Introduction
In November 2023, I published an article on Teleperformance SE, a multinational business services provider. At that time, the company’s shares were trading at €140, significantly lower than their peak of €400 in 2021. However, the initial appearance of a value opportunity turned out to be misleading due to the challenges faced by the business. Five months later, the stock price has dropped to below €90, a decrease of almost 40% from when I first wrote about it. In this update, I will explain why I believe the current share price presents a strong buying opportunity.
Teleperformance’s 2023 Results
In 2023, Teleperformance reported a modest revenue growth of 2.3% compared to the previous year, a decline from previous years. Excluding the impact of the Majorel acquisition (consolidated since November 1, 2023), revenue actually decreased by 1.8% year-over-year. Despite this, the company benefitted from the pandemic and other factors in 2021 and 2022, leading to front-loaded growth. Looking at the longer-term growth, Teleperformance has shown a solid compound annual growth rate of 11.4% since 2017. The acquisition of Majorel is expected to significantly contribute to future sales, potentially reaching around €10 billion in revenue if consolidated from the start of 2023.
Profitability and Cash Flow
Teleperformance’s profitability looks promising, although there is room for improvement in free cash flow conversion. The integration of Majorel may temporarily impact the company’s profitability, with adjusted EBITDA and operating margins expected to decrease slightly initially. However, as synergies are realized and integration costs are eliminated, margin expansion is anticipated in the coming years.
Balance Sheet and Debt
Following the acquisition of Majorel, Teleperformance’s net debt nearly doubled from €1.9 billion to €3.7 billion. The leverage ratio also increased significantly, prompting the company to prioritize debt reduction. Management aims to reduce net debt to less than 2x EBITDA by the end of 2024. Shareholder returns may be affected, with the possibility of a flat dividend or even a modest cut to focus on deleveraging.
Valuation
Despite the recent decline in share price, Teleperformance is undervalued compared to historical levels. The company’s evolution into a stronger and more diversified entity should be considered in the valuation. While concerns about artificial intelligence impacting the business exist, Teleperformance’s leading position and early adoption of AI tools mitigate this risk. A significant margin of safety is necessary for such an investment, especially given the integration risk and high leverage associated with the Majorel acquisition.
In conclusion, Teleperformance’s current share price presents a compelling buying opportunity, with the potential for future growth and improved profitability.
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