Pro-forma historic financials are the starting point for the forecasting. And while 31 December 2018 is the valuation date, Ordina published condensed financial reports by now over the first three quarters in 2019. The shared data in these reports has been assumed representative for the full year as no intra annual seasonality could be determined. The forecasts of 2019 match the provided data by Ordina.

7.1. The economic cycle

Ordina has been defined a cyclical company, which creates a need to include the subsequent impact of a complete cycle in a forecast. If not done properly, forecasts can end up to positive or to negative.

Koller (2015) suggests a much referred to approach that will be used: he proposes to use the multiple-scenario probabilistic approach to value cyclical companies. This probabilistic approach avoids the trap of a single forecast (no one can predict the future exactly) and it allows exploration of multiple outcomes and their implications.

Based on data of the Centrale Bureau van Statistiek (CBS), it can be concluded that although 10 of their 13 business cycle indicators are still above long-term average, 9 of those 10 are deteriorating. The resulting conclusion is that we are over the peak of the current cycle and moving towards a downturn of the economy. Results are forecasted accordingly in the following scenarios.

7.2. The scenarios for Ordina

For the valuation of Ordina, two scenarios will be forecasted:
1. The 1st will be referred to as the ‘management case’. This scenario is build bottom-up based on revenue and cost drivers.
2. The 2nd will be referred to as the ‘base case’. This scenario is build top-down based on market expectations.

For both scenarios a derivative will be based on synergies that a strategic buyer of Ordina could benefit from.

The scenarios are forecasted for a period of 5+5 years. The impact of reorganizations and strategy will be mainly forecasted in the first five years. The following five years, performance will gradually move to a steady state. The story line of both forecasts will be based on the industry perspective and firm perspective of the previous chapters.

7.2.1. The management case

Ordina is recovering from a decade with negative earnings. The best strategy for a company in such a situation is to focus on improvement of ROIC before focusing on revenue growth (Koller, 2015). For the management case it will be assumed that Ordina follows this strategy in the Netherlands. This is in line with communicated results and targets53. The Belgian and Luxembourgish part are performing well and the focus here will be on growth.

7.2.1.1. Revenue

For 2019/2020 pricing in the Netherlands is assumed to grow with GDP and quantity slightly increases. This continues the trend of previous years and is in-line with the running reorganization.

These years Ordina will focus on the improvement of margins. As per 2021 the focus will shift to (profitable) revenue growth and Ordina will decrease the gap in revenue growth with peers.

Belgium and Luxembourg are performing well and will continue this trend from the previous years with improved pricing and increased quantity. In the course of the forecasted period the proportion of Belgian/Luxembourgish revenue increases from 28,5% to 34% in line with the historic trend.

7.2.1.1. Profit

The latest financial report showed Ordina is making progress with the reduction of overhead. The management case forecasts further progress in the following 4 years, in-line with communicated targets. In the resulting years no improvements are expected.

As the SWOT-analysis makes clear, it is difficult to find and retain qualified employees. Ordina has started initiatives several years ago to develop and retain young IT-specialists, which impact has been factored in. The effect of these initiatives is that the ratio between work contracted out and own personnel doesn’t further deteriorate, but the ratio improvement is expected to be limited as shortages remain a serious problem in the industry for years to come.

The PESTLED-analysis showed that the implementation of the law “Wet Deregulering Beoordeling Arbeidsrelatie” per 2021 will bring higher costs for Ordina. This burden is expected not to be completely transferred to the contractors or to Ordina’s customers, leading to higher costs per 2021.

On the other hand, costs per employees have decreased over the previous 6 years. The expectation is that these will decrease further, as reorganizations are causing elder (expensive) employees to leave the company. Per 2021 costs are expected to grow with expected demand for IT-professionals.

An additional driver of profit is productivity. Ordina has focused on improving this ratio for the previous years. Based on Ordina’s peer group, the management case will assume a limited further improvement is possible.

7.2.2. The base case

The assumption upon which the base case elaborates, is that large companies usually don’t grow faster than the market: they grow with the market. In 2018 Ordina had a market share of 1,5% in the Benelux market of IT-services. The base case expects Ordina to keep this share of the market.

7.2.2.1. Revenue

Although demand for IT-related services is good and forecasts are solid, Ordina is active in the segment of system integrators/ IT- service providers. And this segment is underperforming. Ordina’s new strategy is promising, but the fact is that 70% of its revenue is still in the “old segment” of generalist IT-services providers where the level of competition is high.

For the top down approach therefor GDP-growth has been used as growth indicator for Ordina’s traditional business as general IT- services provider. For the increasing revenue in higher value market segments, general expectations for the IT-sector are used.

7.2.2.2. Profit

The base case expects, contrary to the management case, that the industry trend of IT-professionals preferring to be independent small contractors (“ZZP-ers”) instead of employees will continue. This will deteriorate the ratio of work contracted out versus own personnel for at least 3 years, before Ordina’s in-house programs will start paying off. This increase in work contracted out puts additional pressure on the results of Ordina.

The ratio between indirect and direct personnel is expected to decrease in a similar way as in the management case: recent publications proof management is able to reduce overhead. These costs are within Ordina’s influence and there still is room for improvement.

The reorganizations will also lead to a lower average cost per employee. But, the war for talent in the market will have impact: there is only a limited amount of IT-professionals and demand is high. This will increase pricing (salary) and puts pressure on Ordina’s margin.

As additional profit driver is the productivity of Ordina’s direct personnel. This ratio is slowly improving since 2014 and the base case expects this trend to continue in the same pace: it is within the influence of Ordina and less depending on external factors.

7.3. Financial ratios

7.3.1. Return on invested capital

The improvement of ROIC in the management case leads to an immediate positive economic profit. The ROIC including goodwill improves from below WACC (since 2013) to above WACC. This implies Ordina would be creating value again. Improvements are expected to gradually increase until a modest ROIC of 13,5% has been achieved in 2025.

The base case however leads to a different perspective: here the impact of the reorganization leads to a small positive economic profit for 4 years, after which the WACC transcends ROIC again.

It is debatable whether it is a realistic scenario whether Ordina would continue to destroy shareholder value in 2023. A fair question would be whether Ordina is capable of creating value from its past acquisitions, or whether another impairment of its goodwill would start making sense. Ordina’s last impairment dates from 2013, but this didn’t lead to healthy performance metrics yet.

7.3.2. EBITDA

The management case leads to an average EBITDA margin of 7,3%. This is a 39% improvement compared to current EBITDA. But still 25% below the median of the forward-looking EBITDA (9,8%) of the peer group. This is justified by the fact that the cost base of Ordina will probably improve but due to legacy won’t meet the cost base of peers.

The base case provides an average EBITDA margin of 5,0%, which is a small decrease compared to the current EBITDA of 5,3% and below Ordina’s own targets. The main causes for this underperformance are the lower revenue growth and the expectations that the ratio between work contracted out and own personnel further deteriorates while the war for talent puts additional pressure on the margins.

7.4. Conclusion

Two forecasts have been created: a management case that assumes Ordina’s strategy of reducing cost and focusing on higher value market segments is paying off for the period of the detailed planning period. Ordina is closing the gap to performance of peers and the underperforming Dutch part of the business will approach the performance of the Belgian/Luxembourgish part. As per 2020 Ordina will be creating value for its shareholders.

The base case assumes Ordina’s position in a tough part of the market determines its performance for the coming years. The initiated improvements will start paying off, but due to market circumstances not as fast as management predicted and they will have less impact than aimed for. The result is a performance that initially exceeds the previous 6 years’ results, but which is then gradually reverting back to the historic performance.