* Clarity of message: We have spent 2 days in roadshow meetings with the
CFO. The one consistent message that impressed us was the conviction in
the long term growth opportunity for the sector and how Capgemini can
differentiate itself within that structural growth trend. In particular,
management believes that most major industries are striving for efficiency
gains and that will lead to greater standardisation and industrialisation. As
part of this process, non-core activities will get outsourced to third parties like
Capgemini. This will support medium term growth. Companies like
Capgemini that can offer appropriate resourcing (to reduce labour costs) and
global scale will be best placed to take advantage of this trend.
* Risks overplayed: The other key message was that there are no major
signs of macro risks. Consulting has had one of the best starts to the year
ever. This is normally seen as a leading indicator and demonstrates that
there are no immediate pressures. There is weakness in Brazil but it is only
3% of group revenues. Similarly, there are investor concerns regarding the
outlook for investment banking, but Capgemini's financial services exposure
is largely insurance and retail banking so the risks appear modest. Even if
there is a slowdown, management remains convinced that the depth of client
relationships means there will be limited margin volatility through the cycle.
* Undemanding valuation: We believe that Capgemini is the best positioned
IT services company in Europe and against that backdrop the current
valuation is undemanding. In particular, the current FY16 FCF yield of 5.5%
for a company with solid organic growth prospects and scope to drive
through margin enhancement looks undemanding. Hence we reiterate our
Outperform rating. We have updated numbers for the full financial
statements.