The Corner analysis | Eurostoxx50: SAP

Company Description: SAP is the world leader in software solutions for the business segment, with an estimated quota of 34%, very far ahead of its main competitors (Oracle with a 17% quota and Microsoft with 4%). Its success is based on its main product, mySap , an evolutionary platform that adapts to each industry and allows an integrated management of the value chain of the business (Finances, Human Resources, etc.). The company is divided into two divisions: (i) Products (79.5% of Sales’11) that groups together the Software License and Maintenance and (ii) Services and Consulting (20.5% of Sales’11). By regions, revenue is distributed in the following manner: i) EMEA 49% Sales’11, America 36% Sales’11 and Asia-Pacific 15% Sales’11.

In mid-2011, SAP saw its dispute with Oracle for illegal downloads of Tomorrow Now was reduced to €235mn (initially it amounted to $1,300mn, $980mn provisioned, 2% cap). Although, in principle, the case seems closed, rumors could continue since Oracle has gone to appeal. This may temporarily affect the value, although we think the effect would be limited.

Company strategy After buying the U.S. company Sybase Inc. for an EV of $5,800mn (€4,582mn, 8.6% capitalization) in 2010, the company’s goal in 2012 is to maintain double digit organic growth (target between 10% and 12%), while continuing with the policy of cost containment (which should lead to a sustained increase until it reaches its EBIT target margin of 35% in 2015 vs. the current 33%). In the medium term, SAP plans to maintain its global leadership position by expanding its current business model: (i) organically promoting the development of the demanded applications and (ii) inorganically through strategic operations.

Latest Results On 25 January, SAP released its results, which considerably exceeded the consensus estimates, ranking above its guidance for 2011. It reported a record growth in Software revenue for 4Q’11 (+16%) while sales grew +13.5% in 2011. The 2011 EBIT margin increased by 1.1 percentage points and reached 33.1%. Thus, they exceeded their guidance for 2011 in both revenue and EBIT, since they expected a growth in their software division of +10% and an improved EBIT margin of between 0.5% and 1.0%.


Company Outlook The company expects an increase in sales 2012 by growing between 10 to 12% in the software division, and an EBIT’12 of between €5,025mn and €5,250mn (an increase of 11.4% at the high end). In addition, SAP said it is on track to meet its guidance for 2015 (35% EBIT margin). We believe this goal is achievable thanks to the company’s leadership position in software solutions for the enterprise segment (33% share vs. its first competitor’s, Oracle, 17.5%). Furthermore, we believe that the increased business investment in IT, industry trends (outsourcing, consolidation, etc.) and the evolution of the exchange rates (since 35% of sales are in euros) will be determinant factors. The company will also benefit from the positive momentum that the sector is experiencing.

Conclusion Despite the strong performance of the value this year (+21.35% vs. 11.54% Eurostoxx Technology), the company continues to be cheaper than the sector (16X PER’12 vs. 17X PER’12 Eurostoxx Technology). In addition, it is clearly a defensive company since 55% of its revenues are recurring; the customer base is well diversified (EMEA sales 48%, America 36%, and Asia/Pacific/Japan 16%) and it enjoys great financial strength (NFD/EBITDA 0.2X). Moreover, on 24 February, the company announced a DPS of 1.1 euros / share (in excess of 0.72 euros / share expected by the consensus), which consists of a $ 0.75 regular DPS/share and a special DPS of 0.35 euros / share, so its dividend yield stands at 2.2% (vs. 1.6% of the sector), which implies an increase of 83% compared to 2010. We believe this announcement will allow it to continue the good momentum the quote is enjoying since the presentation of its results, since we also believe its evolution in the market is not reflecting the above mentioned objectives which as a result leads us to believe that the upside potential is high. Another of SAP catalysts is corporation activity, as its comfortable financial situation and its inorganic growth strategy suggest it could carry out medium size acquisitions (less than €10,000mn) without ruling out the possibility that it could be the object of interest of some of its major competitors (Microsoft or IBM).

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