An excellent year

Piteco 26 March 2020 Update
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Piteco

An excellent year

FY19 results

Software & comp services

26 March 2020

Price

€5.3

Market cap

€95m

Net debt (€m) FY19, excl. value of put options

14.6

Shares in issue

17.9m

Free float

27%

Code

PITE

Primary exchange

Borsa Italiana

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(13.1)

(14.5)

18.8

Rel (local)

16.7

19.1

46.8

52-week high/low

€6.8

€4.4

Business description

Piteco is Italy’s leading company in designing, developing and implementing software for treasury, finance and financial planning management. Piteco Spa is core corporate treasury software, Myrios specialises in finance and risk management, and Juniper in digital payments and clearing houses.

Next events

AGM

29 April 2020

H120 results

29 September 2020

Analysts

Sara Welford

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Piteco is a research client of Edison Investment Research Limited

Piteco Spa generated solid organic revenue and EBITDA growth in FY19 of 7% and 9% respectively and continued to benefit strongly from recent acquisitions. FY20 started very well, although the COVID-19 pandemic is likely to affect growth. It is still early days and Piteco is not directly affected. Indeed, its products can help steer financial and treasury decision-making at times of crisis. A potential global recession would be likely to cause a softening in the demand for Piteco’s products. Piteco continues to trade at a discount to Italian and international software peers.

Year end

Net sales* (€m)

EBITDA**
(€m)

EPS**
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/18

19.4

8.3

31.5

15.0

16.8

2.8

12/19

22.8

10.2

31.6

15.0

16.8

2.8

12/20e

24.6

10.5

36.1

17.50

14.7

3.3

12/21e

26.4

11.7

40.2

20.00

13.2

3.8

Note: *Excludes the capitalisation of development costs, change in work in progress and other revenues (largely expenses charged back to customers). **Normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

FY19 showed excellent underlying growth

During FY19 Piteco Group reported 19% revenue and 24% EBITDA growth, with a full benefit of the acquisition of Myrios (acquired in October 2018). Piteco Spa reported organic growth of 7% and 9%, respectively. Group EBITDA margin was an impressive 43% for the year. The underlying results were largely in line with our forecasts. Headline pre-tax and net profit were down heavily: this was due to the increased value of the Myrios put option and earnout causing higher non-cash P&L financial costs. As a reminder, the acquired asset cannot be revalued, and hence the excellent performance of Myrios – which has led to its increased value – is only reflected via the higher P&L financial cost. Excluding this non-cash charge, the net profit was up 8% in underlying terms.

Good underlying growth but COVID-19 caution

Our forecasts reflect relatively stable organic growth for the corporate treasury core business (Piteco Spa) with strong growth for Myrios (finance and risk management solutions), mainly thanks to recent commercial success with both corporates and bank clients. The acquisition of Everymake should enable cross-selling opportunities, and we believe further acquisitions are likely. Based on our FY20 forecasts, we estimate balance sheet headroom of at least €25–30m. We cut our revenue and EBITDA forecasts by 6% and 10% respectively to reflect the COVID-19 emergency. In a worst case scenario, we believe FY20 revenues could be 3% lower than in FY19, with EBITDA 7.5% below the FY19 level.

Valuation: At a discount to peers

We believe the key attractiveness of Piteco is its ability to generate high profit margins while providing customers with a flexible and cost-effective solution. The stock is trading on 10x EV/EBITDA and 15x P/E for FY20, at a discount to large international software providers and small Italian software companies. Our DCF-based valuation falls to €6.0/share (from €6.7 previously).

FY19 a good year

During FY19, Piteco Spa generated solid organic revenue and EBITDA growth of 7% and 9% respectively and strongly benefitted from recent acquisitions. While we previously expected organic growth to continue for Piteco Spa and an acceleration for Myrios and Juniper, we take a more cautious view in light of the COVID-19 pandemic. It is still too early to gauge its full impact, but we have cut our revenue forecasts by 7–8%. However, we see balance sheet headroom for further M&A, which could strengthen the growth outlook (albeit with execution risks). Piteco continues to trade at a discount to Italian and international software players.

Piteco organic growth and Myrios lead to excellent FY19

Piteco reported strong revenue and EBITDA growth during FY19 thanks to organic development and the full benefit of the acquisition of Myrios (October 2018). We provide more detail on the key trends in the full year results below.

Group revenues grew 19% y-o-y to €24.0m, with the growth principally stemming from subscription fees, which in FY19 accounted for 60% of total revenues.

EBITDA growth of 24% y-o-y to €10.2m was driven by strong revenue growth and margin expansion (to 42.6% in FY19 from 40.9% in FY18) also thanks to the higher margins of Myrios.

Pre-tax profit declined by €2m, to €3.7m in FY19 due to an increase in non-cash charges. Financial costs were up €2.7m due to the one-off impact of the revaluation of the outstanding put options that Piteco granted to the shareholders of Myrios and Juniper.

Net income of €3.0m versus €5.3m in FY18 also declined due to the increase in non-cash financial charges. Piteco provides an adjusted underlying net income figure of €5.7m, which is 8% higher than in FY18.

Net debt (excluding put options) reduced to €14.6m (from €15.3m at the end of FY18 and €14.8m at end H119) thanks to free cash-flow generation, partly offset by the dividend payment (€2.7m) and the second tranche of the payment for Myrios (€2.9m). Including the value of the put options, net debt was €27.5m at end FY19 (vs €26.8m at end FY18). As a reminder, 50% of the value of the Myrios put option (hence at least €5.6m) will be paid via new share issuance.

Piteco growth to continue, Juniper to accelerate

In light of the COVID-19 pandemic, we have cut our forecasts. While we previously expected organic growth in the corporate treasury core business (Piteco Spa) to maintain the same trajectory, we now believe growth may slow materially in FY20 as new clients decide to preserve cash and defer spending on their IT and management systems.

Piteco Spa is the core corporate treasury business, which includes the group’s broad treasury management software activities. This business develops and delivers treasury and financial planning solutions, primarily to the Italian market, but it is also expanding internationally. Piteco Spa signed 40 new clients in FY19, beating the number of new client additions in previous years. We now expect 38 new clients in FY20 (previously 44).

Myrios offers software solutions for finance and risk management areas, targeted at banks (60% of revenue) and large corporates (40% of revenue). Myrios Switzerland (based in Geneva) was set up in February 2019 to help internationalise Piteco group’s existing products. Myrios witnessed extremely strong growth in FY19 (revenues up 33%, EBITDA up 39%). While we would expect the growth to moderate somewhat, we still expect double-digit revenue growth in the shorter term, as Myrios Switzerland continues to expand internationally and Myrios Srl also widens its client base as well as benefitting from recurring fees from existing clients.

Juniper Payments (digital payment and clearing house) is a US payments software business focused on the correspondent banking space. FY19 witnessed broadly flat sales as a new client chose to defer its start date. We previously expected a revenue and margin improvement in FY20 following a year of significant investments in several new projects, which resulted in a reduction in EBITDA margin during FY19. We now expect another flat year in FY20 as again new clients may choose to conserve cash and defer projects to FY21.

We expect robust group revenue growth (6% CAGR 2020e–22e) to translate into solid earnings progression (normalised EPS CAGR of 10%). Favourable business mix should continue to help drive EBITDA margin improvement (Myrios has higher margins and a higher growth rate than the Piteco base business). Our forecasts only reflect organic growth for the group but we believe further acquisitions could strengthen the outlook. As discussed above, we have cut our FY20 revenue forecasts by 7% to reflect the potential effects of the COVID-19 pandemic. We have left growth rates in subsequent years broadly unchanged at this stage.

Exhibit 1: Revenue breakdown by business

Exhibit 2: Group EBITDA and EBITDA margin

.

Source: Company data, Edison Investment Research

Source: Company data, Edison Investment Research

Exhibit 1: Revenue breakdown by business

Source: Company data, Edison Investment Research

Exhibit 2: Group EBITDA and EBITDA margin

.

Source: Company data, Edison Investment Research

Everymake the latest addition, but balance sheet headroom remains for further acquisitions

Piteco Group has expanded significantly via acquisitions over the last few years with three deals in four years (Centro Data in 2015, Juniper in 2017 and Myrios in 2018). With good cash flow generation (10% FCF yield 2019) leverage ratios well below the covenant thresholds and the prospect of further organic growth in the next few years, we expect the company to consider further acquisitions.

Existing bank loans have the covenants of net debt/EBITDA <3x and net debt/equity <1x. Hence, based on our FY20 forecasts, both covenants suggest a net debt ceiling of c €30–40m (assuming no new EBITDA contribution from acquisitions) versus our year-end FY20 forecast of c €10.5m net debt (assuming full conversion of outstanding convertible bonds by FY20 and excluding the value of the put options related to Myrios and Juniper, which are not considered in the covenant calculations), leaving at c€25-30m of balance sheet headroom.

Exhibit 3: Leverage and FCF yield

Source: Company data, Edison Investment Research

Everymake

Piteco announced the acquisition of a branch of Everymake on 19 March. The acquired business produces cloud software for data matching, mainly of financial products. It offers vertically-integrated solutions across a number of sectors including utilities, financials, consumer credit, financial leasing and factoring. The acquired business is complementary to Piteco’s existing business and will allow cross-selling opportunities. The acquisition is expected to close on 31 March 2020 and Piteco will pay the first tranche of the acquisition price, which is €0.55m in cash. The potential second tranche will be determined at 31 December 2022, based on Everymake’s EBITDA performance, and will be structured as an earn-out.

Forecasts: Revenue and EBITDA cuts

We have cut our revenue and EBITDA forecasts in light of the COVID-19 pandemic. It is still too early to determine the full impact of the pandemic given we do not know how long the disruption will last, nor the ultimate cost to the global economy. We recognise that Piteco’s business is not directly affected by the coronavirus outbreak; indeed, its products can help steer financial and treasury decision making at times of crisis. That said, a potential global recession would be highly likely to cause a softening in demand for Piteco’s products, as new and existing customers choose to conserve cash and delay upgrading their internal systems. As a reminder, Piteco’s customers are medium- and large-scale corporates, so are less likely to face a longer-term liquidity crisis. In addition, its customers do not operate in the sectors that are most affected by the temporary restrictions, such as leisure and tourism.

We assume that during FY20 Juniper’s revenues are flat, as any potential new customers choose to delay implementing new software to conserve cash. We also assume that Piteco Spa and Myrios gain fewer new customers than previously forecast. As a reminder, c85% of their business is derived from recurring fees from existing clients, while c15% of their business stems from new customers. We assume the recurring fees continue on their previous trajectory. In addition, we incorporate the Everymake acquisition into our forecasts. This results in the forecast changes detailed in Exhibit 4.

We also run a worst case scenario. This assumes no new customers are gained by Piteco Spa and Myrios during Q2 and Q3. In other words, new customer growth for FY20 is halved. Our other assumptions remain unchanged vis-à-vis our base case. Our worst case scenario results in FY20 sales of €22.2m, or 3% below the FY19 level. Our FY20 EBITDA would move to €9.5m, or 7.5% below the FY19 level.

Exhibit 4: Forecast changes

€000s

2019

2020e

2021e

2022e

Net sales revenue

NEW

22,774

24,568

26,450

28,046

OLD

23,944

26,030

27,919

29,664

% change

-5%

-6%

-5%

-5%

EBITDA

NEW

10,238

10,484

11,722

13,179

OLD

10,628

11,678

12,600

14,709

% change

-4%

-10%

-7%

-10%

Operating profit (before amort. and exceptionals)

NEW

7,255

8,521

9,819

11,335

OLD

7,855

8,860

9,836

11,998

% change

-8%

-4%

0%

-6%

Net income

NEW

3,017

6,733

7,693

8,993

OLD

6,071

6,894

7,562

9,198

% change

-50%

-2%

2%

-2%

Source: Company data, Edison Investment Research

Valuation: Discount to international and Italian players

We believe the key attractiveness of Piteco is its ability to generate high profit margins while providing customers with a flexible and cost-effective solution The historical growth track record, the earnings growth outlook and sustained cash-flow generation support further investment opportunities that could strengthen the growth outlook. The stock is trading on 10x EV/EBITDA and 15x P/E for FY20, at a discount to large international software providers and small Italian software companies.

Our DCF-based valuation falls to at €6.0/share. This is based on a 4% CAGR for net revenues over 10 years, a long-term EBITDA margin of 42%, a WACC of 9% and terminal growth rate of 2%.

Exhibit 5: Peer valuation metrics

Share price

Market cap

EV/sales (x)

EV/EBITDA (x)

PE (x)

Local currency

€m

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

Piteco

5.00

93

4.5

4.0

10.5

9.1

13.9

12.4

Large global ERP/accounting software providers

Microsoft

140.40

1,067,889

7.1

6.3

15.5

14.0

24.7

22.0

Oracle

47.27

149,070

4.4

4.3

9.3

9.0

12.2

11.2

SAP

89.07

110,255

4.0

3.7

11.7

10.5

16.2

14.4

Intuit

225.07

58,628

7.5

6.8

20.5

18.3

29.7

26.3

Workday

113.87

26,418

5.9

4.9

27.1

22.1

50.4

40.3

Sage

579.8

6,562

3.5

3.3

13.7

13.2

19.8

18.2

Xero

63.94

9,064

12.5

9.9

63.7

42.9

738.3

132.3

Median

 

5.9

4.9

15.5

14.0

24.7

22.0

Small software companies quoted in Italy

TXT e-solutions

4.63

61

NaN

NaN

12.6

9.2

48.1

33

Neurosoft

0.84

22

NaN

NaN

NaN

NaN

NaN

NaN

Expert System

1.70

68

2.1

1.9

10.2

6.6

NaN

NaN

Tas Tecnologia Avanzata dei Sistemi

1.60

135

NaN

NaN

NaN

NaN

NaN

NaN

Primi Sui Motori

1.65

21

NaN

NaN

NaN

12.7

NaN

NaN

Median

 

2.1

1.9

11.4

9.2

48.1

33.0

Source: Refinitiv, Edison Investment Research. Note: Priced at 18 March 2020.

The key upside or downside risks to our forecasts are higher or lower customer acquisition at Piteco Spa, stronger or slower than expected revenue acceleration at Myrios or Juniper, higher/lower contribution from international clients (Myrios Switzerland) and higher or lower margins. Furthermore, we believe M&A activity would represent a significant growth opportunity and generate execution risks. The COVID-19 pandemic is the largest unknown at present, with the scale and duration of any economic downturn potentially affecting the business.

Exhibit 6: Financial summary

€'000s

2017

2018

2019

2020e

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

17,046

20,214

24,039

25,496

27,453

29,098

Net Sales Revenue

16,374

19,374

22,774

24,568

26,450

28,046

EBITDA

 

 

6,457

8,266

10,238

10,484

11,722

13,179

Operating Profit (before amort. and except.)

 

6,110

6,486

7,255

7,255

8,521

9,819

Amortisation of acquired intangibles

(956)

(87)

0

0

0

0

Exceptionals

(1,160)

(327)

(270)

0

0

0

Share based payments

0

0

0

0

0

0

Operating Profit

3,994

6,072

6,985

8,521

9,819

11,335

Net Interest

(537)

(340)

(612)

(600)

(550)

(500)

Fair value adjustments

0

0

(2,694)

0

0

0

Profit Before Tax (norm)

 

 

5,573

6,146

6,643

7,921

9,269

10,835

Profit Before Tax (FRS 3)

 

 

3,457

5,732

3,679

7,921

9,269

10,835

Tax

(72)

(467)

(662)

(1,188)

(1,576)

(1,842)

Profit After Tax (norm)

5,501

5,679

5,713

6,733

7,693

8,993

Profit After Tax (FRS 3)

3,385

5,265

3,017

6,733

7,693

8,993

Average Number of Shares Outstanding (m)

18.1

18.0

18.1

18.7

19.1

19.1

EPS - normalised (c)

 

 

30.3

31.5

31.6

36.1

40.2

44.2

EPS - FRS 3 (c)

 

 

18.7

29.2

16.7

36.1

40.2

44.2

Dividend per share (c)

15.00

15.00

15.00

17.50

20.00

22.50

Gross Margin (%)

0.0

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

37.9

40.9

42.6

41.1

42.7

45.3

Op Margin (before GW and except.) (%)

35.8

32.1

30.2

33.4

35.8

39.0

BALANCE SHEET

Fixed Assets

 

 

39,348

60,884

62,088

60,715

59,446

58,275

Intangible assets and deferred tax

37,834

58,763

58,053

58,181

58,307

58,423

Tangible Assets

1,486

2,098

4,015

2,513

1,119

(169)

Investments

28

23

20

20

20

20

Current Assets

 

 

9,526

11,171

10,742

18,479

22,174

26,400

Stocks

0

0

0

0

0

0

Debtors

4,096

4,808

6,475

6,682

6,891

7,004

Cash

5,154

5,834

3,754

11,285

14,770

18,883

Current Liabilities

 

 

(8,425)

(10,439)

(16,044)

(16,851)

(17,638)

(18,357)

Creditors

(6,100)

(4,360)

(6,308)

(7,115)

(7,902)

(8,621)

Short term borrowings

(2,325)

(6,079)

(9,736)

(9,736)

(9,736)

(9,736)

Long Term Liabilities

 

 

(10,533)

(30,480)

(25,367)

(22,555)

(19,742)

(16,930)

Long term borrowings

(9,354)

(26,549)

(21,476)

(18,664)

(15,851)

(13,039)

Other long term liabilities

(1,179)

(3,931)

(3,891)

(3,891)

(3,891)

(3,891)

Net Assets

 

 

29,916

31,136

31,419

39,789

44,240

49,388

CASH FLOW

Operating Cash Flow

 

 

5,670

7,223

7,223

10,660

11,856

13,408

Net Interest

(538)

(336)

(612)

(600)

(550)

(500)

Tax

(309)

(648)

(467)

(930)

(1,109)

(1,483)

Capex

(400)

(624)

(547)

(590)

(635)

(673)

Acquisitions/disposals

(9,830)

(10,018)

(2,495)

(1,791)

0

0

Financing

0

0

0

0

0

0

Dividends

(3,094)

(2,698)

(2,707)

(2,710)

(3,264)

(3,826)

Net Cash Flow

(8,501)

(7,101)

396

4,038

6,298

6,926

Opening net debt/(cash)

 

 

(1,946)

6,525

26,794

27,458

17,115

10,817

Other

30

(13,168)

(1,060)

6,304

0

0

Closing net debt/(cash)

 

 

6,525

26,794

27,458

17,115

10,817

3,891

Source: Company data, Edison Investment Research

Note: net debt includes the value of put options


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Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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 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

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

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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