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Neurones: Outsider CEO

Stellar growth record, fortress balance sheet, first-class chairman and CEO — those are the three distinctive features of Neurones, a French IT consulting business headquartered in Paris.

The company spearheads the digital transformation market since 1985, when it was founded by Luc de Chammard — a spirited entrepreneur who happened to sport zero technology credentials back then — to set up local networks for corporate clients.

It has retained a strong focus on architecture design and maintenance services. This positioning leads management to claim that 70% of revenue should be considered as recurrent.

Neurones grew above the market by an average annual rate of 11% between 2008 and 2017 (from €189mil to €485mil), while EBITDA margins were maintained above 10%. Not many peers have been able to replicate this top tier performance.

The largest part of this growth has been organic, for Mr. de Chammard, who controls 66% of equity capital, has expressed reluctance about acquisitions and confessed a bent for financial orthodoxy.

Dividend is remarkably low, so cash has been piling up at a fast clip on the balance sheet. Per latest annual accounts (2017) net cash amounts to €150mil, for a market cap of €460mil. This conservative capital allocation leaves plenty of leeway for strategic options — or, to quote Mr. de Chammard, for “a logical employment of our reserves” — but depresses returns on equity.

All else being equal, should management decide to distribute excess cash, return on equity would consequently jump to 30%, and shed light upon the true quality of the business. Frequently cited as a reference, rival Alten, for instance, delivered return of equity of about 17% last year.

The customer portfolio appears concentrated — financials weigh one-third of business and the largest customer accounts for 8% of revenue — but this aspect is typical of mid-size consulting companies.

Of note: The “crédit impôt recherche” fiscal scheme allows the company to save €1mil-€1.5mil on its yearly tax bill. Should the former be discontinued, bottom line (€27mil) would be negatively impacted, albeit in limited proportions.

Finally, IFRS earnings and free cash-flow are not always easy to reconcile, for working capital consumes a lot of resources as business expands. Books look clean still, and receivables troubleless to convert into cash.

At €18 a share, on an enterprise value basis of €330mil, Neurones now trades at 6x EBITDA and 0.7x revenue, in the low range of typical M&A multiples for profitable and growing consulting businesses. Perhaps the market took umbrage of Mr. de Chammard’s repeated comments about lifelong — and beyond to the next generation — ownership?

On a market capitalization basis, with per share earnings of €1.12 and net cash per share of €6.30, Neurones trades at 11x earnings. Unless a brutal downturn in IT spending looms around the corner, such valuation hardly does justice to the positive prospects and first-class management team.

Aware that illiquidity certainly keeps most institutional investors at bay, which is precisely why the opportunity exists, the author would be keen to purchase shares in Neurones should valuation wane under x0.5 revenue.

(No position, but a close relative owns shares.)

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