In the previous chapters the environment of Ordina has been analyzed, this context is the basis upon which the historic analysis is performed. This chapter will provide additional context first, after which historic results will be normalized to exclude distortions and enhance comparability. The pro forma results are the basis for the historic analyses, which will be supported by the value drivers that were identified in 3.2.5 and by applicable financial ratios. The results will be benchmarked to the performance of peers and Ordina’s stock price development.
According to Koller (2015) the historical performance of a cyclical company must be assessed in the context of its cycle. Being a temp labor company, Ordina most likely can be characterized as a cyclical company, so this context may have an impact and needs to be confirmed before drawing conclusions.
To determine whether Ordina indeed follows a cyclical pattern, its performance over the past 19 years has been analyzed high over and compared to GDP patterns of the Netherlands and it turned out to correlate into a high extent. In other words: Ordina indeed is a cyclical company.
As a result, Ordina’s performance should be analyzed in the context of the cycle: an improvement in recent performance does not necessarily indicate a long-term positive trend but could rather be a shift to a different part of the cycle.
Over the period of 2013 - 2018 there were no distortions of data:
• M&A – Ordina’s last acquisition was in 2005 and its last divestiture in 2011.
• Currency – All revenue is earned within the Euro region.
• Accounting policies – IFRS 16 is effective per January 1st, 2019 and left out of scope for this part of the analysis. No other policies with a distorting effect are considered.
There were however several one-time costs related to the reorganization of Ordina and to the settlement of the fraud allegations. The historical financials have been corrected fully for the costs related to fraud and partly for the reorganization costs: Ordina faces quite a few challenges in the near future, leading to the assumption that more reorganizations will follow, and a continuous level of reorganization costs is likely.
Furthermore, Ordina is sensitive to additional or lesser working days per book year. This effect has also been corrected for comparison reasons.
The 6 years of most recent data (2013 – 2018) have been used on a pro forma basis to analyze Ordina’s historic performance based on its key value drivers for revenue and earnings (3.2.5).
As one of the main drivers of value, revenue growth has a major impact on Ordina’s valuation. Overall revenue decreased with a compound annual growth rate (CAGR) of 1,00% over the period 2013-2018. It is interesting to note that this decrease is fully due to the Dutch part or Ordina (-19,5%). The revenue of the Belgian/Luxembourgish part grew with double digits year-on-year (+44,5%).
Looking at the four market segments, the segment “Industry” performed particularly bad. This is in line with market developments, as peers like ICT Group N.V. also experienced headwind in the segment. But overall, Ordina is underperforming to peers: the median organic growth percentage over the last book year within the peer group was 16,8%, where Ordina grew its revenue with just 4%.
The economy is a major driver of Ordina’s revenue. Considering its dependence on the state of the economy and growth of GDP, one would expect Ordina’s performance to pick up after the financial crisis and improve in line with the general state of the economy. It didn’t however and Ordina’s revenue growth underperformed to GDP each year of the analyzed period except 2018.
The market analysis (3.2) highlighted that although the IT-industry as a whole is growing fast, the sub-sector where Ordina operates has limited growth potential and doesn’t perform well. My conclusion is that Ordina is in the middle of a transition to higher value sub-sectors but results don’t reflect this yet.
For a temp labor firm like Ordina price and quantity are reflected in the revenue per employee and the number of employees that Ordina can contract out. Here a distinction needs to be made between the so-called indirect employees (overhead) and the direct employees. Only the direct employees drive revenue. Next to that, the revenue of Ordina is determined into a large extent by ‘work contracted out’. This artificially boosts the revenue per employee, which is why revenue has been corrected preceding the price analysis (assuming revenue of work contracted out equals its cost).
Over the analyzed period the revenue per direct employee fell back from €118k in 2013 to €114k in 2018, while the ratio direct/ indirect employees did improve. This development is in line with the industry analysis (3.2) that indicate increased competition
in the Dutch market, smaller projects and increased pressure on pricing. The Belgian/Luxembourgish market, facing lesser competition, flourished during the same period. The overall revenue decrease also matches the increased part of work contracted out, for which Ordina apparently didn’t have the expertise in house.
Reorganizations are specifically targeted at redundant management layers and other indirect personnel. The numbers proof that indeed these ratios indeed improved, but the transformation of Ordina also led to a decrease of 8,1% in direct personnel.
The second major driver of firm value is ROIC, which is defined by dividing Net Operating Profit Less Adjusted Taxes (NOPLAT) by invested capital (Koller, 2015). NOPLAT is a company’s after-tax Earnings Before Interest and Tax (EBIT), which is determined into a large extent by the profit drivers indirect/direct employees, work contracted out, cost per employee and productivity.
Direct employees deliver the service that customers are paying for. Indirect employees have job positions that support direct employees. They constitute the company’s overhead.
Improving the ratio indirect/direct employees has been part of Ordina’s strategy (4.2) and that paid off: the ratio improved from 10,70% to 9,37%. It basically means that each indirect employee now supports an additional direct employee. All things equal this is a cost reduction of 14%.
Although most peers don’t report this ratio, Ordina is performing well when its ratio is compared to the peers that do report it: Brunel for example reports a ratio of 12,92% over 2018.
As more agile competitors are emerging, it is important that Ordina prologues this improvement. Even though an increasing proportion of work contracted out may have a countering effect.
As discussed in the SWOT-analysis (4.1), Ordina has difficulties employing high quality (direct) employees. In response to this ‘threat’ Ordina started programs to hire graduates and develop its current staff. In the long run, this will increase the in-house capacity.
Short term however, the general response in the market to the ‘war on people’ is to contract out work to small independent parties. Knowing that this is an expensive solution, that the contractors will become a main point of contact with your customer and the fact that knowledge and experience is build up outside the firm, makes large amounts of work contracted out a negative driver.
From 2013 to 2018 the work contracted out increased in absolute and relative terms: in 2013 this part was 23% of revenue, in 2018 it has increased to 27%. Despite Ordina’s efforts to hire and retain its own personnel this ratio hasn’t improved and considering the trend in the market towards more independence of high-educated IT-professionals (3.2.2) it will be a challenge to improve this ratio.
Peers appear to perform better on this element: the median percentage of work contracted out in the peer group is 14,25%, about half of Ordina, making peers less vulnerable to this negative driver.
As a temp labor firm, the costs per employee have a major impact on Ordina’s earnings (they are basically their ‘cost of goods sold’). Over the past 6 years, these costs have shown a counter market movement: where the market for IT-labor became tight, Ordina’s cost per employee decreased from €79.700 to €77.600.
If these costs are compared to peers, there seems to be room for further improvement of 20%. As a result of past acquisitions, Ordina is stuck with an above average cost per employee. Current reorganizations and in-house development programs for graduates are targeting a decrease of these costs. The historic analysis shows Ordina is making some progress, but still has steps to make.
Productivity indicates which percentage of its time a direct employee is billable to customers. During the analyzed period, the productivity decreased to 68,6%. This is not uncommon during reorganizations, but there should be an upward potential to at least the historical level (69,7%).
Ordina has the typical capital light balance sheet of a temp labor provider, of which only the large amount of goodwill from past acquisitions really stands out.
Ordina has a negative amount of net working capital (2018). Although both days receivable and days payable show a negative trend, the net effect is due to the large amount of work contracted out. Ordina has a large leverage over smaller contractors and that pays of in better terms.
On the other hand, Ordina itself is also paid later by its debtors. Longer payment terms are probably the new status quo but shouldn’t further increase as Dutch companies should be protected from longer than 60 days payment terms per July 1st, 2018.
Further revenue growth will have a positive impact on the negative working capital position.
Ordina has €130m in intangible assets on its balance sheet. €125m of it being goodwill resulting from past acquisitions. This goodwill seems to weigh heavy on Ordina. If the market value of Ordina on the valuation date is compared to its book value, it appears that Ordina is trading at a market value which is below its book value. This usually indicates the market doesn't believe that the company is worth the value on its books or that there are enough assets to generate future profits and cash flows.
Although Ordina itself recognizes the value of its goodwill (impairment test of 2018), the market thinks otherwise. This may be due to informational asymmetry between management and the market, but past goodwill impairments (€72,5m in 2008 and €60m in 2013) are no promising signals. And the fact that the ROIC (including goodwill) was lower than the weighted average cost of capital (WACC) in every year of the analyzed period, indicates that Ordina was not able to create value with these assets. A future impairment is not unlikely.
Ordina has no debt on its balance sheet. During 2013 and 2015 it seems to have used a revolving credit facility, but the past 3 years there were no debt obligations at year end. This is in line with the industry moral: the average debt-to-equity ratio of the peer group is zero.
Although modest, cash flow has been improving since 2013.
The cash conversion rate measures the ability of Ordina to convert its profits into available cash. The rate is generally greater than 1 which is a good sign because funds will be available for investments and dividends for investors.
As previously stated, when the general concept of value (creation) is applied to the business of Ordina, its core elements (growth and the spread between ROIC and WACC) are represented by revenue growth and operating profit. ROIC is determined by NOPLAT and asset turnover, but as Ordina is a capital light temp labor company the focus is on the first: its operating profit.
Before the historic analysis is finalized, the performance of Ordina on two important financial ratios related to ROIC and operating profit will be analyzed.
The ROIC fluctuates wildly from 12% to 270% (excluding goodwill) and returns an extreme low ROIC from 0,48%
to 8,04 on invested capital including goodwill: ROIC turns
out to be a difficult measure for a capital-light business as Ordina’s. Here ‘economic profit’ is a more solid measure of performance as it indicates return on capital in absolute terms instead of relative.
When the economic profit over 2013 – 2018 is analyzed it becomes clear that Ordina had a negative economic profit in every of those years: shareholder value has been destructed for the past 6 years. But, although still negative, the situation is improving.
Without a solid ROIC on invested capital (including goodwill) and a negative economic profit over the past 6 years, it is fair to conclude that Ordina should focus in the next years on improving its returns before it will start focusing on growth again. Current growth would only lead to more value destruction.
Over the period of 2013-2018 EBITDA grew with a CAGR of 6,32% but was still a modest 5,26% of revenue in 2018. When the results of Ordina in Belgium/Luxembourg are analyzed separated from the results in the Netherlands, an interesting pattern emerges: the average EBITDA in the Netherlands pulls down the results of Ordina as a whole.
The main reason for this gap is the different composition of the labor force. The Dutch organization still has a large amount of (relative expensive) older employees.
Within its peer group Ordina is an underperformer: over the period 2008 - 2018 the average EBITDA of peers was 7,6%, where Ordina’s average EBITDA was 5,5%.
January 2007, the price of ordinary Ordina shares hovered around €17. Within 2 years the price dropped to 2 euro and remained on that level until this day. While the initial decrease coincides with the financial crisis, the economy picked up again while Ordina didn’t.
Taking into consideration the results of the historic analysis, it is clear that the share price of Ordina basically followed the performance of the company.
The impression that results from the external and internal analyses is fully reflected in the financials: Ordina is at a tough spot and over the past 6 years, revenue declined by 4,9%.
Margins on the other hand slightly improved. The reason for this improvement is the reorganization that decreased Ordina’s above-industry average cost per employee. The financials show that Ordina chose to first focus on improving ROIC, before investing in growth. This is in line with research findings and an excellent approach.
The improvement in EBITDA and cash flow indicates that Ordina’s transition starts delivering results. This supports the vision that Ordina is making progress towards higher value markets with a slimmed organization. But it’s important to note that currently and over the past 6 years Ordina destroyed shareholder value: WACC exceeded ROIC in every year resulting in negative economic profits. Ordina basically finds itself in an economically distressed situation. The reason for this partly lies in past acquisitions: besides much overhead, the acquisitions resulted in a large amount of goodwill.