Acquiring Italian software testing business

TXT e-solutions 15 May 2019 Update
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TXT e-solutions

Acquiring Italian software testing business

Q1 results, acquisition

Software & comp services

15 May 2019

Price

€8.57

Market cap

€101m

Net cash (€m) at end Q119

61.1

Shares in issue

11.7m

Free float

45%

Code

TXT

Primary exchange

Borsa Italiana (STAR)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(7.3)

(11.6)

(30.6)

Rel (local)

(2.8)

(15.4)

(19.2)

52-week high/low

€12.32

€7.70

Business description

TXT e-solutions provides IT, consulting and R&D services to aerospace, aviation, automotive, banking and finance customers.

Next events

H119 results

1 August 2019

Analyst

Katherine Thompson

+44 (0)20 3077 5730

TXT e-solutions is a research client of Edison Investment Research Limited

With the acquisition of Assioma, TXT continues to deploy its substantial cash pile. The deal doubles the size of its financial institution-focused software testing business and is earnings accretive. The company announced strong Q119 revenue and net income growth, with a particularly good performance from the Aerospace, Aviation & Automotive business. We have revised our forecasts to reflect the acquisition and Q1 results, with EPS upgrades of 31% and 22% in FY19 and FY20 respectively.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

35.9

3.0

0.19

1.00

46.1

11.7

12/18

40.0

1.5

0.10

0.50

83.4

5.8

12/19e

54.3

5.2

0.31

0.13

28.0

1.5

12/20e

61.2

5.9

0.34

0.15

24.9

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Doubling the size of the Banking & Finance division

On 1 May, TXT acquired Assioma, an Italian software testing business focused on the Italian banking sector. On a pro forma basis, this doubles the size of the Banking & Finance division and increases its profitability. The deal will cost up to €9.3m, with €4.3m already paid out in cash, and €0.3m in cash and €2.3m worth of shares in escrow until the end of May. Up to €2.4m is payable for earnouts over the medium term, treated as long-term debt in our forecasts.

Impressive organic growth in Q119

TXT reported Q119 revenue growth of 26.5% y-o-y, and 17.3% organic growth. The Aerospace, Aviation & Automotive (AAA) division was the biggest contributor to organic growth, up 20% y-o-y, with Banking & Finance up 6.6% on an organic basis. The cost base increased at a slightly faster rate than revenues (mainly due to a 63% increase in R&D spend), resulting in normalised EBIT growth of 13.4% y-o-y. Marking to market the €100m invested in multi-segment insurance funds resulted in financial income of €1.3m in Q119, which was the main factor in the 163% increase in net income y-o-y. We have revised our forecasts to reflect Q1 results and the Assioma acquisition, resulting in upgrades to normalised EPS of 31% in FY19 and 22% in FY20. Management confirmed that it continues to seek appropriately priced acquisitions in both divisions.

Valuation: Accretive acquisitions to drive upside

TXT is trading on EV multiples that are at a c 30% discount to peers – by FY20 EBITDA margins are forecast to be broadly in line with peers, although EBIT margins are lower. As the company still has a large proportion of the cash from the sale of TXT Retail (we estimate €50m in net cash by the end of FY19), its P/E multiples are inflated versus peers. We expect this premium to reduce as the company makes earnings-enhancing acquisitions.

Assioma doubles size of Banking & Finance business

TXT has acquired Assioma, an Italian software testing business, with a completion date of 30 April. Assioma will be consolidated from 1 May.

Deal to cost up to €9.3m

TXT has paid initial cash consideration of €4.3m. It has also put €0.3m cash and treasury shares worth €2.3m in escrow (due for release by end May), for a total initial consideration of €6.9m. The shares are being issued at an agreed value of €8.982 per share, ie 253,846 shares. Contingent consideration of up to €2.4m is payable in two tranches based on the achievement of specific operational goals in the medium term.

Background on Assioma

Assioma was founded 30 years ago by current CEO Giovanni Daniele De Stradis. The business currently has 150 employees based in offices in Bari, Milan and Turin. Customers include banks such as Intesa San Paolo, Unicredit Leasing, UBI, ING Direct, Widiba, BPM Group, Allianz and AXA. In 2018, the Assioma group generated revenues of €9.4m, EBITDA of €1.3m (13.9% margin) and net income of €0.9m.

Integration plans

Assioma will continue to trade under its own name and be run by Mr De Stradis. Over time, he will develop integration opportunities with TXT’s Banking & Finance division, which also provides software testing services into Italian financial institutions.

Review of Q119 results

Exhibit 1: Quarterly results highlights

€m

Q119a

Q118a

y-o-y

Revenues

11.9

9.4

26.5%

Licenses & maintenance

1.5

1.1

31.8%

Services

10.4

8.3

25.7%

Gross margin

43.9%

45.1%

-1.2%

EBITDA

1.3

1.2

9.2%

EBITDA margin

10.9%

12.6%

-1.7%

Normalised EBIT

1.0

0.8

13.4%

Normalised EBIT margin

8.1%

9.0%

-0.9%

Reported net income

1.4

0.5

162.9%

Net cash

61.1

87.9

-30.5%

Source: TXT e-solutions

TXT reported 26.5% y-o-y growth in group revenues in Q119. Stripping out the €0.9m contributed by Cheleo (acquired in Q318), the business grew 17.3% y-o-y. Software licenses, subscriptions and maintenance revenues totalled €1.5m, up 31.8% y-o-y and 13.0% on an organic basis. Services revenues totalled €10.4m, up 25.7% y-o-y and 17.9% on an organic basis. On a divisional basis, Aerospace, Aviation & Automotive grew 20.3% y-o-y (all organic) and Banking & Finance grew 49.2% (6.6% organic). Total operating costs before depreciation and amortisation increased 28.5% y-o-y, with R&D seeing the largest increase (+63% y-o-y). This resulted in EBITDA increasing at a slower rate of 9.2% y-o-y and the margin falling from 12.6% to 10.9%. TXT reported financial income of €1.278m (Q118: €17k) as the investment in multi-segment insurance funds was revalued upward during the quarter. This resulted in a net income increase of 162.9% y-o-y.

Changes to forecasts

Management expects an acceleration in revenue growth in Q219, from organic revenues and the Cheleo and Assioma acquisitions. EBITA is expected to be substantially higher than in Q218.

We have revised our underlying forecasts to reflect the revenues reported in Q119 (slightly reducing software revenues but increasing services revenues) and to reflect a higher ongoing level of R&D. Within financial income, we have also factored in a €1m upward revaluation of the multi-segment insurance fund investments for FY19. The company had previously noted that these suffered a downward revaluation of c €1m in FY18, but had nearly recovered the whole amount in Q119.

We have factored in the Assioma acquisition from 1 May 2019. As TXT expects to record the earnouts as long-term debt, we have increased our long-term debt forecasts accordingly. Based on our forecasts for FY20, the acquisition doubles the size of the Banking & Finance business and results in margin expansion on a divisional and group basis. We forecast that TXT will have net cash of €50m by the end of FY19, providing a substantial level of funding for further acquisitions in either the Banking & Finance or Aerospace, Aviation & Automotive divisions.

Exhibit 2: Changes to forecasts

FY19e old

FY19e new

Change

y-o-y

FY20e old

FY20e new

Change

y-o-y

Revenues (€m)

46.0

54.3

18.0%

35.8%

49.5

61.2

23.6%

12.8%

Gross margin

45.2%

42.8%

(2.4%)

(1.4%)

45.2%

42.2%

(3.0%)

(0.6%)

Gross profit (€m)

20.8

23.2

11.7%

31.5%

22.4

25.8

15.3%

11.2%

EBITDA (€m)

5.1

5.5

7.3%

33.1%

5.9

7.3

23.8%

33.2%

EBITDA margin

11.1%

10.1%

(1.0%)

(0.2%)

11.8%

11.9%

0.0%

1.8%

Normalised EBIT (€m)

3.5

3.9

12.2%

41.7%

4.3

5.6

32.1%

44.4%

Normalised EBIT margin

7.6%

7.2%

(0.4%)

0.3%

8.6%

9.2%

0.6%

2.0%

Normalised net income (€m)

2.7

3.6

32.2%

198.7%

3.3

4.1

23.9%

13.3%

Normalised EPS (€)

0.23

0.31

31.1%

198.0%

0.28

0.34

22.1%

12.5%

Reported basic EPS (€)

0.17

0.25

42.0%

412.9%

0.22

0.29

28.3%

15.6%

Net cash (€m)

57.7

50.1

(13.2%)

(17.0%)

60.2

53.2

(11.6%)

6.2%

Dividend (€)

0.13

0.13

0.0%

(74.0%)

0.15

0.15

0.0%

15.4%

Source: Edison Investment Research

Exhibit 3: Financial summary

€'000s

2014

2015

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

54,410

61,540

33,060

35,852

39,957

54,260

61,202

Cost of sales

(26,455)

(29,189)

(18,954)

(20,224)

(22,289)

(31,035)

(35,384)

Gross profit

27,955

32,351

14,106

15,628

17,668

23,225

25,818

EBITDA

 

 

5,324

6,659

4,260

3,536

4,098

5,453

7,262

Operating Profit (before amort and except)

 

 

4,284

5,820

3,954

3,180

2,755

3,904

5,638

Amortisation of acquired intangibles

(285)

(285)

(264)

(439)

(610)

(960)

(960)

Exceptionals and other income

1,468

0

(557)

0

(300)

0

0

Other income

0

(740)

0

(69)

0

0

0

Operating Profit

5,467

4,795

3,133

2,672

1,845

2,944

4,678

Net Interest

(249)

(151)

48

(208)

(1,284)

1,300

300

Profit Before Tax (norm)

 

 

4,035

5,669

4,002

2,972

1,471

5,204

5,938

Profit Before Tax (FRS 3)

 

 

5,218

4,644

3,181

2,464

561

4,244

4,978

Tax

(1,046)

(762)

(661)

(710)

4

(1,188)

(1,394)

Profit After Tax (norm)

3,226

4,739

3,170

2,170

1,204

3,747

4,275

Profit After Tax (FRS 3)

4,172

3,882

2,520

1,754

565

3,056

3,584

Average Number of Shares Outstanding (m)

11.5

11.7

11.7

11.7

11.7

11.7

11.8

EPS - normalised (€)

 

 

0.281

0.406

0.271

0.186

0.103

0.306

0.345

EPS - normalised fully diluted (€)

 

 

0.276

0.403

0.271

0.186

0.103

0.306

0.345

EPS - (IFRS) (€)

 

 

0.364

0.333

0.475

5.874

0.048

0.248

0.286

Dividend per share (€)

0.23

0.25

0.30

1.00

0.50

0.13

0.15

Gross margin (%)

51.4

52.6

42.7

43.6

44.2

42.8

42.2

EBITDA Margin (%)

9.8

10.8

12.9

9.9

10.3

10.1

11.9

Operating Margin (before GW and except) (%)

7.9

9.5

12.0

8.9

6.9

7.2

9.2

BALANCE SHEET

Fixed Assets

 

 

18,019

18,132

25,428

8,860

22,942

30,323

28,179

Intangible Assets

15,078

14,692

21,296

7,332

17,751

25,963

24,975

Tangible Assets

1,249

1,361

1,598

793

3,680

2,849

1,693

Other

1,692

2,079

2,534

735

1,511

1,511

1,511

Current Assets

 

 

34,892

38,946

37,085

109,426

134,674

119,777

117,633

Stocks

1,820

2,075

3,146

2,528

3,141

3,441

3,741

Debtors

20,768

27,791

26,369

17,215

16,992

23,075

26,027

Cash

12,304

9,080

7,570

89,683

114,541

93,261

87,865

Other

0

0

0

0

0

0

0

Current Liabilities

 

 

(17,451)

(18,349)

(21,051)

(13,612)

(30,086)

(29,648)

(31,814)

Creditors

(15,297)

(17,528)

(20,243)

(12,937)

(12,782)

(17,244)

(19,410)

Short term borrowings

(2,154)

(821)

(808)

(675)

(17,304)

(12,404)

(12,404)

Long Term Liabilities

 

 

(6,491)

(5,105)

(7,180)

(4,781)

(41,184)

(35,084)

(26,584)

Long term borrowings

(1,685)

0

(1,391)

(1,688)

(36,882)

(30,782)

(22,282)

Other long term liabilities

(4,806)

(5,105)

(5,789)

(3,093)

(4,302)

(4,302)

(4,302)

Net Assets

 

 

28,969

33,624

34,282

99,893

86,346

85,368

87,414

CASH FLOW

Operating Cash Flow

 

 

5,404

2,412

10,676

119

2,039

3,533

6,175

Net Interest

(249)

(151)

105

(208)

(69)

1,300

300

Tax

(1,344)

(1,461)

(2,022)

379

(624)

(1,188)

(1,394)

Capex

(615)

(763)

(738)

(661)

(526)

(440)

(440)

Acquisitions/disposals

0

0

(5,403)

82,250

1,314

(9,400)

0

Financing

(597)

2,215

(828)

(6)

(7,227)

(674)

0

Dividends

(2,615)

(2,678)

(2,931)

(3,496)

(11,710)

(5,913)

(1,537)

Net Cash Flow

(16)

(426)

(1,141)

78,377

(16,803)

(12,783)

3,104

Opening net debt/(cash)

 

 

(8,575)

(8,465)

(8,259)

(5,371)

(87,320)

(60,358)

(50,075)

HP finance leases initiated

0

0

0

0

(2,788)

0

0

Other

(94)

220

(1,747)

3,572

(7,371)

2,500

0

Closing net debt/(cash)

 

 

(8,465)

(8,259)

(5,371)

(87,320)

(60,358)

(50,075)

(53,179)

Source: TXT e-solutions, Edison Investment Research

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This report has been commissioned by TXT e-solutions and prepared and issued by Edison, in consideration of a fee payable by TXT e-solutions. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This report has been commissioned by TXT e-solutions and prepared and issued by Edison, in consideration of a fee payable by TXT e-solutions. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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