Teleperformance SE: -35%
Acquiring businesses for a premium is likely to hurt short-term financials but if done for a strategic purpose, it can create value well beyond the additional capital spent on the purchase.
Teleperformance SE is an example of this — which is why it was the worst performer in our 2023’s top 10 stocks with 35% losses compared to the benchmark MSCI Europe’s 4.7% returns. Based on our updated in-house valuations of the company, the intrinsic value of Teleperformance is roughly around 55% above its current trading price of EUR162.20 ($239.12).
To recap, Teleperformance offers customer relationship management services as part of the overall business process outsourcing industry. Teleperformance is a global leader in the digital integrated business and services space, where it partners clients on their digital transformation journey and specialises in designing and executing specific, tailor-made outsourcing solutions. In this industry, scale and reach are important key factors in assessing the business. Teleperformance is a well-established name and a worldwide leader when it comes to the outsourced customer and citizen experience management market.
As part of the strategy of increasing its footprint and scale, the company’s M&A is targeted and strategic. This means the M&A activity not only consolidates the market and helps mitigate disruptive AI trends, but it is also in line with the company’s focus on digital transformation. In late April, Teleperformance offered to acquire its rival Majorel at a premium above the latter’s share price which saw the company’s share price drop by almost 15% on the trading day following the announcement.
Teleperformance expects continued robust sales momentum for FY2023 ending December, with a revised upward target for margins. It also intends to further carry out targeted acquisitions to improve its scale as part of its “TP Cube” approach to adapt to the growing complexity of client and customer demand globally. The company also intends to focus on automating certain lines of business and has connected with OpenAI and developed its own AI-powered GPT which will streamline and optimise operations for better margins and profitability.
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Teleperformance has had over 10 semi-annual financial periods of positive, consistent and growing operating cash flow and free cash flow which reflects the strong profitability of the business. The company’s balance sheet is good, with a current ratio of 1.3 times and an interest coverage ratio of over 10 times, reflecting decent liquidity and adequate solvency. Yield-wise, the company’s earnings, operating cash flow and free cash flow yields are 7.1%, 9.5% and 10.3% respectively, which is significantly more attractive than the risk-free rate of 2.93%. Teleperformance also trades at a steep discount for its P/E, EV/Ebitda and P/B ratios at 43%, 48% and 26% respectively, indicating that it is an extremely attractive pick-up at current prices.
The stock has 15 “buy” calls, two “hold” calls, and no “sell” calls, with a consensus target price of around 75% above its current trading price.
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Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
Data for Charts & Tables were sourced from Bloomberg; Stock returns include capital adjustments and dividends, and excludes currency exchange fluctuations.
