TXT e-solutions |
Growth accelerates in Q2 |
H119 results |
Software & comp services |
6 August 2019 |
Share price performance
Business description
Next events
Analyst
TXT e-solutions is a research client of Edison Investment Research Limited |
TXT reported strong organic revenue growth in both divisions in Q219, which combined with the contribution from recent acquisitions, translated into strong growth in EBIT and improved EBIT margins year-on-year. Recent acquisitions have been integrated and provide the potential for cross-selling in the banking & finance division, while the aerospace business has seen significant contract wins in North America. We have revised our forecasts to reflect stronger revenues, higher operating costs and higher tax rates in FY19 and FY20.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
35.9 |
3.0 |
0.19 |
1.00 |
45.0 |
12.0 |
12/18 |
40.0 |
1.5 |
0.10 |
0.50 |
81.3 |
6.0 |
12/19e |
57.4 |
6.1 |
0.34 |
0.13 |
24.9 |
1.6 |
12/20e |
64.4 |
6.0 |
0.32 |
0.15 |
25.8 |
1.8 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strong organic growth in Q219
TXT reported year-on-year revenue growth of 57% for Q219, of which 26% was organic. The recent Cheleo and Assioma acquisitions contributed revenue of €3.0m in Q219. On a divisional organic revenue basis, the Aerospace, Aviation & Automotive division grew 25% and Banking & Finance 33% in Q219. Gross margins were lower on a year-on-year basis due to the higher mix of services revenues. Normalised EBIT grew 108% y-o-y, generating a margin of 7.3%, up from 5.5% a year ago. Net cash at the end of H119 was €44.2m, reflecting the payment of dividends and the acquisition of Assioma in H119.
Positive outlook
Management expects continued organic revenue growth in Q319 and improved EBITA versus Q318. We have revised our forecasts to reflect stronger services revenues in FY19 and FY20, higher operating expenses and a higher tax rate (to match the rate reported in H119). These changes, combined with movements in the value of short-term investments, result in a 9.5% upgrade to FY19 normalised EPS and a 5.8% reduction in FY20 EPS.
Valuation: Accretive acquisitions to drive upside
TXT is trading at a discount to its peer group on EV/Sales and EV/EBITDA multiples, with EBITDA and EBIT margins slightly below the group average. While the company still holds a high level of cash (we forecast €50m by the end of FY19), it continues to trade at a premium to peers on a P/E basis. Further acquisitions of earnings-enhancing businesses should reduce this premium.
Review of H119 results
Exhibit 1: Q219 and H119 results highlights
€m |
Q219 |
Q218 |
y-o-y |
H119 |
H118 |
y-o-y |
Revenues |
15.1 |
9.6 |
57.3% |
27.0 |
19.0 |
42.0% |
Licenses and maintenance |
1.4 |
1.2 |
18.4% |
2.9 |
2.4 |
24.9% |
Services |
13.7 |
8.4 |
62.9% |
24.1 |
16.7 |
44.5% |
Gross margin (%) |
43.1% |
43.8% |
(0.7%) |
43.5% |
44.4% |
(1.0%) |
EBITDA |
1.5 |
0.9 |
68.9% |
2.8 |
2.1 |
34.7% |
EBITDA margin (%) |
9.9% |
9.2% |
0.7% |
10.3% |
10.9% |
(0.6%) |
Normalised EBIT |
1.1 |
0.5 |
108.4% |
2.1 |
1.4 |
50.0% |
Normalised EBIT margin (%) |
7.3% |
5.5% |
1.8% |
7.6% |
7.2% |
0.4% |
Reported net income |
0.7 |
0.3 |
100.9% |
2.1 |
0.9 |
139.5% |
Net cash |
44.2 |
74.0 |
(40.3%) |
44.2 |
74.0 |
(40.3%) |
Source: TXT e-solutions
TXT reported year-on-year revenue growth of 57.3% for Q219, compared with 26.5% in Q119, resulting in 42% growth for H119. Organic growth in Q219 was 26% y-o-y (Q119 17%), with a further €3.0m contribution in Q2 from the Cheleo and Assioma acquisitions (consolidated from 1 August 2018 and 1 May 2019, respectively).
Revenues from software licenses and maintenance increased 18.4% y-o-y in Q219 while revenue from services increased 62.9% y-o-y. Of the €3.0m acquired revenue contributed in Q219, €2.8m was reported within the services segment. The company noted that it had won important new contracts in the aerospace business, mainly in North America, which should provide further benefits to near-term results.
Gross margin reduced in both Q219 and H119 reflecting the higher proportion of lower margin services revenues compared to last year. Normalised EBIT more than doubled in Q219 and was 50% higher for H119, reflecting the contribution from the acquired businesses. We have treated €346k of reorganisation costs in H119 as exceptional.
In FY18, the company invested the majority of its excess cash in multi-segment insurance funds, which are marked to market. In H218, these were revalued downwards resulting in a net financial expense of €1.3m in FY18. Through the course of 2019 the assets have increased in value and the company reported net financial income of €1.8m for H119.
Net cash at the end of Q219 had reduced to €44.2m from €60.4m at the end of FY18, reflecting payment of the dividend in May (€5.8m), payment to acquire Assioma (€5.6m), purchase of treasury shares (€1m) and newly capitalised leases (€2.2m).
Exhibit 2: Divisional revenues
Revenues (€m) |
H119 |
H118 |
y-o-y |
Aerospace, Aviation & Automotive (AAA) |
18.6 |
15.2 |
22.7% |
Banking & Finance (B&F) |
8.4 |
3.8 |
119.0% |
- Original business |
4.5 |
3.8 |
18.2% |
- Cheleo & Assioma |
3.9 |
0 |
N/A |
Source: TXT e-solutions
On a divisional basis, growth in the AAA division was all organic. Organic growth in the B&F division was similarly strong, boosted by a €3.9m contribution from acquisitions in H119. In Q219, growth in AAA was 25% (all organic) and 196% for B&F (33% organic).
Management changes
In Q2, Marco Guida, CEO of the AAA division and previously group CEO, resigned and has since left the business. Daniele Misani, who has worked his entire career at TXT, has been appointed to this role and also the board.
The CFO, Paolo Matarazzo, resigned in July and will leave TXT at the end of September. Stepping into this role is Eugenio Forcinito, who has worked closely with Paolo at TXT for many years.
Outlook and changes to forecasts
In Q319, the company expects further revenue growth, both organic and from acquisitions, and for Q319 EBITA to be significantly ahead of Q318.
We have revised our forecasts to reflect Q2 results (Exhibit 3). As services revenues saw strong growth in H119, we have increased our services revenue forecasts for the remainder of FY19 and for FY20. We have also increased our operating cost forecasts to reflect increased investment across all cost lines. Based on the 31% tax rate achieved in H119, we have increased our tax rate forecast from 28% to 31% in FY19 and FY20. In FY19, these changes result in a 9.5% increase in normalised EPS. In FY20, the increase in the tax rate outweighs the small increase in normalised EBIT, resulting in a 5.8% decrease in normalised EPS. We note that our normalised EPS forecasts include net financial income of €1.8m in FY19, reflecting the upward valuation of short-term investments in H119, whereas in FY20 we have a €0.3m net financial income forecast reflecting a modest return on cash (as we do not attempt to estimate the likely valuation of the short-term investments). This somewhat skews the growth of EPS in both years.
Exhibit 3: Changes to forecasts
(€m) |
FY19e old |
FY19e new |
change |
y-o-y |
FY20e old |
FY20e new |
change |
y-o-y |
Revenues |
54.3 |
57.4 |
5.8% |
43.7% |
61.2 |
64.4 |
5.3% |
12.2% |
Gross margin (%) |
42.8% |
43.1% |
0.3% |
(1.2%) |
42.2% |
43.0% |
0.8% |
(0.0%) |
Gross profit |
23.2 |
24.7 |
6.5% |
40.0% |
25.8 |
27.7 |
7.3% |
12.0% |
EBITDA |
5.5 |
5.8 |
5.9% |
40.9% |
7.3 |
7.2 |
(0.3%) |
25.4% |
EBITDA margin (%) |
10.1% |
10.1% |
0.0% |
(0.2%) |
11.9% |
11.2% |
(0.6%) |
1.2% |
Normalised EBIT |
3.9 |
4.3 |
9.3% |
54.9% |
5.6 |
5.7 |
0.6% |
32.9% |
Normalised EBIT margin (%) |
7.2% |
7.4% |
0.2% |
0.5% |
9.2% |
8.8% |
(0.4%) |
1.4% |
Normalised net income |
3.6 |
3.9 |
9.2% |
226.1% |
4.1 |
3.8 |
(6.2%) |
(2.7%) |
Normalised EPS (€) |
0.31 |
0.34 |
9.5% |
226.3% |
0.34 |
0.32 |
(5.8%) |
(3.2%) |
Reported basic EPS (€) |
0.25 |
0.26 |
4.4% |
435.7% |
0.29 |
0.27 |
(6.2%) |
3.8% |
Net cash |
50.1 |
50.3 |
0.5% |
(16.6%) |
53.2 |
53.2 |
0.1% |
5.8% |
Dividend (€) |
0.13 |
0.13 |
0.0% |
(74.0%) |
0.15 |
0.15 |
0.0% |
15.4% |
Source: Edison Investment Research
Valuation
Exhibit 4: Peer group valuation multiples
Company |
Share |
Market |
Rev growth |
EBIT margin |
EBITDA margin |
EV/Sales |
EV/EBITDA |
P/E |
Div yield |
||||||||||
price |
cap m |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
||||
TXT |
€ 8.36 |
€ 98 |
43.7% |
12.2% |
7.4% |
8.8% |
10.1% |
11.2% |
0.9 |
0.8 |
9.4 |
7.5 |
24.9 |
25.8 |
1.6% |
1.8% |
|||
AKKA Technologies |
€ 61.90 |
€ 1,253 |
21.5% |
5.3% |
8.4% |
8.8% |
10.2% |
10.6% |
0.8 |
0.8 |
8.3 |
7.5 |
12.4 |
10.9 |
1.8% |
2.0% |
|||
Alten |
€ 107.1 |
€ 3,623 |
14.5% |
7.3% |
9.8% |
9.9% |
10.6% |
10.7% |
1.4 |
1.3 |
13.1 |
12.1 |
19.5 |
17.7 |
0.9% |
1.0% |
|||
Altran |
€ 14.35 |
€ 3,680 |
11.0% |
5.6% |
11.2% |
12.0% |
14.8% |
15.3% |
1.5 |
1.4 |
10.3 |
9.4 |
16.8 |
14.5 |
1.6% |
1.9% |
|||
AtoS |
€ 70.24 |
€ 7,653 |
(5.8%) |
2.0% |
9.9% |
10.3% |
14.5% |
14.8% |
1.0 |
1.0 |
7.0 |
6.8 |
8.6 |
8.0 |
2.3% |
2.5% |
|||
Cap Gemini |
€ 112.0 |
€ 18,696 |
7.5% |
5.3% |
12.1% |
12.3% |
15.4% |
15.4% |
1.4 |
1.3 |
9.1 |
8.6 |
17.2 |
15.6 |
1.7% |
1.8% |
|||
Devoteam |
€ 105.6 |
€ 878 |
18.7% |
11.5% |
11.0% |
11.1% |
11.9% |
12.1% |
1.1 |
1.0 |
9.2 |
8.1 |
18.9 |
16.7 |
1.2% |
1.4% |
|||
ESI Group |
€ 30.40 |
€ 181 |
1.8% |
8.0% |
6.1% |
6.9% |
8.5% |
9.7% |
1.5 |
1.4 |
17.3 |
14.1 |
36.6 |
27.6 |
0.0% |
0.0% |
|||
Exprivia |
€ 0.99 |
€ 51 |
0.0% |
3.4% |
4.2% |
4.7% |
7.5% |
7.8% |
0.5 |
0.4 |
6.0 |
5.7 |
9.9 |
6.2 |
0.0% |
0.0% |
|||
Reply |
€ 53.3 |
€ 1,990 |
13.7% |
8.5% |
12.7% |
12.9% |
14.6% |
14.7% |
1.7 |
1.5 |
11.5 |
10.5 |
18.8 |
17.1 |
0.9% |
1.0% |
|||
Sopra Steria |
€ 114.0 |
€ 2,336 |
7.9% |
5.1% |
7.2% |
8.2% |
10.4% |
11.2% |
0.7 |
0.6 |
6.5 |
5.7 |
11.8 |
9.5 |
2.0% |
2.5% |
|||
Average |
9.1% |
6.2% |
9.2% |
9.7% |
11.9% |
12.2% |
1.2 |
1.1 |
9.8 |
8.9 |
17.0 |
14.4 |
1.2% |
1.4% |
|||||
(Discount)/premium to peers |
(18%) |
(22%) |
(4%) |
(16%) |
46% |
79% |
24% |
28% |
Source: Edison Investment Research, Refinitiv (as at 5 August 2019)
TXT is trading at a discount to its peer group on EV/Sales and EV/EBITDA multiples. While the company still holds a high level of cash (we forecast €50m by the end of FY19), it continues to trade at a premium to peers on a P/E basis. Further acquisitions of earnings-enhancing businesses should reduce this premium.
Recent M&A highlights the attraction of outsourced IT services
In June, CGI announced that it had made a cash offer for Scisys at 254.15p per share. This valued the company at a market cap of £78.9m. Based on consensus forecasts at the time, this equates to a FY19 EV/Sales multiple of 1.3x and a FY19 P/E of 19.0x, above the average of the peer group. Scisys was forecast to generate an EBIT margin of 8.9% in FY19 and revenue growth of 5.8%.
Exhibit 5: 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 |
57,426 |
64,417 |
|||
Cost of sales |
(26,455) |
(29,189) |
(18,954) |
(20,224) |
(22,289) |
(32,697) |
(36,708) |
|||||
Gross profit |
27,955 |
32,351 |
14,106 |
15,628 |
17,668 |
24,730 |
27,708 |
|||||
EBITDA |
|
|
5,324 |
6,659 |
4,260 |
3,536 |
4,098 |
5,776 |
7,241 |
|||
Operating Profit (before amort and except) |
|
|
4,284 |
5,820 |
3,954 |
3,180 |
2,755 |
4,269 |
5,673 |
|||
Amortisation of acquired intangibles |
(285) |
(285) |
(264) |
(439) |
(610) |
(960) |
(960) |
|||||
Exceptionals and other income |
1,468 |
0 |
(557) |
0 |
(300) |
(346) |
0 |
|||||
Other income |
0 |
(740) |
0 |
(69) |
0 |
0 |
0 |
|||||
Operating Profit |
5,467 |
4,795 |
3,133 |
2,672 |
1,845 |
2,963 |
4,713 |
|||||
Net Interest |
(249) |
(151) |
48 |
(208) |
(1,284) |
1,800 |
300 |
|||||
Profit Before Tax (norm) |
|
|
4,035 |
5,669 |
4,002 |
2,972 |
1,471 |
6,069 |
5,973 |
|||
Profit Before Tax (FRS 3) |
|
|
5,218 |
4,644 |
3,181 |
2,464 |
561 |
4,763 |
5,013 |
|||
Tax |
(1,046) |
(762) |
(661) |
(710) |
4 |
(1,476) |
(1,554) |
|||||
Profit After Tax (norm) |
3,226 |
4,739 |
3,170 |
2,170 |
1,204 |
4,187 |
4,122 |
|||||
Profit After Tax (FRS 3) |
4,172 |
3,882 |
2,520 |
1,754 |
565 |
3,286 |
3,459 |
|||||
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 |
0.335 |
0.325 |
|||
EPS - normalised fully diluted (€) |
|
|
0.276 |
0.403 |
0.271 |
0.186 |
0.103 |
0.335 |
0.325 |
|||
EPS - (IFRS) (€) |
|
|
0.364 |
0.333 |
0.475 |
5.874 |
0.048 |
0.258 |
0.268 |
|||
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 |
43.1 |
43.0 |
|||||
EBITDA Margin (%) |
9.8 |
10.8 |
12.9 |
9.9 |
10.3 |
10.1 |
11.2 |
|||||
Operating Margin (before GW and except) (%) |
7.9 |
9.5 |
12.0 |
8.9 |
6.9 |
7.4 |
8.8 |
|||||
BALANCE SHEET |
||||||||||||
Fixed Assets |
|
|
18,019 |
18,132 |
25,428 |
8,860 |
22,942 |
30,995 |
28,907 |
|||
Intangible Assets |
15,078 |
14,692 |
21,296 |
7,332 |
17,751 |
24,163 |
23,175 |
|||||
Tangible Assets |
1,249 |
1,361 |
1,598 |
793 |
3,680 |
5,321 |
4,221 |
|||||
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 |
123,872 |
121,569 |
|||
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 |
24,421 |
27,394 |
|||||
Cash |
12,304 |
9,080 |
7,570 |
89,683 |
114,541 |
96,010 |
90,434 |
|||||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|||||
Current Liabilities |
|
|
(17,451) |
(18,349) |
(21,051) |
(13,612) |
(30,086) |
(30,636) |
(32,816) |
|||
Creditors |
(15,297) |
(17,528) |
(20,243) |
(12,937) |
(12,782) |
(18,232) |
(20,412) |
|||||
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) |
(37,584) |
(29,084) |
|||
Long term borrowings |
(1,685) |
0 |
(1,391) |
(1,688) |
(36,882) |
(33,282) |
(24,782) |
|||||
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 |
86,647 |
88,575 |
|||
CASH FLOW |
||||||||||||
Operating Cash Flow |
|
|
5,404 |
2,412 |
10,676 |
119 |
2,039 |
3,496 |
6,149 |
|||
Net Interest |
(249) |
(151) |
105 |
(208) |
(69) |
1,800 |
300 |
|||||
Tax |
(1,344) |
(1,461) |
(2,022) |
379 |
(624) |
(1,476) |
(1,554) |
|||||
Capex |
(615) |
(763) |
(738) |
(661) |
(548) |
(620) |
(440) |
|||||
Acquisitions/disposals |
0 |
0 |
(5,403) |
82,250 |
1,314 |
(6,500) |
0 |
|||||
Financing |
(597) |
2,215 |
(828) |
(6) |
(7,227) |
(931) |
0 |
|||||
Dividends |
(2,615) |
(2,678) |
(2,931) |
(3,496) |
(11,710) |
(5,781) |
(1,531) |
|||||
Net Cash Flow |
(16) |
(426) |
(1,141) |
78,377 |
(16,825) |
(10,012) |
2,924 |
|||||
Opening net debt/(cash) |
|
|
(8,575) |
(8,465) |
(8,259) |
(5,371) |
(87,320) |
(60,336) |
(50,324) |
|||
HP finance leases initiated |
0 |
0 |
0 |
0 |
(2,788) |
(2,500) |
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) |
(60,336) |
(50,324) |
(53,248) |
Source: TXT e-solutions, Edison Investment Research
|
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