Tinexta — Incorporating management’s FY22–24 guidance

Tinexta released its FY21 financial statements following the publication of headline FY21 results and new guidance for both FY22 and its new three-year business plan for FY22–24 earlier in March 2022.

In our last note, we provided an overview of the headline results and provisional new estimates for revenue and EBITDA in FY22 onwards based on management’s new guidance. To summarise, FY21 was a strong year financially as Tinexta delivered on the financial guidance it provided at the start of the year. From a business perspective, it was an important year given a higher than typical level of M&A at €193m.

Tinexta delivered on the guidance it 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.

We concluded that, based on the new guidance, provisional estimates would reflect a modest increase to FY22 but a reduction in FY23. Our commentary below focuses mainly on the new disclosures included in the full results release, in particular with respect to Q421 results, and to formally update/introduce our new estimates for FY22–24.

Tinexta produced its typical strong Q4 performance with organic revenue growth of 6.9%, albeit against a slightly easier comparative of 2.8% in Q420, but we note that through FY20 the individual quarters were affected by the phasing of restrictions due to the COVID pandemic.

Digital Trust (DT) benefited from the continued strong demand for its services, which help companies migrate their processes to digital and streamline operations, with organic revenue growth of 7.7% in Q421 and 11.0% for the full year.

In its first year of ownership, Cyber Security (CS) contributed revenue of €72.8m, slightly lower than management’s guidance from the start of the year of €76m. However, as EBITDA of €10.1m was in line with its prior guidance, it therefore generated a better margin than expected.

CIM’s organic revenue decline of 7.2% in Q421 continued the trend seen in Q321, reflecting the tough comparatives from the prior year when it benefited from client requests to access the Italian government’s Central Guarantee Fund, which provided financial support for companies affected by COVID-related lockdowns. These declines were partially offset by growth in Tinexta’s real estate services.

IMS demonstrated its typical seasonally strong Q4 performance with organic revenue growth of 16.4%, albeit against an easier comparative from the prior year. For FY21, organic revenue growth of 11.3% reflects strong demand for the consulting services that help companies gain tax credits and other incentives, and a rebound in export consulting. In addition, the acquisitions that focus on digital marketing are seeing strong demand from new clients.

The strong revenue growth fed through to an improved adjusted EBITDA margin for Q421 of 31.1% (Q420: 30.3%). This reflects a combination of improved margins for a number of business units ie DT (32% in Q421 versus 27.6% in Q420) and CIM (29.4% versus 28.5%), and the negative mix effects from the inclusion of lower-margin Cyber Security for the first time. In addition, there were lower (relative to revenue) central costs (ie ‘other’). The full year adjusted EBITDA margin of 26.3% versus FY20’s 30.2% mainly reflects the addition of CS’s lower margin of 13.9% for the first time since acquisition, as well as a higher margin for DT (operating leverage) with lower margins for CIM (operating leverage) and IMS (mix changes including M&A). In aggregate, therefore, Tinexta’s adjusted EBITDA increased by 21.5% y-o-y, of which 2.7% was organic and 18.9% was from M&A.

The higher level of M&A undertaken in the year led to an increase in depreciation and amortisation to €36.1m from €25.2m in FY20, including €11.7m for amortisation of acquired intangibles, which led to operating profit growth of c 8% y-o-y to €56.9m. On a normalised basis, ie excluding amortisation of acquired intangibles, operating profit growth was greater at c 20%.

Net financial charges of €3.3m for FY21 compared with net financial income of €0.6m in FY20, which included a capital gain on the sale of LuxTrust (Tinexta’s joint venture in Luxembourg).

Tinexta’s net profit growth benefited from a lower effective corporate tax rate of 25.8% versus 27.8% in the prior year, and we note versus 31.8% in FY19, due to a higher level of non-recurring tax income than the prior year.

Net attributable profit grew y-o-y by c 3% y-o-y to €38.3m, while the declared dividend of €0.30 per share grew by 15% y-o-y.

In FY21 Tinexta generated free cash of €56.4m versus €66.7m in the prior year. Relative to its larger revenue base, the lower free cash flow generation reflects the addition of CS’s lower margin, a lower positive contribution from working capital (this was an area of focus for the new CFO in the prior year, his first year), higher cash tax payments, and a marginally lower investment in tangible and intangible assets.

At the end of FY21, Tinexta’s net debt position was €263.3m (2.67x EBITDA), a significant increase from €92.0m (1.1x EBITDA) at the end of FY20, given the high level of M&A undertaken in the year (including the acquisitions of Corvallis, Yoroi, Queryo, Forvalue and CertEurope). The net debt position was higher than we anticipated but it excludes the previously announced €70m capital increase from Bregal Milestone for its acquisition of a minority stake in InfoCert (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 end February 2023.

Under the new FY22–24 business plan (see below), management expects a rapid improvement in the net debt position, reducing to 2.0x adjusted EBITDA by the end of FY22 and 0.7–0.8x by the end of FY24.

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. In Exhibit 2, we summarise management’s guidance for FY22 and the new three-year business plan.

Our new forecasts for revenue and adjusted EBITDA are shown in Exhibit 3. We forecast revenue growth for the next three years of c 18% (to €443m in FY22), c 12% (to €496m in FY23) and c 12% (to €554m in FY24). These give a revenue CAGR of c 14% versus management’s guidance for a low double-digit CAGR. Our estimates at the group level for FY22 and FY23 are broadly unchanged, but divisional estimates for DT (higher organic growth assumption) and IMS (acquisition of Evalue) increase, while those for CIM and CS reduce due to a lower revenue base from FY21.

Our new adjusted EBITDA forecasts are for growth in the next three years of c 21% (to €120m in FY22), 15% (to €138m in FY23) and 13% (to €156m in FY24), a CAGR of 16.5% versus management’s guidance of mid-double digit. Our forecast for FY22 is unchanged but our forecasts for FY23 is reduced by 4% as higher growth expectations for DT are offset by lower expectations for CS, CIM and IMS.

Our updated DCF-based valuation for Tinexta increases modestly to €42 per share, with lower profit estimates and a higher net debt position since our last update compensated for by rolling forward our valuation. Our near-term estimates to FY24 are detailed above. For FY25, we include the ramp-up of the Forvalue acquisition, and thereafter we assume a rapid fade in the group’s annual revenue growth to 6% in FY26 and to 2% by FY31. We then assume a stable EBITDA margin of 28.2% from FY25, assuming no further operational gearing, which is conservative versus Tinexta’s history. We use a weighted average cost of capital of 7% and terminal growth rate of 2%. The sensitivity of the DCF valuation is as follows:

In Exhibit 5 we show Tinexta’s growth prospects and valuation relative to peers of its business units, which we then use to calculate a sum-of-the-parts (SOTP) valuation in Exhibit 6.

Our SOTP valuation for Tinexta when applying the above peer multiples to our new forecasts is approximately €49 per share.