Investors undervalue the balance sheet
* Reiterating targets: Dassault recently held a capital markets day in which management reiterated the 2014-19 target that was set in 2014 to double EPS to c€3.5. In delivering on this target, we believe investors are undervaluing the balance sheet, either to fund M&A to help the achievement of targets, or in accumulated net cash on the balance sheet that should have a tangible value. We reiterate our €85 TP and believe that c30% upside in one of the best quality European software stocks is an attractive opportunity. We reiterate our Outperform.
* Growth needs to accelerate: Doubling EPS in 5 years was always based on c9% organic growth, consistent with the track record from 2009-15. Following just 7% growth in FY15 and guidance for 6-7% growth in FY16, Dassault is currently trending below the required run rate and needs growth to accelerate. We continue to believe digital manufacturing represents a sizeable opportunity that supports faster growth, and management remains confident that growth will accelerate into 2H16 and FY17. As growth accelerates, we expect the shares to re-rate.
* Valuation is attractive: Assuming Dassault continues down an organic path, then doubling EPS can be achieved through c9% organic growth and 80- 100bps pa of margin expansion. Importantly, in this scenario net cash will continue to accumulate on the balance sheet and we estimate 2019 net cash could be close to €4bn or c€15/ share. If we take account of this cash and value the core earnings stream on 25x earnings, we justify a target of €85. Alternatively, at the current share price, the core business is trading on just 18.2x target earnings. This looks far too low for one of the best quality sustainable growth assets in the sector. We reiterate our Outperform rating