Tinexta — Confirming FY23 guidance

Tinexta reported continued strong underlying revenue growth in Q323, which was complemented by a sequential (ie quarter-on-quarter) improvement in underlying growth in adjusted EBITDA (ie before non-recurring items). Revenue grew by c 11% to €87.1m, giving growth for the first nine months of FY23 (9M23) of c 9% and revenue of €269.5m, which took adjusted EBITDA to €19.0m for Q323 and €56.9m for 9M23. The acquisition of Ascertia contributed c 2% to Tinexta’s Q323 revenue growth but marginally diluted its adjusted EBITDA, by c 0.3%. As we show later (see Exhibit 3), the third quarter of Tinexta’s financial year is typically one of the smaller quarters for profit generation.

Group organic revenue growth of 8.6% in Q323 was driven by continued strong growth by DT and CS, while growth in BI remained weak due to seasonality issues (typically, a high proportion of annual profit is reported in the fourth quarter of any year) and ongoing weakness in core markets. There was a slight pick-up in organic revenue growth in Q323 from 7.3% in Q223, but Q323 had a slightly easier comparative on Q322, when revenue grew by just over 3%, versus the more than 6% growth that the group reported for the whole of FY22.

A combination of lower margins in Q323 versus Q322 for the two most profitable divisions – DT, albeit this was due to the first-time consolidation of Ascertia, and BI – as well as a significant improvement in the profitability of the lowest-margin division, CS, contributed to a decline in the overall adjusted EBITDA margin from 22.5% in Q322 to 21.8% in Q323.

DT’s underlying revenue growth of 13.9% in Q323 was complemented by the first-time contribution from Ascertia, which added a further 4.5% growth since being consolidated from the start of August 2023. DT’s underlying revenue growth through 9M23 has been consistently above management’s guidance from the start of year of 10% for FY23 and FY23–25, and management expects this outperformance to continue into Q423. Management’s commentary suggests strong growth across the board, domestically and internationally, with some contribution to revenue growth from price increases on off-the-shelf products that were implemented towards the end of 2022 to counter underlying cost inflation. Operational gearing from the strong revenue growth, as well as the growth of products and solutions with a high standard of innovation, contributed to a marginal increase in the underlying adjusted EBITDA margin from 31.6% in Q322 to 31.7% in Q323. The acquisition of Ascertia contributed a small EBITDA loss of c €30k in Q323, according to our estimate, which is equivalent to a margin of c -2% on its reported revenue in the period.

CS’s year-on-year revenue growth of 12.4% to €20.2m in Q323 continues the double-digit revenue growth that the division had already reported through H123. Management’s commentary emphasised that the growth was broad-based across all three of the division’s subsidiaries, which has been enhanced by CS’s cooperation with DT. A combination of operational gearing on the strong revenue growth, as well as better profitability achieved on its proprietary offering, led to a sequential (ie quarter-on-quarter) improvement in the adjusted EBITDA margin through 9M23, such that Q323’s margin of 15.7% was significantly higher than Q322’s margin of 9.8%. We note that the drop-through of incremental revenue to adjusted EBITDA for CS was c 80% in Q323 and c 67% for 9M23, demonstrating a high level of operational gearing. We note that management guided to 30% organic revenue growth for FY23 at the start of the year, which requires growth of c 67% in Q4.

BI’s revenue grew by less than 1% y-o-y to €24.4m in Q323. In addition to the typical seasonality of its revenue streams, BI’s two key subsidiaries continue to demonstrate limited growth/underlying weakness. The revenue of the most significant subsidiary, Warrant Hub (WH), is affected by the lower rates of deductibility offered by the government on investment made by WH’s clients, and the delayed ‘enactment’ of a decree that was proposed by the Italian government in June, which management expects to strengthen WH’s competitive position in the market. The revenue of Co.Mark, a subsidiary that provides consulting services to help companies grow their businesses overseas, continues to suffer from a lack of financial support by the Italian Ministry of Foreign Affairs and International Cooperation. Limited revenue growth, mix changes (towards lower-margin services) and higher personnel costs ahead of expected seasonally higher revenues in Q423 led to a significant reduction in the adjusted EBITDA margin to 23.8% in Q323 from 31.8% in Q322. At the start of the year, management guided to 15% organic revenue growth for BI in FY23, which would require c 26% y-o-y revenue growth in Q423, a significant step-up from the growth reported for 9M23 of c 1%.

On a reported basis, cumulative free cash for 9M23 of c €22m was below the comparable figure of c €37m for 9M22. However, this includes the effects of discontinued operations. For continuing activities, free cash flow generation was much healthier at €40.3m, more than 11% greater than the 9M22 comparative of €36.2m. Tinexta’s free cash flow generation therefore improved at a greater rate than revenue growth of c 9% and reported EBITDA growth of c 5% in 9M23.

By the end of Q323, Tinexta’s net debt position had increased to €91.5m from €52.6m at the end of H123, partly due to the completion of the acquisition of Ascertia.

Management updated its guidance for the group’s year-end expected net debt position. The new guidance for net financial debt/adjusted EBITDA at the end of FY23 is 0.7–0.8x. This has increased from 0.2–0.3x at the time of the H123 results and expected cash positive prior to then. The new guidance updates for the acquisitions that have taken place, specifically Ascertia, and now includes the assumption of lower proceeds from the postponement of the exercise of matured stock options.

Based on the group’s 9M23 performance and anticipating the typical seasonality of profits in the financial year (see below), management reiterated its FY23 guidance for year-on-year revenue growth of 11–15% and adjusted EBITDA growth of 8–12% on an underlying basis (ie before any M&A undertaken in FY23). However, the mix of growth is different from that anticipated at the start of the year.

Management’s commentary on the conference call that DT’s organic revenue growth rate through 9M23 was above the guidance for FY23, and is expected to continue into Q423, implies that growth elsewhere is likely to be below the reiterated group guidance. We have therefore increased our estimates for DT to reflect the better expectations for growth, applied some caution to our estimates for BI and left our estimates for CS unchanged given management’s positive commentary about its progress. This means our overall adjusted EBITDA estimates for FY23 are unchanged.

Our new forecasts imply strong year-on-year growth for revenue and adjusted EBITDA in Q423 of c 28% and c 18% respectively.

To demonstrate the seasonality of Tinexta’s profitability, in Exhibit 3 we show the proportion of group annual profit (adjusted EBITDA before central costs) that was generated in FY22 and is expected to be generated in FY23 by division and for the company as a whole in each financial quarter of the year. The FY22 figures are based on reported figures for the year, while the estimated Q423 contribution is based on our updated forecasts for FY23.

Exhibit 3 demonstrates a number of key points:

Our new forecasts for FY23 are consistent with a similar skewing in profitability to Q4, albeit there is a greater dependence on the period in FY23 than the prior year due to strong growth still anticipated by BI and CS’s expected higher profitability. We believe the expected strong performance of BI in Q423 is more likely to be due to growth from WH than Co.Mark.

Rolling forward our DCF to take account of Tinexta’s 9M23 results leads to a broadly unchanged valuation of €30/share (€30.4/share previously) based on a WACC of 8% and a terminal growth rate of 2%. The valuation suggests significant upside potential from the current share price.

To provide some perspective on Tinexta’s current valuation, in Exhibits 4 and 5 we show its prospective EV/sales and EV/EBITDA multiples for FY23–25e and how they compare with historical trading multiples, showing the high, average and low forward multiples for previous financial years. With respective to EV/sales, the prospective multiples for FY23–25e of 3.0x, 2.7x and 2.4x are above the long-term average multiple of 2.4x in the first two forecast years but in line for FY25. We feel a premium is justified given the company’s greater scale and better structural growth following the disposal of its Credit Information and Management division and acquisition of Cyber Security. Similarly, the prospective EV/EBITDA multiples for FY23 and FY24 of 11.9x and 10.2x are above to line with the long-term average of 10.2x, although FY25’s 9.0x is at a discount.