Business portfolio generates solid growth

Piteco 7 October 2019 Update
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Piteco

Business portfolio generates solid growth

H1 results

Software & comp services

7 October 2019

Price

€5.30

Market cap

€95m

Net debt (€m) H119, excl. value of put options

14.8

Shares in issue

17.9m

Free float

27%

Code

PITE

Primary exchange

Borsa Italiana

Share price performance

%

1m

3m

12m

Abs

2.9

3.9

17.8

Rel (local)

3.9

7.1

14.7

52-week high/low

€5.75

€3.60

Business description

Piteco is Italy’s leading company in designing, developing and implementing software for treasury, finance and financial planning management. In addition to the core corporate treasury software (Piteco Spa), the product offering has increased thanks to the acquisitions of Myrios (finance and risk management) and Juniper (digital payment and clearing house).

Next events

FY results

March 2020

Analyst

Dario Carradori

+44 (0)20 3077 5700

Piteco is a research client of Edison Investment Research Limited

Piteco generated solid organic revenue and EBITDA growth in H1 (+7/+8%) and benefitted strongly from recent acquisitions. We expect organic growth to continue for Piteco Spa and we forecast acceleration for Myrios and Juniper. 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 peers.

Year end

Net sales* (€m)

EBITDA**
(€m)

EPS**
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

16.4

6.5

30.3

15.0

17.5

2.8

12/18

19.4

8.3

31.5

15.0

16.8

2.8

12/19e

23.9

10.6

38.3

17.5

13.8

3.3

12/20e

26.0

11.7

41.5

20.0

12.8

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.

Organic growth and recent M&A boost H1 results

Piteco group reported 23/31% H1 revenue/EBITDA growth year-on-year (y-o-y) thanks to organic progress (+7/+8% y-o-y) and the full benefit of the acquisition of Myrios (acquired in October 2018). Overall, we believe H1 revenue and EBITDA are in line with our largely unchanged FY forecasts, while below the EBITDA level the run-rate of D&A was higher than suggested by our forecasts, due to the non-cash impact of the Myrios acquisition (IFRS3 – business combination).

8% two-year revenue CAGR, balance sheet headroom

Our forecasts reflect rather stable organic growth for the corporate treasury core business (Piteco Spa) with an acceleration, already from H219, for recently acquired Myrios (finance and risk management solutions), mainly thanks to recent commercial success with both corporates and bank clients. We expect robust revenue growth (8% CAGR 2019e–21e) for the group to translate into solid earnings progression (we forecast normalised EPS CAGR of 10%). Further acquisitions could strengthen the growth outlook. Based on our FY20 forecasts, we estimate balance sheet headroom of at least €25–30m. Our forecasts for revenue and EBITDA are broadly unchanged whereas FY19e–21e net income declines by an average 8%, reflecting an increase in D&A.

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 historical growth track record, the earnings growth outlook (10% EPS CAGR 2019e–21e) and sustained cash-flow generation (10% FCF yield) supports further investment opportunities that could strengthen the growth outlook. The stock is trading on 9x EV/EBITDA and 13x P/E for FY20, at a discount to large international software providers as well as small Italian software companies. Our DCF-based valuation is broadly unchanged at €6.7/share.

Solid growth in H119

Piteco generated solid organic revenue/EBITDA growth in H1 (+7/+8%) and strongly benefitted from recent acquisitions. Overall, we see H1 revenue and EBITDA as consistent with our marginally updated FY expectations. We expect organic growth to continue for Piteco Spa, while we forecast an acceleration for Myrios and Juniper. 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.

Organic growth and Myrios acquisition drive H1 results

Piteco reported strong revenue and EBITDA growth for H1 thanks to organic development and the full benefit of the acquisition of Myrios (October 2018). Overall, we believe H1 revenue and EBITDA are in line with our FY forecasts, while below the EBITDA, the run-rate of D&A was higher than our expectations. Respectively, H1 revenues and EBITDA represent 45% and 41% of our largely unchanged FY forecasts, which we believe makes sense as historical results for Piteco have been skewed towards H2 (as most projects are completed and billed in H2 and the sale of new licences is concentrated in Q4, when clients have more visibility on their budgets). We provide more detail on the H1 results key trends below.

Revenues grew 23% y-o-y to €11.1m. Myrios contributed €1.4m (16%) to revenue growth whereas organic growth was c +7% y-o-y.

EBITDA growth of 31% y-o-y to €4.3m was driven by strong revenue growth and margin expansion (to 39% in H119 from 37% one year earlier) also thanks to the higher margins of Myrios (51% in H119 vs 38/34% for Piteco Spa/Juniper). Organic growth was 8% y-o-y.

Net income declined 8% y-o-y due to the increase in non-cash charges (D&A up €0.6m, largely driven by the accounting impact of the Myrios acquisition – IFRS 3 Business Combinations) and, to a lesser extent, an increase in financial costs (+€0.4), which are mostly driven by the one-off impact of the revaluation of the outstanding put options that Piteco granted to the shareholders of Myrios and Juniper. Piteco provides an adjusted net income figure (removing only the increased D&A expense – IFRS 3) of €2.3m, up 3% y-o-y.

Net debt reduced to €14.8m (from €15.3m at the end of FY18) thanks to free cash-flow generation of €4.0m in H119, partly offset by the dividend payment (€2.8m). Including the value of the put options, net debt was €26.4m.

Piteco growth to continue, Myrios to accelerate

Our forecasts reflect stable organic growth in the corporate treasury core business (Piteco Spa) with an acceleration of growth in the recently acquired Myrios and Juniper.

We expect growth to continue at sustained pace for Piteco Spa (corporate treasury, which includes the group’s broad treasury management software activities), in line with the historical trend (we forecast 6% 2019e–21e revenue CAGR vs +5% in 2012–18). This business develops and delivers treasury and financial planning solutions, primarily to the Italian market, but it is also expanding internationally. Due to the flexibility of the solutions offered, the cost-effectiveness, the good company reputation and historical track record, the opportunity to grow the customer base in Italy (with c 1,100 prospects according to the company) and the difficulty for international players to penetrate the Italian market, we expect organic growth to continue at a robust pace. Piteco Spa signed 30 new clients in the first three quarters of 2019 (compared to a portfolio of c 600 clients). If we annualise new client wins (40), the company is on track to beat the number of client additions in FY18 (37) and FY17 (30). It should be noted that a SaaS option is offered to new clients, which is growing very quickly (albeit from a low base). As a result, revenue growth may be more subdued in the short term (as revenues are spread over a number of years) in exchange for more stability in the longer term and a higher overall contract value.

We expect an acceleration of growth for Myrios, which offers software solutions for finance and risk management areas, targeted at banks (60% of revenue) and large corporates (40% of revenue). Myrios’s key areas of functionality cover deal management across a broad range of asset classes (FX, debt, commodities and securities), hedge accounting and risk analysis. Significant commercial progress was achieved in 2019 and we expect growth for Myrios to accelerate in H219 and FY20 thanks to new large client additions, both corporate (eg Telecom Italia) and banks (eg Medio Credito Centrale).

A new subsidiary, Myrios Switzerland (based in Geneva) was set up in February 2019 to help internalise Piteco group’s existing products. The unit offers all Piteco’s software solutions for treasury management, digital payments and financial risk management. It is too early to assess the success of this commercial effort, but we point out that a pick-up in orders from outside Italy would represent upside to our forecasts for the group – we believe this will be one of the key points to focus on in FY20.

H1 growth was slower (2% revenue growth year-on-year, despite the recent US dollar appreciation), for Juniper Payments (digital payment and clearing house), a US payments software business focused on the correspondent banking space. We expect a revenue step-up in FY20 following a year of significant investments, which led to a significant increase in costs (H1 Juniper operating costs up 14% y-o-y vs revenues +2% y-o-y). We expect to have more visibility on the outlook for this business with the FY19 results.

Profit forecasts overview: Robust organic growth

We expect robust revenue growth (8% CAGR 2019e–21e) to translate into solid earnings progression (normalised EPS CAGR of 10%). Our forecasts only reflect organic growth for the group although we believe further acquisitions could strengthen the outlook. We provide more detail on the key financials below:

We forecast 8% revenue CAGR 2019e–21e for the group with the strongest growth rate at Myrios (17% vs 6/8% CAGR for Piteco Spa/Juniper).

Following an expected expansion of the EBITDA margins for the group in FY19 (mostly reflecting the full-year contribution of Myrios), we factor in a small further expansion in FY20/FY21 thanks to a more favourable business mix (Myrios has higher margins and has a higher growth rate) and economies of scale. We see our forecasts for EBITDA margins as conservative as we see potential for margins to expand. Overall we estimate an EBITDA CAGR of 9%.

Sustained EBITDA growth, combined with constant D&A in FY20e–FY21e and a decline in financial expenses results in a 10% normalised net income CAGR.

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

Balance sheet headroom for further acquisitions

Piteco Group 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), 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 starting in FY20.

Existing bank loans have the covenants of net debt/EBITDA < 3x and net debt/equity < 1x. Hence, based on FY20 forecasts, both covenants suggest net debt ceiling of c €35–40m (assuming no new EBITDA contribution from acquisitions) vs our year-end FY20 forecast of c €10m (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 least €25–30m of balance sheet headroom.

Exhibit 3: Leverage and FCF yield

Source: Company data, Edison Investment Research

Forecasts: Revenue and EBITDA little changed

We have made only small changes to revenue and EBITDA forecasts post the H1 results. However, 2019e–21e EBIT/net income both reduce by an average 8%, mostly reflecting an increase in non-cash expenses (D&A), partly offset by a small increase in EBITDA margins in FY20–FY21. We now forecast total D&A of €2.8m for FY19 vs €1.9m previously. We have also assumed an increasing number of shares to reflect the full conversion of convertible bonds by FY20 and increased the portion of D&A included in the adjusted operating profit and adjusted net income (which results in lower estimates) to better align it with the company definition.

Exhibit 4: Forecast changes

€000s

2018

2019e

2020e

2021e

Net sales revenue

NEW

19,374

23,944

26,030

27,919

OLD

-

24,042

26,276

28,247

% change

-

0%

-1%

-1%

EBITDA

NEW

8,266

10,628

11,678

12,600

OLD

-

10,666

11,677

12,300

% change

-

0%

0%

2%

Operating profit

NEW

6,399

7,855

8,860

9,836

OLD

-

8,775

9,751

10,344

% change

-

-10%

-9%

-5%

Net income

NEW

5,265

6,071

6,894

7,562

OLD

-

6,794

7,561

7,883

% change

-

-11%

-9%

-4%

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 (10% EPS CAGR 2019e–21e) and sustained cash-flow generation (10% FCF yield) supports further investment opportunities that could strengthen the growth outlook. The stock is trading on 9x EV/EBITDA and 13x P/E for FY20, at a discount to large international software providers and small Italian software companies.

Our DCF-based valuation is broadly unchanged, at €6.7/share. This is based on a 5.1% CAGR for net revenues over 10 years, a long-term EBITDA margin of 43%, 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

520.0

93

4.8

4.1

10.9

9.1

13.6

12.5

Large global ERP/accounting software providers

Microsoft

104.3

736,367

6.0

5.4

14.0

12.3

23.3

20.4

Oracle

47.8

157,760

4.6

4.5

9.8

9.4

14.0

13.0

SAP

89.2

99,911

4.5

4.2

14.3

12.8

20.2

18.3

Intuit

202.7

48,385

7.8

7.1

21.2

18.9

31.0

27.4

Workday

166.2

33,329

12.7

10.2

76.3

54.5

130.6

102.0

Sage

621.0

5,966

3.8

3.6

14.6

13.5

20.8

18.9

Xero

43.0

3,689

12.2

9.3

79.2

46.7

NaN

181.6

Median

 

6.0

5.4

14.6

13.5

22.0

20.4

Small software companies quoted in Italy

TXT e-solutions

914.0

118

1.4

1.2

12.6

9.2

48.1

33.0

Neurosoft

82.0

21

NaN

NaN

NaN

NaN

NaN

NaN

Expert System

122.5

44

1.6

1.4

10.2

6.6

NaN

NaN

Tas Tecnologia Avanzata dei Sistemi

174.0

144

NaN

NaN

NaN

NaN

NaN

NaN

Primi Sui Motori

237.0

25

NaN

2.0

NaN

12.7

NaN

NaN

Median

 

1.5

1.4

11.4

9.2

48.1

33.0

Source: Refinitiv, Edison Investment Research. Note: Priced at 30 September 2019.

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.

Exhibit 6: Financial summary

€'000s

2017

2018

2019e

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

17,046

20,214

24,850

27,004

28,952

Net Sales Revenue

16,374

19,374

23,944

26,030

27,919

EBITDA

 

 

6,457

8,266

10,628

11,678

12,600

Operating Profit (before amort. and except.)

 

 

6,110

6,486

8,705

9,710

10,686

Amortisation of acquired intangibles

(956)

(87)

(850)

(850)

(850)

Exceptionals

(1,160)

(327)

0

0

0

Share based payments

0

0

0

0

0

Operating Profit

3,994

6,072

7,855

8,860

9,836

Net Interest

(537)

(340)

(750)

(600)

(550)

Profit Before Tax (norm)

 

 

5,573

6,146

7,955

9,110

10,136

Profit Before Tax (FRS 3)

 

 

3,457

5,732

7,105

8,260

9,286

Tax

(72)

(467)

(1,034)

(1,367)

(1,723)

Profit After Tax (norm)

5,501

5,679

6,921

7,744

8,412

Profit After Tax (FRS 3)

3,385

5,265

6,071

6,894

7,562

Average Number of Shares Outstanding (m)

18.1

18.0

18.1

18.7

19.1

EPS - normalised (c)

 

 

30.3

31.5

38.3

41.5

44.0

EPS - FRS 3 (c)

 

 

18.7

29.2

33.6

37.0

39.5

Dividend per share (c)

15.00

15.00

17.50

20.00

22.50

Gross Margin (%)

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

37.9

40.9

42.8

43.2

43.5

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

35.8

32.1

35.0

36.0

36.9

BALANCE SHEET

Fixed Assets

 

 

39,348

60,884

58,686

56,493

54,399

Intangible assets and deferred tax

37,834

58,763

58,069

57,372

56,666

Tangible Assets

1,486

2,098

594

(902)

(2,290)

Investments

28

23

23

23

23

Current Assets

 

 

9,526

11,171

16,078

25,140

29,114

Stocks

0

0

0

0

0

Debtors

4,096

4,808

5,639

5,827

5,947

Cash

5,154

5,834

9,910

18,783

22,638

Current Liabilities

 

 

(8,425)

(10,439)

(11,370)

(12,141)

(12,824)

Creditors

(6,100)

(4,360)

(5,291)

(6,062)

(6,745)

Short term borrowings

(2,325)

(6,079)

(6,079)

(6,079)

(6,079)

Long Term Liabilities

 

 

(10,533)

(30,480)

(29,168)

(26,355)

(23,543)

Long term borrowings

(9,354)

(26,549)

(25,237)

(22,424)

(19,612)

Other long term liabilities

(1,179)

(3,931)

(3,931)

(3,931)

(3,931)

Net Assets

 

 

29,916

31,136

34,225

43,136

47,147

CASH FLOW

Operating Cash Flow

 

 

5,670

7,223

10,889

11,965

12,893

Net Interest

(538)

(336)

(750)

(600)

(550)

Tax

(309)

(648)

(467)

(955)

(1,275)

Capex

(400)

(624)

(575)

(625)

(670)

Acquisitions/disposals

(9,830)

(10,018)

(2,495)

(1,241)

0

Financing

0

0

0

0

0

Dividends

(3,094)

(2,698)

(2,707)

(3,162)

(3,731)

Net Cash Flow

(8,501)

(7,101)

3,895

5,382

6,667

Opening net debt/(cash)

 

 

(1,946)

6,525

26,794

21,406

9,720

Other

30

(13,168)

1,492

6,304

0

Closing net debt/(cash)

 

 

6,525

26,794

21,406

9,720

3,053

Source: Company data, Edison Investment Research. Note: *FY18 ‘Other’ represents Myrios and Juniper acquisition liabilities. Acquisitions: FY18 – the initial payment for 56% Myrios, net of cash acquired. FY19 – payment for 5% of Juniper and second payment for 56% of Myrios, both reversed from acquisition liabilities. FY20: Third payment for 56% of Myrios, reversed from acquisition liabilities. FY20 ‘Other’ also includes the assumed conversion of all outstanding convertible bonds.


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Australia

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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

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.

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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.

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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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