Early Thoughts about Akka’s CLEAR 2022 Strategic Plan
Akka presented its CLEAR 2022 strategic plan that runs over the 2018-2022 period. CLEAR 2022 is growth plan in what Akka described as “a booming market”. And indeed, Akka has bold financial ambitions with plans to reach:
- Revenues: EUR 2.5bn in revenues by 2022, up from EUR 1.3bn in 2017.
- Adjusted EBIT margin: 10%-12% (EUR 250m), from an estimated 7.1% (EUR 95m)
- FCF: EUR 150m (6% of revenues).
M&As are an important element of the growth strategy of Akka. The company has taken a conservative CC/CS revenue growth objective of 3%-6% (2017: +7.0%, 2016: +5.5%), which implies buying EUR 0.7bn-EUR 1.0bn in revenues.
Taking into account that Akka had a net debt of EUR 222m at end of H1 2017, Akka will be raising its capital. Will this be enough? Akka currently has a market cap of EUR 1.2bn, which seems a bit short for financing an acquisition of this scale. The example of Altran with Aricent show valuations in the US, with their offshore mix, are very aggressive. Nevertheless, Akka has identified targets and has started discussions. it is targeting in priority the US aerospace sector, with Boeing as a client. Life science is probably a candidate for M&As too, we think.
APAC is also on the agenda of Akka. The company did not mention the geographies it is targeting in APAC, but China comes to mind, probably around automotive and aerospace. It intends to grow in the region, by following its clients, and thanks to offset investment, as well as relying on its Global Excellence Centers (GECs). It is unclear how offset investment and reliance on GECs located in high cost countries are relevant to APAC countries, although the example of ÅF shows that servicing from a high cost country Chinese automotive OEMs is possible to some extent.
GECs are an important element in structuring the delivery engine of Akka, with Akka claiming 21 GECs (e.g. systems engineering, product mechanical engineering, process engineering, electronics and embedded systems, information systems, consulting).
Along with GECs, Akka intends to use the traditional levers in workforce management, and intends to hire 10k “digital natives” to shape its workforce pyramid, and also bring digital skills into the organization. This brings to the topic of portfolio management, with Akka intending to reach 75% in “digital” revenues, up from 50% currently. The definition of digital is course debatable but Akka seems to include within digital, IoT, autonomous driving, exoskeletons, and AI, in addition to the more traditional embedded systems expertise.
Along with workforce management, Akka will be increasing its presence offshore. The target is relatively vague as the company did not provide any numbers on this. Akka will be expanding in India, from its nearshore based in Romania and in the Czech Republic. Developing in India will be key.
Finally, Akka will be focusing on large accounts, intending to grow its top 20 clients to more than EUR 50m per year each. The company is seeing growth opportunity with VW, Nissan, and Mitsubishi.
Our opinion on this: bold revenue and M&A ambitions. From a profitability perspective, guiding to a 10%-12% adjusted operating margin is a wide range, and whether Akka achieves 10% or 12% will make all of the difference. Finally, we would have liked to have more specific information on US ambitions and offshore headcount. Financial analysts welcomed CLEAR 2022 and the stock was up 6.4% on the day of the announcement.