SII Raises Its Profitability On High Organic Growth
Continued High Organic Growth for SII
SII truly impressed us with its high organic growth in Q2 FY23. The company grew organically by 28.7% yoy (to EUR 239m), despite an unfavorable comparison basis (Q2 FY22: +27.1% yoy organically). This quarter, SII beat its Indian peers and even the much larger Alten.
France has slowed down but remains at respectable levels (+12.9%). The operations suffered from somewhat demanding comps (+18.5%), and one lesser working day. The French market has slowed down as it returns to standard growth rates. Nevertheless, SII is growing faster than the market and beats Alten domestically (+10.7% organically yoy).
We had worried about SII’s dependency on its Polish operations. Much of SII’s growth in the past years has relied on Poland, now its largest market before France. Despite demanding comps (Q2 FY22: +33%), Poland accelerated in Q2 FY23 (+42%). This is the fourth quarter of Poland growing by 40ish%.The performance is impressive. We estimate it will add EUR 100m in revenues this FY23.
At times when most competitors have their operating margin (and FCF) impacted by high growth, SII now expects an adjusted operating margin of 9-10%, in line with FY22 (9.7%). The company is now close to Alten’s best-in-class performance in the onshore ER&D industry, thanks to a high utilization rate.
So all good for SII? Well, we still have concerns. SII’s geographical mix analysis shows the company relies on two large and well-performing countries (Poland and France), two mid-sized countries (Spain and Germany) with fluctuating performance, and a flurry of tiny but high-growth countries. The conclusion is logical: SII needs to add a third significant country to derisk its geographical mix.
Little M&A Activity
However, SII has followed a different strategy with its M&As. The company is little-acquisitive, with three acquisitions in the past five years. Two of the transactions strengthened its French operations, i.e., Feel Europe in 2017 (EUR 57m in revenues) and the pending Metanext acquisition announced this year (EUR 18m). The only international M&A was last year, Anankei in Belgium (EUR 8m).
With high inflation and rising energy costs, a recession in Europe is forthcoming. However, this recession will be different from the pandemic, which impacted Europe primarily in the automotive and commercial aviation sectors. We expect that this time, the inflation will be spread across verticals. How SII will be affected will depend on how much the company has moved away from staff augmentation to projects.