financial institutions. In this field, Reply is working with some of the major players in the sector on many key issues, such as the definition of complete multi-channel digital experience and customer engagement strategies: from digital branding to the implementation of app strategy.
With regard to the wealth management area, Reply has a strong presence on the market and has developed a wide range of specific skills and solutions aimed at, for example, the emerging models of consultancy and remote advice platforms and solutions.
Finally, Reply is working with major financial institutions, such as banks and insurance companies, on the tech subjects of the moment: big data, mobile payments or biometric security.

Energy and Utility: Key areas where Reply provides consulting services to these sectors are the digitisation, optimisation, programming and operation of installations for the generation, transport and
distribution of electricity. Reply also assists its customers in the adoption of new energy management paradigms aimed at raising energy efficiency, a field in which the company offers a complete product range aimed at both energy producers and end consumers.

In addition to the abovementioned sectors Reply is also active in the sectors manufacturing and retail and government & healthcare.
The following chart provides a graphical illustration of the company’s revenue split by industry/sector:


Source: Company Website

Background Information

Reply was founded by its current Chairman and CEO Dr. Mario Rizzante and current Executive Director Oscar Pepino in 1996. Mr. Rizzante still controls and owns over 50% of the company. In its 21 years of operation, Reply has grown to a company with a market cap of 1.7bn € and over 6,000 employees.

Reply touches on many different domains in relation with new technology, such as blockchain, cloud computing, big data, digital payments, the Internet of Things, Industry 4.0 etc. Though this breadth of service coverage may seem very ambitious at first, it fully makes sense as there is such a high degree of interconnectivity in today’s world. In fact, it is this wide coverage of competence that makes Reply such an attractive partner for its clients. Notably, “old” industrial groups can benefit greatly from Reply’s services in order to manage the transition into the new world of interconnectivity, digital presence and integration.

Reply puts its service offering into three main categories:

➢ Consulting: Strategy, communication, design, process and technology;
➢ System Integration: Making the best use of the potential of technology, combining business consulting with innovative technological solutions of high added value;
➢ Digital Services: Innovative services based on new communication channels and digital trends.

To best understand what Reply’s services comprise, the following provides a few examples as to Reply’s services for certain industries. As can be seen, in many cases Reply offers a number of services to the same industry thus creating significant economies of scale:

Telco and Media: For these two sectors Reply offers a great deal of expertise covering numerous domains. For example, the company provides strategic and technological consultancy to support the design, definition and management of the new generation networks based on SDN (Software Defining Network). In addition, the company works with leading European operators towards increasingly more customer-focused service models and an omni-channel configuration of their offering. With respect to network security, Reply can provide innovative solutions based on Blockchain principles. Finally, Reply is involved in the design and implementation of services and applications for latest generation
mobile devices (on-demand or linear audio/video content, integration with connected products, customer support services and omni-channel customer engagement solutions).

Financial Services: Reply is increasingly active in supporting the digital transformation of Europe’s financial institutions. In this field, Reply is working with some of the major players in the sector on many key issues, such as the definition of complete multi-channel digital experience and customer engagement strategies: from digital branding to the implementation of app strategy.
With regard to the wealth management area, Reply has a strong presence on the market and has developed a wide range of specific skills and solutions aimed at, for example, the emerging models of consultancy and remote advice platforms and solutions.
Finally, Reply is working with major financial institutions, such as banks and insurance companies, on the tech subjects of the moment: big data, mobile payments or biometric security.

Energy and Utility: Key areas where Reply provides consulting services to these sectors are the digitisation, optimisation, programming and operation of installations for the generation, transport and
distribution of electricity. Reply also assists its customers in the adoption of new energy management paradigms aimed at raising energy efficiency, a field in which the company offers a complete product range aimed at both energy producers and end consumers.

In addition to the abovementioned sectors Reply is also active in the sectors manufacturing and retail and government & healthcare.
The following chart provides a graphical illustration of the company’s revenue split by industry/sector:

Investment Case

A quick overview of our investment case:

➢ Leading consulting company in new megatrends of digitalization, online security, big data etc.
➢ Strong growth prospects
➢ Founder/owner owner and controlled
➢ Strong alignment of interest of management and shareholders: With a fixed remuneration of EUR 730,000 the CEO’s pay is very reasonable and oriented towards value creation in the enterprise value
➢ Debt free
➢ Highly diversified revenue split both by industry and geography


Risk and Weaknesses

It is difficult to put a finger on concrete risk for Reply Spa. The need for the company’s services is massive. It has a proven track record in revenue growth. It is well diversified both geographically and by customers working with all the major names in the world of business IT (Salesforce, SAP, Oracle etc.). In the end, Reply’s long-term success is fully dependent on execution, for which the company has a very strong track record.

Valuation

We believe that the high value added services provided by Reply, its strong market position and strong growth potential warrants the current valuation with a 2017 PE ratio of 22.8x. In light of its growth prospects, the company clearly has not been able to place its primary focus on profitability so far. In light of this, a better determinant of the adequacy of its valuation likely is market cap/sales. By this measure, at 1.92x for 2017, Reply is cheaper than IBM at 2.26x – whereby it is important to mention that analysts project negative revenue growth for the latter. Also Accenture, which has higher projected revenue growth rates than IBM, though well below those of Reply, is more expensive by the measure of market cap/sales at 2.24x. Cognizant, another US based technology service provider even trades at 2,5x of sales. We believe that Reply deserves a similar valuation, which yields a price target of 233 € (upside of 30%).





Article published on 06/06/2017

Ulrich Ebensperger
© 4-traders.com 2017

Disclaimer: The information, charts, data, views, or comments provided by SURPERFORMANCE SAS are intended for investors who have the necessary knowledge and experience to understand and appreciate the information contained within. These items are disseminated for personal reference only. They do not constitute an offer or solicitation to buy or sell financial products or services, nor an investment advice.
The use of the information disseminated takes place under the investor's sole responsibility, without recourse against SURPERFORMANCE SAS. SURPERFORMANCE SAS will not be liable, whether in contract, in tort, under any warranty, for errors, omissions, improper investments, or adverse evolution of markets.

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