UPDATED: Akka Suffers Greatly from its Lack of Client Diversification in H1 2020

/ July 28, 2020/ Aerospace, Akka, Automotive, Financials, France, Germany

Revenues Collapsed in H1 2020

Akka suffered greatly in H1 2020, with revenues down by 20.3% yoy at CC/CS. Q2 was particularly difficult for the firm, with a decline of 31.4%, three times as much as in Q1 (-9.2%). In total, Akka missed its guidance of a pro-forma decline of ~15% during the first semester (-17.1% actuals).

Akka is paying the price for its exposure to automotive and aerospace, which represent almost 70% of revenues. All geographies were down: Germany, which heavily relies on automotive, was down by 28.7%. The French operations did slightly better (-20.1%) despite their exposure to, not only the European auto and aero industries but also Boeing (through the Safran account).

UPDATED: in an interview with boursier.com, Akka’s CFO added that sales in from aeronautics only dropped by 15% thanks to military aircraft engineering in the US and MRO activities. Airbus accounts for 10% of revenues and Boeing, 5%.

UPDATED: Elsewhere, Other International (-15.4%) and North America (-11.6%) performed better, thanks respectively to their more diversified client base (Other International) and better conditions in Q2 (North America). Nevertheless, Akka lost its primary client Japan and has dismissed all delivery employees in the county. We are hearing that Akka will lose ~80 of is revenues in APAPC.

The company Is Exploring How to Improve its Balance Sheet

Akka is heavily suffering: its adjusted operating margin will be in the red in H1 (it will announce its results in September). Also, the company is facing two one-offs: a €40m charge related to the pandemic (WaH computer costs, health expenses, and partial unemployment) and a €10m restructuring charge (Fit-2-Clear-Now program) targeting, in particular, German operations.

With the of Data Respons acquisition and the pandemic, Akka is heavily in debt, despite a good cash collection/FCF in H1. The company is now close to its covenants (4 times net debt/EBITDA) and is “working proactively on various options” to improve its balance sheet.
UPDATE: Akka’s CFO specifically mentioned that he is considering suspending its covenants, implying Akka will break its covenants by the enf of 2020.

Client Diversification and Digital Are the Priority

Akka is, however, seeing the light at the end of the tunnel: Q2 2020 was low-point, and activity is now gradually improving. Significant clients keep their confidence in the firm, with the recent – unofficial – selection of Akka by Renault as one of the four preferred partners. Finally, digital continues to do well: Data Respons was up by 16.8% in H1 (pro-forma).

We think Akka will survive the crisis. However, the company will need to diversify its client base, and focus on digital and cloud offerings such as IoT and connected devices and equipment, digital manufacturing, and security. The change is easier said than done: Data Respons is a good starting point. The company will, nevertheless, face the competition from its peers rushing in this space, along with IT services vendors.

UPDATE: Akka’s share was down by 14% on Wednesday, after 20% on Tuesday. The company’s market cap is now €370m, in par with Assystem (€350m) despite Akka being more than three times as large as Assystem. The fall in Akka’s market cap will continue as speculators are probably shorting the firm.

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