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-9.88
▲ −0.06 (−0.60%)
Market capitalisation
129m
Research: TMT
TXT reported H118 revenue growth of 6% y-o-y; investments in R&D and sales and marketing ahead of this growth rate resulted in margin pressure in H118. TXT has completed the acquisition of a majority stake in Cheleo and we have factored this into our forecasts from 1 August. The combination of slightly lower growth forecasts for TXT Next, a one-off tax credit and the higher margin growth of Cheleo results in normalised EPS upgrades of 16% in FY18e and 24% in FY19e. After paying for Cheleo, we estimate the company has funds of more than €70m to invest in accretive acquisitions in the transportation and fintech markets.
TXT e-solutions |
Cheleo acquisition drives upgrades |
Q218 results |
Software & comp services |
6 August 2018 |
Share price performance
Business description
Next events
Analysts
TXT e-solutions is a research client of Edison Investment Research Limited |
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TXT reported H118 revenue growth of 6% y-o-y; investments in R&D and sales and marketing ahead of this growth rate resulted in margin pressure in H118. TXT has completed the acquisition of a majority stake in Cheleo and we have factored this into our forecasts from 1 August. The combination of slightly lower growth forecasts for TXT Next, a one-off tax credit and the higher margin growth of Cheleo results in normalised EPS upgrades of 16% in FY18e and 24% in FY19e. After paying for Cheleo, we estimate the company has funds of more than €70m to invest in accretive acquisitions in the transportation and fintech markets.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
33.1 |
4.0 |
0.27 |
0.30 |
35.6 |
3.1 |
12/17 |
35.9 |
3.0 |
0.19 |
1.00 |
51.9 |
10.4 |
12/18e |
39.9 |
3.2 |
0.21 |
0.16 |
44.9 |
1.7 |
12/19e |
44.9 |
4.4 |
0.27 |
0.17 |
36.1 |
1.8 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
H118 results show steady growth and investment
TXT reported 6.1% y-o-y revenue growth in H118 (+4.3% in Q118, +7.2% in Q218). Gross margins have improved on a year-on-year basis, resulting in gross profit growth of 8.2%. Growth in the operating cost base of 17% over the period resulted in a 2.5pp decline in the normalised operating margin to 7.5%. As well as investing in R&D and sales and marketing, TXT is now incurring the full cost of central functions that were previously split across TXT Next and TXT Retail (sold in Q417). Net cash at the end of H118 stood at €74.0m.
Earnings upgraded after incorporating Cheleo
The Cheleo acquisition completed on 31 July. We have factored in revenue growth for Cheleo of 25% for FY18 and 10% for FY19 with 34% EBITDA margins in both years. We estimate Cheleo will make up 8.5% of FY19 revenues. We trim our underlying TXT Next forecasts to reflect slower than expected growth in Q218. Overall, this results in revenue upgrades of 2.2% in FY18 and 7.4% in FY19. We upgrade normalised EPS by 16% in FY18 (also taking into account a one-off tax credit in H118), and 24% in FY19. We forecast net cash of €71.9m at the end of FY18, providing ample funds to make further earnings enhancing acquisitions.
Valuation: Factoring in accretive acquisitions
On price-based valuation metrics, TXT continues to trade at a premium to peers as even post the deal c 60% of its market cap is made up of the net cash balance. Until the bulk of TXT’s cash is put to use on value-accretive acquisitions, we would expect the stock to trade at a significant premium to peers on a P/E basis. On an EV basis, TXT trades more in line with peers, with forecast EBITDA and EBIT margins moving up to the peer group average by FY19. The company continues to evaluate targets in the transportation and fintech markets.
Review of H118 results
Exhibit 1: TXT half-year results highlights
€m |
H118 |
H117 |
% y-o-y |
Revenues |
19.0 |
17.9 |
6.1% |
Licenses & maintenance |
2.4 |
1.5 |
57.8% |
Services |
16.7 |
16.4 |
1.4% |
Gross margin |
44.4% |
43.6% |
0.9% |
EBITDA |
2.1 |
1.9 |
6.3% |
EBITDA margin |
10.9% |
10.9% |
0.0% |
Normalised EBIT |
1.4 |
1.8 |
-20.4% |
Normalised EBIT margin |
7.5% |
9.9% |
-2.5% |
Net income from continuing operations |
0.9 |
1.0 |
-10.6% |
Discontinued operations |
0.0 |
0.6 |
-100.0% |
Reported net income |
0.9 |
1.6 |
-44.5% |
Net cash |
74.0 |
5.5 |
1245.5% |
Source: TXT e-solutions, Edison Investment Research
TXT reported H118 revenue growth of 6.1% y-o-y, which splits out as revenues of €9.4m in Q118 (+4.9% y-o-y) and €9.6m in Q218 (+7.2% y-o-y, lower than our 11% expectation). H1 software sales saw 57.8% y-o-y growth whereas services only grew 1.4%. Gross margin improved 90bp to 44.4%, partially offsetting lower revenue growth. H118 operating costs including depreciation totalled €7.0m, 2% ahead of our forecast. The company has been investing in R&D and sales and marketing ahead of the revenue growth rate, in part due to the end of social contribution grants that TXT was earning as a result of hiring in Italy and also reflecting investment in international expansion. G&A costs now incorporate the full charge for central costs, which previously were shared with TXT Retail (sold in Q417).
The company incurred an effective tax rate of 4% in H118, benefiting from a €0.2m one-off credit relating to the patent box regime.
After paying €11.7m for dividends in Q218, the company closed H118 with net cash of €74.0m, down from €87.3m at the end of FY17. During Q2, the company invested €70m of its cash in short-term investments. A portion of these investments is marked to market, resulting in a net finance charge of €0.3m for H118.
Acquisition of Cheleo
TXT has acquired a controlling stake in Cheleo, an Italian developer of lifecycle management software for financing. Cheleo’s portfolio includes software to manage the entire process (initial application, credit management and collection, disposal of loan books) for leasing, mortgages, personal loans, salary-based loans, factoring and non-performing loans. Customers are Italian specialist financial companies.
Terms of the deal
On 31 July, TXT acquired 51% of Cheleo; it has a put/call option in place to acquire the remaining 49% over the period 1 January to 31 January 2019. Cheleo was majority-owned by Laserline, the business owned by Enrico Magni, TXT’s largest shareholder and a TXT board director.
The price of the deal was set at a total consideration of €10m, based on an enterprise value of €7.6m plus c €2.5m of net cash. TXT is paying 60% in cash and 40% in treasury shares. It has issued 354,202 shares at an implied price of €11.293/share to the founders of the business (value €4.0m) and paid €1.1m in cash to Laserline. TXT will pay the remaining €4.9m in cash when it exercises its option to acquire the remaining 49% of the business. We understand that Cheleo will be fully consolidated with the amount due for the 49% stake treated as debt.
Highly profitable business
Cheleo reported 2017 revenues of €2.8m and EBITDA of €0.95m (34% margin). The acquisition price implies a trailing EV/EBITDA multiple of 8x versus TXT’s trailing multiple of 7.9x FY17.
While Cheleo will continue to operate on a standalone basis within the banking and finance division, we expect a focus on cross-selling opportunities across the combined Italian client base. The two founders, Bruno Roma and Flavio Minari, will remain on the Cheleo board and will be entitled to a future cash payment based on the 2019 performance of Cheleo.
We have included Cheleo from 1 August 2018. TXT expects Cheleo to grow revenues and EBITDA by 25% compared to 2017 ie revenues €3.5m and EBITDA €1.19m (34% margin) spread equally across the year. We assume that c 50% of revenues are licence-based and c 50% services-based. We note that the software is sold on a subscription basis. We assume the business continues to achieve EBITDA margins in the region of 34%. We have factored in a 10% revenue growth rate for FY19.
Outlook and changes to forecasts
Management expects organic revenue growth in Q318 and organic profitability in line with last year. We have reduced our underlying revenue forecasts for TXT Next by 1.5% in FY18 and 1.8% in FY19. We have reduced the effective tax rate in FY18 from 28% to 20% to reflect the one-off €0.2m tax credit received for R&D spending. Our net cash forecasts take into account the full cash cost of the Cheleo acquisition (€1.1m paid in Q318 and €4.9m due in Q119).
Exhibit 2: Changes to forecasts
FY18e old |
FY18e new |
% |
% |
FY19e old |
FY19e new |
% |
% |
|
Revenues (€m) |
39.1 |
39.9 |
2.2% |
11.4% |
41.9 |
44.9 |
7.4% |
12.6% |
Gross margin |
43.5% |
44.3% |
0.9% |
0.8% |
43.1% |
44.4% |
1.4% |
0.1% |
Gross profit |
17.0 |
17.7 |
4.3% |
13.3% |
18.0 |
20.0 |
10.8% |
12.8% |
EBITDA (€m) |
4.1 |
4.3 |
5.2% |
22.7% |
4.6 |
5.6 |
22.1% |
29.9% |
EBITDA margin |
10.6% |
10.9% |
0.3% |
1.0% |
11.0% |
12.5% |
1.5% |
1.7% |
Normalised EBIT (€m) |
2.9 |
3.0 |
5.4% |
(5.2%) |
3.4 |
4.3 |
28.0% |
42.4% |
Normalised EBIT margin |
7.3% |
7.6% |
0.2% |
(1.3%) |
8.0% |
9.6% |
1.5% |
2.0% |
Normalised net income (€m) |
2.2 |
2.5 |
16.8% |
16.7% |
2.5 |
3.2 |
26.8% |
26.4% |
Normalised EPS (€) |
0.19 |
0.21 |
16.0% |
15.5% |
0.22 |
0.27 |
24.0% |
24.5% |
Reported basic EPS (€) |
0.16 |
0.18 |
17.0% |
(96.9%) |
0.19 |
0.24 |
27.7% |
30.3% |
Net cash (€m) |
76.8 |
71.9 |
(6.5%) |
(17.7%) |
78.0 |
73.3 |
(6.0%) |
2.0% |
Dividend per share (€) |
0.16 |
0.16 |
0.0% |
(84.0%) |
0.17 |
0.17 |
0.0% |
6.3% |
Source: Edison Investment Research
Valuation
Taking into account the recent payment of the dividend and the full cost of the Cheleo acquisition, TXT is now trading at a small discount to peers on most EV multiples. We note that with the inclusion of Cheleo, by FY19 TXT’s margins are in line with peers.
TXT continues to trade at a premium to peers on a P/E basis, although with the upgrade in earnings arising from the Cheleo acquisition, this has reduced since we wrote in May, from 66.9x to 44.9x for FY18e and from 57.6x to 36.1x for FY19e. With net cash of €71.9m (after paying for 100% of Cheleo), the company still has ample funds to make further earnings enhancing acquisitions.
Exhibit 3: Peer valuation
Company |
Share |
Market |
Rev growth |
EBIT margin |
EBITDA margin |
EV/Sales |
EV/EBITDA |
P/E |
||||||
price |
cap (m) |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
CY |
NY |
|
TXT |
€9.64 |
€115 |
11.4% |
12.6% |
7.6% |
9.6% |
10.9% |
12.5% |
1.2 |
1.1 |
10.9 |
8.4 |
44.9 |
36.1 |
European engineering & IT services companies |
||||||||||||||
AKKA Technologies |
€62.00 |
€1,258 |
9.8% |
11.0% |
7.1% |
7.9% |
9.1% |
9.5% |
1.0 |
0.9 |
11.2 |
9.6 |
21.7 |
16.6 |
Alten |
€85.15 |
€2,880 |
11.2% |
7.5% |
9.9% |
10.1% |
10.6% |
10.8% |
1.3 |
1.2 |
12.2 |
11.2 |
18.7 |
16.9 |
Altran* |
€8.19 |
€2,105 |
25.9% |
10.6% |
10.8% |
12.1% |
13.6% |
14.6% |
0.8 |
0.8 |
6.2 |
5.2 |
10.5 |
8.4 |
AtoS |
€112.45 |
€12,019 |
-2.5% |
4.8% |
9.7% |
10.4% |
13.5% |
14.2% |
1.0 |
0.9 |
7.3 |
6.6 |
13.0 |
11.7 |
Cap Gemini |
€108.80 |
€18,359 |
2.4% |
6.0% |
11.0% |
11.7% |
14.2% |
14.4% |
1.6 |
1.5 |
11.0 |
10.2 |
18.3 |
16.3 |
Devoteam |
€105.20 |
€877 |
16.5% |
9.6% |
10.3% |
10.6% |
10.8% |
11.0% |
1.3 |
1.2 |
12.4 |
11.1 |
26.2 |
22.9 |
ESI Group |
€42.20 |
€254 |
9.4% |
7.3% |
8.2% |
10.0% |
11.2% |
12.9% |
1.9 |
1.8 |
17.2 |
14.0 |
37.2 |
28.4 |
Exprivia |
€1.21 |
€63 |
278.4% |
2.3% |
3.5% |
4.4% |
6.9% |
7.7% |
0.5 |
0.5 |
7.8 |
6.9 |
30.2 |
9.3 |
Reply |
€58.00 |
€2,170 |
15.7% |
10.3% |
12.8% |
13.1% |
14.2% |
14.5% |
2.1 |
1.9 |
14.5 |
13.0 |
23.7 |
20.7 |
SciSys |
£1.83 |
£54 |
-7.3% |
5.2% |
9.2% |
9.9% |
11.5% |
11.8% |
1.1 |
1.1 |
9.8 |
9.1 |
17.0 |
15.3 |
Sopra Steria |
€150.10 |
€3,086 |
6.2% |
4.9% |
7.6% |
8.5% |
9.6% |
10.1% |
0.9 |
0.8 |
9.2 |
8.4 |
14.1 |
12.1 |
Average |
33.2% |
7.2% |
9.1% |
9.9% |
11.4% |
12.0% |
1.2 |
1.2 |
10.8 |
9.6 |
21.0 |
16.2 |
||
Discount to peers |
(4%) |
(8%) |
1% |
(12%) |
||||||||||
Source: Edison Investment Research, Bloomberg (as at 1 August). Note: *Trading on depressed multiples after notifying the market that it had discovered a fraud in a business it recently acquired. Prior to that, Altran was trading nearer to 8.4x FY18e EBITDA and 7.1x FY19e.
Exhibit 4: Financial summary
€'000s |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
|||||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||||
PROFIT & LOSS |
|||||||||||
Revenue |
|
|
54,410 |
61,540 |
33,060 |
35,852 |
39,927 |
44,942 |
|||
Cost of sales |
(26,455) |
(29,189) |
(18,954) |
(20,224) |
(22,221) |
(24,973) |
|||||
Gross profit |
27,955 |
32,351 |
14,106 |
15,628 |
17,707 |
19,969 |
|||||
EBITDA |
|
|
5,324 |
6,659 |
4,260 |
3,536 |
4,340 |
5,639 |
|||
Operating Profit (before amort and except) |
|
|
4,284 |
5,820 |
3,954 |
3,180 |
3,016 |
4,295 |
|||
Amortisation of acquired intangibles |
(285) |
(285) |
(264) |
(439) |
(439) |
(439) |
|||||
Exceptionals and other income |
1,468 |
0 |
(557) |
0 |
0 |
0 |
|||||
Other income |
0 |
(740) |
0 |
(69) |
0 |
0 |
|||||
Operating Profit |
5,467 |
4,795 |
3,133 |
2,672 |
2,577 |
3,856 |
|||||
Net Interest |
(249) |
(151) |
48 |
(208) |
150 |
150 |
|||||
Profit Before Tax (norm) |
|
|
4,035 |
5,669 |
4,002 |
2,972 |
3,166 |
4,445 |
|||
Profit Before Tax (FRS 3) |
|
|
5,218 |
4,644 |
3,181 |
2,464 |
2,727 |
4,006 |
|||
Tax |
(1,046) |
(762) |
(661) |
(710) |
(545) |
(1,122) |
|||||
Profit After Tax (norm) |
3,226 |
4,739 |
3,170 |
2,170 |
2,532 |
3,200 |
|||||
Profit After Tax (FRS 3) |
4,172 |
3,882 |
2,520 |
1,754 |
2,181 |
2,884 |
|||||
Average Number of Shares Outstanding (m) |
11.5 |
11.7 |
11.7 |
11.7 |
11.8 |
12.0 |
|||||
EPS - normalised (€) |
|
|
0.281 |
0.406 |
0.271 |
0.186 |
0.215 |
0.267 |
|||
EPS - normalised fully diluted (€) |
|
|
0.276 |
0.403 |
0.271 |
0.186 |
0.215 |
0.267 |
|||
EPS - (IFRS) (€) |
|
|
0.364 |
0.333 |
0.475 |
5.874 |
0.185 |
0.241 |
|||
Dividend per share (c) |
0.23 |
0.25 |
0.30 |
1.00 |
0.16 |
0.17 |
|||||
Gross margin (%) |
51.4 |
52.6 |
42.7 |
43.6 |
44.3 |
44.4 |
|||||
EBITDA Margin (%) |
9.8 |
10.8 |
12.9 |
9.9 |
10.9 |
12.5 |
|||||
Operating Margin (before GW and except) (%) |
7.9 |
9.5 |
12.0 |
8.9 |
7.6 |
9.6 |
|||||
BALANCE SHEET |
|||||||||||
Fixed Assets |
|
|
18,019 |
18,132 |
25,428 |
8,860 |
18,426 |
17,083 |
|||
Intangible Assets |
15,078 |
14,692 |
21,296 |
7,332 |
14,388 |
13,945 |
|||||
Tangible Assets |
1,249 |
1,361 |
1,598 |
793 |
3,303 |
2,403 |
|||||
Other |
1,692 |
2,079 |
2,534 |
735 |
735 |
735 |
|||||
Current Assets |
|
|
34,892 |
38,946 |
37,085 |
109,426 |
102,850 |
102,036 |
|||
Stocks |
1,820 |
2,075 |
3,146 |
2,528 |
2,828 |
3,128 |
|||||
Debtors |
20,768 |
27,791 |
26,369 |
17,215 |
18,596 |
20,932 |
|||||
Cash |
12,304 |
9,080 |
7,570 |
89,683 |
81,426 |
77,976 |
|||||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
|||||
Current Liabilities |
|
|
(17,451) |
(18,349) |
(21,051) |
(13,612) |
(19,920) |
(16,753) |
|||
Creditors |
(15,297) |
(17,528) |
(20,243) |
(12,937) |
(14,345) |
(16,078) |
|||||
Short term borrowings |
(2,154) |
(821) |
(808) |
(675) |
(5,575) |
(675) |
|||||
Long Term Liabilities |
|
|
(6,491) |
(5,105) |
(7,180) |
(4,781) |
(7,093) |
(7,093) |
|||
Long term borrowings |
(1,685) |
0 |
(1,391) |
(1,688) |
(4,000) |
(4,000) |
|||||
Other long term liabilities |
(4,806) |
(5,105) |
(5,789) |
(3,093) |
(3,093) |
(3,093) |
|||||
Net Assets |
|
|
28,969 |
33,624 |
34,282 |
99,893 |
94,263 |
95,273 |
|||
CASH FLOW |
|||||||||||
Operating Cash Flow |
|
|
5,404 |
2,412 |
10,676 |
119 |
4,066 |
4,736 |
|||
Net Interest |
(249) |
(151) |
105 |
(208) |
150 |
150 |
|||||
Tax |
(1,344) |
(1,461) |
(2,022) |
379 |
(545) |
(1,122) |
|||||
Capex |
(615) |
(763) |
(738) |
(661) |
(430) |
(440) |
|||||
Acquisitions/disposals |
0 |
0 |
(5,403) |
82,250 |
1,400 |
(4,900) |
|||||
Financing |
(597) |
2,215 |
(828) |
(6) |
(1,200) |
0 |
|||||
Dividends |
(2,615) |
(2,678) |
(2,931) |
(3,496) |
(11,710) |
(1,874) |
|||||
Net Cash Flow |
(16) |
(426) |
(1,141) |
78,377 |
(8,269) |
(3,449) |
|||||
Opening net debt/(cash) |
|
|
(8,575) |
(8,465) |
(8,259) |
(5,371) |
(87,320) |
(71,851) |
|||
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
|||||
Other |
(94) |
220 |
(1,747) |
3,572 |
(7,200) |
4,900 |
|||||
Closing net debt/(cash) |
|
|
(8,465) |
(8,259) |
(5,371) |
(87,320) |
(71,851) |
(73,301) |
|||
Source: TXT e-solutions, Edison Investment Research
|
|
The group’s annualised recurring revenue (ARR) was flat due to higher than normal churn. However, we believe this slowdown is temporary as StatPro is looking increasingly well positioned to benefit from the outsourcing shift in the global asset management industry. StatPro is the only SaaS provider of performance, attribution and risk solutions and it also offers APIs along with full managed services. We have increased our interest forecasts while also reducing tax, which results in EPS forecasts remaining unchanged. Given the ongoing active M&A backdrop in financial software and the scope for revenue acceleration and margin expansion, we continue to see strong upside potential in the shares.
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