Investments In AI And Next-Gen Technologies Will Expand Digital Services Dominance By 2028

Key Takeaways

• Sopra Steria's focus on high-value digital services and consulting aims to significantly boost revenue growth and market presence.
  
• Strategic sector focus and contract wins enhance revenue stability, while cost control measures aim to improve profitability and net margins.
  
• Revenue challenges and operational pressures arise from strategic realignments, reliance on large contracts, and sectoral volatility, especially in the aerospace and European markets.

Catalysts

Provides consulting, digital, and software development services in France and internationally.

• Sopra Steria's long-term plan to become a European leader in digital services and consulting, with high added value offers and technology integration, is expected to support revenue growth and expand market presence.
  
• The focus on expanding digital services to constitute 85% of revenues and increasing consulting and next-gen technologies to 12% and 60% of revenues by 2028, respectively, will drive revenue growth and improve operating margins, thanks to synergies and higher margin services.
  
• Major contract renewals and new wins, such as with Airbus and Metropolitan Police, and the ramp-up of existing contracts like NS&I, provide a strong foundation for revenue stability and growth as conditions improve.
  
• Strategic focus on key sectors, including public sector, financial services, defense, and security, with ongoing investments in AI and other emerging technologies, are positioned to enhance revenue growth and operating margins over time.
  
• Tactical cost control measures and operational efficiencies, including transformations begun three years ago, are set to help sustain or improve profitability even amid challenging market conditions, indicating potential for improved net margins.

Sopra Steria Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sopra Steria Group's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 6.1% in 3 years time.
• Analysts expect earnings to reach €374.2 million (and earnings per share of €18.58) by about March 2028, up from €309.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.2x on those 2028 earnings, up from 10.0x today. This future PE is lower than the current PE for the GB IT industry at 16.3x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.24%, as per the Simply Wall St company report.

Sopra Steria Group Future Earnings Per Share Growth

Risks

• The organic contraction of 0.5% in revenue for 2024 indicates challenges in maintaining growth, which could pressure future revenues.
  
• The operating margin shows variability and could face pressure from increases in social security contributions in the U.K. and France, potentially impacting net margins.
  
• The sale of Sopra Banking Software and restructuring efforts in regions like Germany and Benelux involve costs and strategic realignments that might not guarantee immediate positive financial impacts, possibly affecting earnings.
  
• The volatility in the aerospace sector, notably with Airbus, and the slower start of the year in France, Germany, and Benelux, suggest potential downturns which could negatively impact revenue stability.
  
• Significant reliance on large contracts such as NS&I for revenue stability highlights vulnerability to contract renewals and losses, which when impacted, can negatively affect both revenue and earnings.

Valuation

• The analysts have a consensus price target of €210.212 for Sopra Steria Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €244.0, and the most bearish reporting a price target of just €168.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €6.1 billion, earnings will come to €374.2 million, and it would be trading on a PE ratio of 14.2x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of €152.4, the analyst price target of €210.21 is 27.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.