Poland Continues to Shine at SII in H1 FY20

/ December 12, 2019/ Financials, France, Poland, SII, Unknown

SII improved its profitability in H1 FY20 despite its reorganization investments. Its adjusted operating margin was up by 30 bps to 7.2%. France’s margin remained low to 5.6%, improving slightly by 20 bps. In its domestic market, SII benefitted from one additional working day, rising profitability at Feel Europe, and a 7.5% net headcount increase, counterbalanced by reorganization costs and a decrease in utilization. Poland continues to drive the profitability operations, whose adjusted EBIT margin was up 20 bps to 8.8%. Poland has”remarkable margins,” which counter-balanced declining profitability in Germany (due to its spare part and equipment manufacturing business) and stabilized margins in Spain. Outside of Poland, Spain, and Germany, which represent 86% of international revenues, SII is present in many countries where it derived less than EUR 5m in revenues in H1 FY20. SII is now systematically looking at how it can improve margins in these countries. In H1, Chile and the Netherlands grew and Romania looks promising (thanks to the large Thales contract). The company has confirmed its guidance of revenues in the range of EUR 675-700m for full-year FY20, representing a growth of 7-11%. Profits will grow at the same speed, suggesting flat to slightly increasing margins. We remain mixed about SII. The company is doing very well in terms of revenue growth. However, its margins levels are well below those of peers. In France, SII’s margin suffered from headwinds coming from Feel Europe and its reorganization. Yet, the company does not have a track record of high margins in the country. In international markets, Poland has become a EUR 200m business with a low two-digit margin (our estimate), while other operations have low margins. We still think SII needs to make a decision on its fragmented international presence and invest or divest. The company has the means to invest through M&As, with a net debt of EUR 19m (excluding IFRS 15, its net cash position is EUR 35m). With the ER&D service market deemed for a continued steady slowdown, we think SII now needs to act on its fragmented international presence and also get its domestic business’s margin to industry standards.
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