lundi 13 mars 2017

Wolters Kluwer

Date de l'analyse:13/03/2017
Cours: 38.075 EUR
Nb d'actions: 287 699 000 (plus 14 198 000 treasury shares that I don't include)
Market cap: 10 954 139 000 EUR
Net debt: 1 927 000 000 EUR
EV: 12 881 139 000 EUR


Business


From the annual report 2016: "Wolters Kluwer provides essential information, software, and services to doctors, nurses, accountants, lawyers, and audit, compliance, and regulatory professionals. We enable our customers to provide worldclass service and maximize their potential."

Having started the shift from the paper based information distribution to a software company a few years ago, they are successfully replacing and even outpacing the legacy paper based business with software. Digitial and services represent now 85% of the revenues of the portfolio. 77% of the revenues are recurring.

They grow organically in the low single digit area, and they also grow by acquisition. The strategy consists of buying software companies that are not up to scale yet and integrate them to make them benefit from their scale. Therefore, with the last acquisitions, they seem to buy companies at about five times the sales, which seems to be pretty high. Synergies and scalability must be successful for the acquisition to be relutive.

Financial position


Net debt/EBITDA = 1.7, and the management indicates that it is comfortable with a ratio at up to 2.5. Moreover, cash generation is stable, growing and recurring, therefore, the company seems to be in a solid financial position.


Allocation of capital


The dividend policy is to raise the dividend per share every year. In 2016, 223m has been spent for it (0.79 EUR par action) and it can be paid in cash or shares (DRIP). 

A share buy back program is in place with 600m over 3 years, of which 200m have been executed in 2016. Considering the valuation of the company, I am not sure this is an optimal allocation of capital.

Capex of 224m and acquisitions for 461m are to be compared with depreciation and amortizations for 360m. The fact that the capex is far below depreciation and amortization is a sign that the company heavily relies on acquisitions to grow. Moreover, this strategy inflates the "net cash from operating activities".


Valuation


First of all, in their reports, something makes me sick. They always speak about "adjusted". In the annual report 2016, the word adjusted appears 194 times in 165 pages. In 2015, it was 184 times in 175 pages. While sometimes it can be justified, I think that this is too much, considering that more than 60% of the part of the short term incentive target performance is based on adjusted net profit and adjusted free cash flow... I could not find any justification of using these adjusted measures.

The difference between profit and the adjusted net profit is that the adjusted net profit does not take into account the amortization of publishing rights and impairments. To me, this should be taken into account because even if it is not a cash expense, this corresponds to a depreciation of an asset that must be maintained with capex to retains its profitability. Therefore, for the valuation, I will ignore the "adjusted" results. 

Same for the calculation of the ROIC, the numerator takes into account "adjusted" operating profit to give an ROIC of 9.8%. Re-adjusting the NOPAT to take into account the amortization of publishing rights and impairments, I calculate an ROIC of 8.1% (766 of operating profit * (1- 25% of taxes) / 7084 of average invested capital).

Sales 2016: 4297m
Net income 2016: 489m
Operating profit: 766m

Adjusted free cash flow of 708m is calculated taking into account only the capex, and without acquisitions. This gives an inflated result, as depreciation and amortization is by far superior to capex. Re-adjusting with capex = depreciation and amortization in order to give an approximation of the maintenance capex, free cash flow should be around 570m. With this figure, we don't consider any growth.

After all these modifications, we arrive at the following measures:

EV/Sales: 3
PER: 22.5
EV/(EBITDA-mcapex) = 12 881 / (1133 - 360) = 16,66, therefore 6% annual return

Conclusion


Wolters Kluwer is a growing company, with expanding margins and generating generous free cash flow, but also being generously valued with a PER of 22 for an ROIC of 8.1%. The allocation of capital does not seem optimal as shares buy back seems to be done not matter the price offered by the market. Moreover, it seems to heavily rely on acquisitions to maintain and grow its assets and when buying companies at five times their sales, the growth story heavily depends on the success of these acquisitions. As said, I also don't like the company communicating a lot about adjusted results. Therefore, at these prices, I am not interested by Wolters Kluwer.


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