Tinexta — Exceptional performance

Tinexta reported very strong results for Q220, which we and consensus anticipated would be weak for the company given the potential effects of COVID-19 on some of its businesses. The results are notable as all business units saw an improvement in the rate of organic revenue growth/declines from Q120 to Q220, whereas we anticipated declines for all.

Credit Information & Management and Innovation and Marketing Services reported a higher EBITDA margin in Q220 versus the comparison period in FY19. Digital Trust, which has lower margins in the early phases of solutions sales, reported a minor inflection in EBITDA margin. Management commentary suggests that most businesses saw a relatively quick and clear recovery from May.

For Q220, total revenue grew by 3.1%, including 2.3% organic growth and adjusted EBITDA (ie before stock options) grew by 13.0%, including 11.6% organic growth. Following the relatively weak Q120 results (due to prior year phasing, seasonality and some impact from the COVID-19 lockdown), total revenue growth declined by 2.2% in H120, including an organic decline of 2.7%, and adjusted EBITDA fell by 4.8%, including an organic decline of 5.8%.

Digital Trust’s organic revenue growth accelerated to 9.6% in Q220 from 2.9% in Q120, which had in part been affected by the underperformance of Camerfirma, the Spanish subsidiary; these performance issues have been subsequently resolved. The strong Q220 performance was mainly due to ongoing demand from clients to digitise and streamline their operations, a trend which should continue to provide structural growth for the business in the long term, in the face of macroeconomic uncertainty during the period. The commentary highlights that Q220 was driven by strong growth from Enterprise Solutions in particular, which grew by 23.3% in H120, and other Digital Products grew by 4.7%. Digital Trust’s Trusted Onboarding Platform (TOP) continued to win clients through H120, including in overseas markets such Croatia and Colombia, bringing the total to 13 non-domestic clients, and the number of transactions (for which the business generates a fee) on the platform continues to grow quickly. Similarly, the GoSign product continued to win new clients domestically and overseas. The EBITDA margin of 27.6% was marginally down y-o-y as management highlights that the initial margin on Enterprise Solutions prior to ramp-up are lower than for Digital Products.

Credit Information & Management provided the greatest surprise in terms of improved performance, reducing its Q120 organic revenue decline of 12.3% to a Q220 decrease of 2.7%. Demand for the core information products from financial and corporate clients is still weak and price competition remains. However, the company benefited from a very strong performance from PromozioniServizi, a consultancy that helps SMEs apply for financing and a relatively small proportion of the business unit, as its offer was well positioned to help clients gain access to Guarantee Funds, the government-backed financial assistance plan implemented in response to COVID-19. What was also important, however, was management's decision to reallocate commercial resources to enlarge greatly PromozioniServizi's bank clientele, thereby significantly increasing the number of potential SME clients in search of government-guaranteed, low-cost funding. This not only helped reverse a declining EBITDA margin trend, but also propelled its margin to 36.4% in Q220. Management believes the margin is sustainable, but is less certain about the sustainability of the revenue growth rate beyond FY20.

Organic revenue and EBITDA declined by 2.2% and 1.8% respectively in Q220 and the two core business in Innovation & Marketing Services – Co.Mark and Warrant Hub – saw differing operating trends in Q220. Warrant Hub grew as clients continued to require support in applying for tax credits for R&D etc, and there has been increasing demand for consulting services with respect to obtaining subsidised finance from the EU, national and regional bodies. Co.Mark’s performance was affected by the economic lockdown and travel restrictions, which meant that consultants were not able to travel to clients, for example. Management believes the outlook for Co.Mark is more positive given the easing of lockdown restrictions and the announcement of another government incentive scheme to subsidise Co.Mark’s services via tax vouchers to clients, although the timing of the potential benefit of this is uncertain.

Overall, the EBITDA margin for the entire group was 20.0% in Q120, 34.7% in Q220 and therefore 28.2% in H120, increasing in Q220 due to improved profitability in all individual business units as highlighted above, but lower for H120 compared to the previous year due to the change in mix, ie the lower-margin businesses, Digital Trust and Credit Information & Management, represented a larger proportion on the group.

Group operating expenses were well controlled, down 1.7% y-o-y in the first six months on an underlying basis, ie excluding stock option costs. All expense items decreased except for ‘raw materials’, the line item that includes a high proportion of costs most responsive to the growth rate of the Digital Trust business unit, in which revenue grew during the period. Cost controls helped drive reported operating profit ahead by 3.4% y-o-y to €21.7m in H120 and by 16.6% in Q220, to give a margin of 24.7% versus 18.0% in Q219.

Net financial expenses declined by 67% y-o-y to €419k in H120, helped by an underlying lower net debt position (highlighted later) and the one-off benefit from financings concluded in the period. Higher operating profit and lower net financial expense combined to drive reported profit before tax growth of 6.1% in H120. A lower reported tax rate of 25% was helped by the one-off benefit from a non-recurring Italian government COVID-19 related relief, as well as residual tax benefits from FY19.

The net debt position at end H120 of €113.4m reduced from €128.0m at the end of FY19, and compares to €139.1m at end H119. The improvement in net debt was mainly due to free cash flow generation of €28.9m (€23.7m in H119) offset in part by the purchase of treasury shares of €9m to cover the new 2020–22 executive stock option plan. Key drivers of the improvement in free cash flow were higher profitability and an improvement in working capital due to an inflow on trade debtors (better collections and slightly lower revenue versus the prior year) and increased deferred income, which included c €1.7m received from the government during lockdowns for staff on furlough. Investment in tangibles and intangibles of €5.5m was relatively stable y-o-y. During Q220, free cash flow generation was €8.8m versus €5.8m in Q219, an increase of 51% y-o-y, following €20.1m in Q120. We forecast that, excluding M&A, the net debt position will improve from €128m at end FY19 to €98m at end-FY20.

Management has reiterated its recent (introduced in June) guidance for FY20, having earlier withdrawn it due to the COVID-19 pandemic. It guides to revenue above €250m (a decline of c 3.4% at most vs €258.7m in FY19) and EBITDA of €72m (an increase of at least 1% vs €71.3m in FY19), which represents a slight improvement in EBITDA margin compared to FY19.

In our view, this guidance looks conservative given that just under half of guided annual revenue (49.5%) and EBITDA (47.7%) has already been achieved during H120, and Tinexta typically generates a greater proportion of its revenue and profit in the final six months of the financial year. On the conference call, management claimed to be very confident of meeting the new guidance, which it has not increased despite the better than expected results, exhibiting understandable caution against the backdrop of the current uncertain economic environment given COVID-19.

In the first results presentation hosted by the newly appointed CFO, Oddone Pozzi, he highlighted that a key priority will be to improve ROCE and free cash flow generation.

It is clear from the Q220 results that the businesses have weathered the lockdown better than we expected in our previous notes published in April and May. Therefore, we increase our forecasts for FY20 and FY21 as highlighted in Exhibit 2 below.

We raise our revenue forecast for FY20 by 6.3% to €266.6m and lift our EBITDA forecast by 7.6% to €76.7m. We note that this sets our FY20 revenue and EBITDA forecasts 6.6% above management guidance outlined above. Our forecasts now represent organic revenue growth of 2.7% on FY19 versus our previous estimate of a 3.2% decline. Our new EBITDA (pre-exceptionals) forecast of €76.7m (previously €71.3m) is broadly stable vs €76.8 pre-exceptionals in FY19 and 7.6% higher on a reported basis.

For Digital Trust, we had assumed that the deteriorating macroeconomic outlook would affect demand for solutions, transactions processed and consultancy services for the rest of the year. In the event, Digital Trust performed better than expected through Q2, which we anticipated to be the period most affected by the lockdown. As a result, we increase our forecast for organic revenue growth for Q320 and Q420 to 10% to give growth of 8.2% for the full year vs 1.3% previously. These are marginally higher than the 9.6% growth in Q220 and more in line with the recent double-digit growth rates that we had been modelling prior to COVID.

For Credit Information & Management, our upgrade reflects the new revenue streams for PromozioniServizi from helping corporates gain access to the government-backed COVID funding for the remainder of the year, which have a much higher margin than the rest of the business unit, plus the outperformance in Q220. We assume a reduction in this revenue stream in FY21.

For Innovation & Marketing Services, we retain our existing revenue forecasts for H220, as we had already assumed a recovery through the remainder of the year. The revenue estimate for both FY20 and FY21 increases due to the better performance from Q220 flowing through.

The share price has recovered strongly from the low of €7.28 in March, and at €17.90 is trading around its all-time high.

On our new forecasts, EV/EBITDA is 12.4x in FY20e and 11.8x in FY21e. This compares with the long-term average since IPO in 2014 of 8.5x. The previous highest multiple under the current business structure was 10.3x in FY19. Tinexta should attract a higher multiple than it has historically, given it has a more attractive business mix, with the potential for higher growth rates than in previous years, as well as higher margins. The new CFO’s focus on ROCE and improving cash flow generation should bode well for future returns.