Tinexta — Guiding to mid double-digit profit growth to FY24

Financially, FY21 was a strong year for Tinexta as it reported revenue of €375.4m and adjusted EBITDA of €98.7m, which represented year-on-year growth of c 39% and 22% respectively versus FY20, which was affected by the outbreak of the COVID-19 pandemic. It delivered on the guidance provided at the start of year for revenue of €370m and adjusted EBITDA of €96m.

The results were also above our prior expectations for revenue of €373.7m and adjusted EBITDA of €96.5m, however we had not included any contribution for the recent acquisitions of the majority stake in CertEurope (completed in November 2021), and Forvalue (completed in July 2021) where a limited contribution was expected for the latter. The acquisitions contributed revenue of €2.7m and €3.4m respectively (with no split of Forvalue’s revenue between the Credit Information & Management (CIM) or Innovation & Marketing Services (IMS) business units). Eliminating these ‘new’ revenues takes the comparable revenue to €369m. The acquisitions contributed adjusted EBITDA of €1.2m and €0.7m respectively, taking the comparable figure to €96.8m, which is more in line with our forecast.

Net profit of €40m for FY21 grew by c 6% and compares with our prior estimate of €42.8m. Management highlights that, excluding purchase price amortisation for business combinations completed in the year, net profit would have been about €45m.

At the end of the period, the net financial position was c €263m. This is higher than we anticipated as it excludes the previously announced €70m capital increase from Bregal Milestone for its acquisition of a minority stake in InfoCert (Digital Trust, DT). We had previously assumed the first tranche of €70m would be received in FY21, but it was paid in February 2022. The remaining €30m investment will be received by February 2023.

Free cash flow of €56.4m was down versus FY20’s €66.7m due to higher cash tax payments and a relatively lower positive contribution from working capital.

Beyond delivering good financial results, 2021 was a significant year given the acquisition and integration of the Cyber Security (CS) businesses and M&A across the other business units, which management expects will drive further growth domestically and internationally.

Please see Exhibit 3 for a comparison of the FY21 headline results delivered versus our expectations.

DT’s revenue grew by 13.3% to €131.3m. The organic revenue growth of 10.9% was ahead of our estimate of 10% and returns the business unit to the double-digit organic growth rate that was typical in the years prior to COVID-19. The full year result implies a growth rate of c 7.4% for Q421, and follows a strong performance through 9M21 of 12.3%, albeit comparing year-on-year growth rates for the individual quarters through the year is a little complicated due to the effects of COVID-19-related restrictions in different periods in both years. The-first time revenue contribution from the majority stake in CertEurope added €2.7m revenue. The strong growth in revenue fed through to a 17% increase in EBITDA to €36.4m, with an EBITDA margin of 27.7% versus FY20’s 26.8%, which was naturally hindered by economic weakness. The margin is back to its prior peak of 27.7% and management is guiding to further margin accretion (see below) in future years.

Whilst CS’s revenue of €73m was just shy of management’s guidance of €76m, adjusted EBITDA of €10.1m was in line, thus the margin of 13.8% was better than guided/expected. FY21 was the first year of ownership of CS so the focus was on coordinating the offerings and operations of the three acquired companies.

CIM’s performance was lower than guided, with a revenue decline of 2.4% y-o-y to €75.4m versus our expectations of 6% growth and a 7% decline in adjusted EBITDA to €22.0m. The decline is attributed to lower revenue from advisory services related to Central Guarantee Fund loans from the Italian government as demand partially normalised following the initial boost during the early stage of the COVID-19 pandemic.

IMS grew strongly by c 24% to €94.8m, including organic growth of 11.3% and the first-time contribution of Queryo. This robust growth was achieved despite a mixed economic picture, with increased demand for subsidised financing and digitisation services and an increase in funding available to clients from the EU. EBITDA increased by 13.8% to €41.4m.

To summarise, revenue was better than we expected for DT and IMS, but lower than expected for CS and CIM. Adjusted EBITDA was better than expected for DT, but lower than expected for CIM.

As is now customary with the release of headline results for the prior year, management provided an update on its medium-term business plan and introduced its first guidance for FY22 and for the new three-year plan covering FY22–24. The key pillars for the medium-term plan are:

The financial guidance covers like-for-like growth and total growth, which includes the recent acquisitions of CertEurope and Forvalue, which both completed in FY21, and Evalue, which was announced in January 2022. The medium-term guidance for the business units and group is as follows:

Management guides to total revenue growth of 18–20% in FY22 (ie a range of €443–450m), which includes like-for-like revenue growth of 10–12%. Guidance for adjusted EBITDA growth of 20–22% (ie a range of €118–120m), including like-for-like growth of 8–10%, implies some modest margin compression.

For FY22–24 management guides to a low double-digit CAGR for revenue, which equates to an FY24 revenue range of c €513–542m if we assume 11–13% growth pa, and a slightly higher mid double-digit CAGR for adjusted EBITDA (ie a range of €146–154m). Therefore, management anticipates a return to an improving margin at the group level in the medium term.

We note that the estimated growth rates for CIM and IMS exclude any contribution from Forvalue, but the group totals do include management’s estimate for Forvalue. In addition, management has not included any potential financial benefit in its guidance from the ‘Piano Nazionale di Ripresa e Resilenza’ (PNRR) or recovery and resilience plan. The PNRR is funding worth almost €200bn to Italy provided by the EU to help countries recover post the COVID-19 pandemic. The funding will be partially used to improve digitisation across the public and private sectors, where Italy lags most of the EU. Tinexta’s business units should be well placed to benefit from these money flows.

At the individual business unit level, the medium-term guidance suggests margin expansion for DT (operational leverage) and CS (as indicated by management on the acquisitions), offset by lower margins for CIM (the prior boost from Central Guarantee Fund revenue is reducing) and IMS (due to mix changes from the subsidiaries as lower-margin Co.Mark and Queryo are growing faster than Warrant).

DT’s estimated organic revenue CAGR of 10% is a notable increase on the prior three-year target (for FY21–23) of 7% made at the start of FY21, reflecting less relative uncertainty about the economic outlook. From a revenue perspective, management will continue to pursue M&A, which will be helped by the recent investment by Bregal, and will continue to strengthen its product offering. Improving operational and commercial effectiveness should support future margin growth.

CS’s estimated revenue CAGR of 19% is consistent with the prior three-year (FY21–23) target. In the second year of ownership the focus is strengthening its position in existing sectors and developing new services.

Management’s estimated three-year revenue CAGR for CIM of 6% is consistent with that for FY21–23, although management anticipates greater growth in the earlier years of the new plan.

In Exhibit 2 we show that management’s three-year guidance implies a reduction in the estimated contribution by Forvalue in FY24 versus our prior expectations (with the caveat that rounding on percentage growth rates used may affect the calculation). Our prior published forecasts included estimated Forvalue revenue of c €24m in FY23. Our calculation below suggests that Forvalue will only reach c €8m in FY24, versus the €3.4m reported in FY21, if we assume the low double-digit revenue guidance for group revenue (including acquisitions) equates to 13% pa. This implies the contribution from the acquisition will be much more backend-weighted to FY25 than originally anticipated.

In Exhibit 3 we show our provisional revised estimates for revenue and EBITDA for FY22 and FY23 and new estimates for FY24, based on management’s new guidance, and we incorporate our estimates for the acquisition of Evalue, which was completed in January 2022 for an estimated total investment of c €31m. Evalue offers consulting services in Spain, similar to Tinexta’s existing domestic business, Co.Mark. With an estimated pro forma revenue contribution of c €10m, Evalue enhances FY22 revenue estimates by c 2%.

We will publish updated full forecasts after the release of FY21’s financial statements and caution that there may be minor changes given roundings in headline numbers.

We modestly expect to increase our revenue estimate for FY22 (+1% to c €440m) and reduce FY23 (by c 1% to c €497m). The changes reflect increased estimates for DT (higher organic growth) and IMS (the acquisition of Evalue offset by a lower estimated contribution by Forvalue), and declines for CS (lower FY21 base revenue) and CIM (lower FY21 base revenue and lower estimated contribution from Forvalue). Our new revenue estimate for FY24 of c €554m is modestly ahead of management’s implied €542m, if the CAGR is 13%.

Similarly, we modesty increase our adjusted EBITDA estimate for FY22 (by 1% to c €120m) and reduce our FY23 estimate by 5% to c €136m. Our new FY24 estimate of €151m compares with management’s indicated range of €146–154m.

By the end of FY22, management expects its adjusted net financial position to be c 2x and it will then begin to further deleverage to less than 1x by the end of FY24.

The share price has been weak since peaking at c €44 in September 2021 and more notably since the start of 2022 when Tinexta was subject to press speculation in relation to M&A involving its CIM business unit (subsequently Tinexta denied any interest) and more recently with general market weakness.

Using our new provisional estimates and Tinexta’s pro forma net financial position of €193.3m (post the Bregal investment), Tinexta’s EV/EBITDA multiples for FY22 and FY23 are 11.1x and 9.8x respectively, which is more in line with the low end of recent peak multiples (10.3x in 2019) than the high end (24.8x in FY21).

Our last updated DCF valuation from November 2021 was €41 per share. The above reduction to estimates for FY23 is likely to have negatively affected the valuation but will be somewhat compensated for by the time value of money since then. This will be updated on the publication of full FY21 results.