FY15 organic revenue growth was 20%, including 2% of currency headwinds, along with a full period from Rule Financial, which was acquired in mid-2014, and an initial five months from Adesis Netlife. In total, revenues grew 34% to €374m, including 5% in favourable currency moves. The growth has continued to be led by elevated demand for regulatory compliance projects, primarily from investment banks. Roughly half of group revenues are generated from investment banking customers with the balance mainly being retail banks, along with private wealth, insurance companies and a small number of others. The growth was led by the UK and US, which together now represent 53% of group revenues, and a particularly strong performance in Spain. The continuing GFT business has continued to outperform, beating our forecasts by 3%, while Rule Financial was 1% below our forecast and Adesis was 9% below.
Organic growth has been decelerating from recent exceptionally high levels, with growth at 15% in Q4, down from 19% in Q3 and 23% in Q1 and Q2. Nevertheless, operating margins expanded over the year in typical fashion, with Q4 adjusted operating margin lifting to 12.5% up from 11.0% in Q3, 10.0% in Q2 and 9.4% in Q1.
Cash flow was strong, with FY15 operating cash flow before tax reaching €54.0m (we forecasted €45.0m) and free cash flow was €28.2m. The group’s biggest clients typically overpay in December in order to utilise internal budgets, though payments can quite easily slip into the following year.
The group’s Spanish nearshore business benefits from favourable R&D tax credits, which have been extended to include exported services, hence which benefits GFTs Spanish business.
Exhibit 1: Quarterly analysis
€000s |
FY14 |
Q115 |
Q215 |
Q315 |
Q415 |
FY15 |
GFT (continuing) |
240,830 |
68,810 |
71,460 |
69,610 |
78,300 |
288,180 |
Rule Financial |
38,390 |
19,700 |
18,790 |
20,300 |
20,070 |
78,860 |
Adesis Netlife |
|
|
|
2,810 |
3,610 |
6,420 |
Other/misc |
15 |
0 |
0 |
0 |
50 |
50 |
Total revenue |
279,235 |
88,519 |
90,243 |
92,720 |
102,030 |
373,510 |
Cost of materials |
(52,194) |
(16,229) |
(14,968) |
(15,329) |
(15,963) |
(62,489) |
Gross profit |
227,042 |
72,290 |
75,274 |
77,391 |
86,067 |
311,021 |
Op costs before depreciation |
(191,878) |
(62,735) |
(65,029) |
(65,886) |
(71,853) |
(265,504) |
Adjusted EBITDA |
35,163 |
9,555 |
10,245 |
11,504 |
14,213 |
45,517 |
Depreciation |
(3,365) |
(1,222) |
(1,237) |
(1,280) |
(1,415) |
(5,154) |
Adjusted operating profit |
31,798 |
8,333 |
9,008 |
10,224 |
12,798 |
40,363 |
Adjusted operating margin |
11.4% |
9.4% |
10.0% |
11.0% |
12.5% |
10.8% |
Net interest |
(1,015) |
(313) |
(423) |
(338) |
(630) |
(1,703) |
Edison profit before tax (norm) |
30,783 |
8,020 |
8,585 |
9,886 |
12,169 |
38,660 |
Associates |
(12) |
(4) |
(5) |
(14) |
(8) |
(30) |
Amortisation of acquired intangibles |
(4,711) |
(1,136) |
(1,227) |
(1,355) |
(2,387) |
(6,105) |
Exceptionals – acquisition costs |
(1,040) |
0 |
0 |
0 |
0 |
0 |
Exceptionals – earn-out adjustments |
386 |
0 |
0 |
0 |
0 |
0 |
Profit before tax (FRS 3) |
25,406 |
6,881 |
7,353 |
8,517 |
9,774 |
32,525 |
Headcount grew by 919, or 29%, over the year to 4,050. The growth included c 300 from the acquired Adesis. The Adesis acquisition added a development centre in Mexico, with c 77 employees, which puts the group in a better position to service clients in the Mexican market.
In Q3, the group invested €446k including costs in Parkpocket. However, this is unusual, and management says that GFT does not plan to become a major venture capital incubator.
We have updated the FY14 balance sheet and P&L to exclude emagine, the sale of which was completed on 30 September 2015.
GFT Group has started its FY16 revenue guidance at €410m, along with EBITDA of €48.5m and EBT of €35m. It expects to add c 400 full-time employees over the year. Detailed guidance numbers are shown in Exhibit 2, which also reconciles the company’s definitions with ours. Notably, our adjusted EBITDA and GFT’s EBITDA differ by the amount of the PPA order book amortisation, which is insignificant from FY16.
GFT is seeing ongoing strong demand from its core customer base driven by rising compliance requirements and digitisation in banking. Further, the group benefits from strong outsourcing trends in banking, and its cost-effective nearshore facilities give it a significant competitive advantage over local players. Management expects FY16 growth to be largely driven from the retail banking space. Major customer Deutsche Bank, which generates c 40% of group revenues, is expected to generate stable revenues.
Management has estimated that the group’s total revenue compound annual growth rate (CAGR) over 2005-15 is estimated to have been c 17%, while the underlying organic CAGR over the same period was c 12%. The corresponding figures for EBT are c 21% and c 20% respectively, while EBITDA would be significantly higher still.
Management has now set a new long-term goal to achieve revenues of c €800m by 2020, equating to growth of c 10% pa from the existing business (which would take revenues to c €600m) along with c €200m from acquisitions. Management sees EBITDA margins remaining stable at c 12%.
Management expects the tax rate to rise from 18% in FY15 to 22% in FY16 and c 27% thereafter.
Dividend guidance is for a payout ratio of 30% in FY16, with a payout ratio in a broad range of 20-40% going forward.
Exhibit 2: Presentation of GFT and Edison definitions, based on GFT guidance
€m |
Actual |
GFT guidance |
Edison numbers |
|
FY15 |
FY16e |
FY16e |
Group revenue |
373.507 |
410.000 |
409.954 |
Profit measures: |
|
|
|
GFT |
47.209 |
|
|
Holding company |
(1.723) |
|
|
(A) Operating profit (GFT definition) |
45.486 |
48.569 |
48.609 |
Add back: exceptional items, misc |
0.000 |
0.000 |
0.000 |
Adjusted EBITDA (Edison definition) |
45.486 |
48.569 |
48.609 |
(E) Normal depreciation |
(5.154) |
(6.100) |
(6.100) |
Adjusted operating profit (Edison definition) |
40.332 |
42.469 |
42.509 |
Total net interest |
(1.703) |
(1.800) |
(1.800) |
Profit before tax norm (Edison definition) |
38.629 |
40.669 |
40.709 |
(B) Earn-out accruals |
0.000 |
0.000 |
0.000 |
(C) PPA order book (amort of acquired) |
(0.931) |
(0.069) |
(0.069) |
(F) PPA amortisation (amort of acquired) |
(5.174) |
(5.600) |
(5.600) |
Exceptional items, misc |
0.000 |
0.000 |
0.000 |
EBT (GFT definition) |
32.524 |
35.000 |
35.040 |
(D) EBITDA (GFT definition) (A+B+C) |
44.555 |
48.500 |
48.540 |
EBIT (GFT definition) (D+E+F) |
34.227 |
36.800 |
36.840 |
Management highlights the following growth drivers:
■
Banking and securities IT services spending, with a CAGR of 4.9% (2015-19) according to Gartner.
■
Stable demand for solutions to implement compliance requirements.
■
The trend to digitise business processes is continuing.
■
Margin pressure in banks is accelerating the outsourcing of IT services.
Any acquisition is likely to be a similar IT services business, which would strengthen the group’s position in its existing markets (Europe and Latin America have been highlighted), broadening the group’s customer base and adding expertise in new technologies. The plan is to keep net debt below 2x EBITDA. At current EBITDA levels, this implies €90m net debt, or €54m above the current level, giving plenty of headroom for acquisitions.
We have revised our forecasts to bring them in line with management’s new long-term guidance, broadly with 10% pa growth from existing businesses and flat adjusted EBITDA margins over the forecast period. This results in our revenue forecasts shifting upwards while profits move downwards. Nevertheless, the implied FY16 organic growth is very conservative compared with recent growth rates, at just 7%, while margins are also conservative as there remains scope for improvements from Rule Financial, which currently has margins of 5-6%. On our assumptions, assuming no currency effects, 10% organic growth translates to €421m revenue in FY16, while 15% growth would translate to €440m. Nevertheless there remain significant uncertainties in the investment and commercial banking environment to warrant a cautious view.
The high level of capex in FY15 is due to refurbishments at the new Stuttgart HQ, and we expect capex to fall back from FY16.
Exhibit 3: Forecast changes
|
Forecast |
Actual |
Change |
Old |
New |
Change |
Old |
New |
Change |
New |
(€000s) |
2015 |
2015 |
(%) |
2016e |
2016e |
(%) |
2017e |
2017e |
(%) |
2018e |
Existing GFT revenues |
280,917 |
288,180 |
3 |
300,300 |
307,776 |
2 |
315,315 |
338,554 |
7 |
372,409 |
Rule Financial revenues |
80,000 |
78,860 |
(1) |
85,520 |
84,722 |
(1) |
89,796 |
93,195 |
4 |
102,514 |
Adesis Netlife revenues |
7,083 |
6,420 |
(9) |
18,173 |
17,456 |
(4) |
19,082 |
19,201 |
1 |
21,121 |
Total GFT revenues |
368,000 |
373,460 |
1 |
403,993 |
409,954 |
1 |
424,193 |
450,950 |
6 |
496,045 |
GFT Group revenue |
368,000 |
373,510 |
1 |
403,993 |
409,954 |
1 |
424,193 |
450,950 |
6 |
496,045 |
Growth (%) |
N/A |
33.8 |
|
9.8 |
9.8 |
|
5.0 |
10.0 |
|
10.0 |
Gross profit |
305,441 |
311,021 |
2 |
334,467 |
332,063 |
(1) |
351,190 |
365,269 |
4 |
401,796 |
Gross margin (%) |
83.0 |
83.3 |
|
82.8 |
81.0 |
|
82.8 |
81.0 |
|
81.0 |
Operating exp’s before depreciation |
(260,987) |
(265,504) |
2 |
(279,302) |
(283,454) |
1 |
(291,470) |
(311,970) |
7 |
(343,415) |
Adjusted EBITDA |
45,000 |
45,517 |
1 |
55,765 |
48,609 |
(13) |
59,681 |
53,299 |
(11) |
58,381 |
Normal depreciation |
(5,700) |
(5,154) |
(10) |
(6,700) |
(6,100) |
(9) |
(6,500) |
(6,539) |
1 |
(6,945) |
Adjusted operating profit |
39,300 |
40,363 |
3 |
49,065 |
42,509 |
(13) |
53,181 |
46,760 |
(12) |
51,436 |
Operating profit margin (%) |
10.7 |
10.8 |
|
12.1 |
10.4 |
|
12.5 |
10.4 |
|
10.4 |
Growth (%) |
17.5 |
26.9 |
|
24.8 |
5.3 |
|
8.4 |
10.0 |
|
10.0 |
Net interest |
(2,000) |
(1,703) |
(15) |
(1,750) |
(1,800) |
3 |
(1,400) |
(1,400) |
0 |
(1,200) |
Profit before tax norm |
37,300 |
38,660 |
4 |
47,315 |
40,709 |
(14) |
51,781 |
45,360 |
(12) |
50,236 |
Amortisation of acquired intangibles |
(6,300) |
(6,105) |
(3) |
(5,000) |
(5,669) |
13 |
(5,000) |
(5,600) |
12 |
(5,600) |
Associates |
0 |
(30) |
|
0 |
0 |
|
0 |
0 |
|
0 |
Earnings Before Tax (GFT definition) |
31,000 |
32,525 |
5 |
42,315 |
35,040 |
(17) |
46,781 |
39,760 |
(15) |
44,636 |
Taxation |
(10,444) |
(5,979) |
(31) |
(12,775) |
(8,956) |
(30) |
(13,981) |
(12,247) |
(12) |
(13,564) |
Net income from discont’d businesses |
461 |
(1,209) |
|
0 |
0 |
|
0 |
0 |
|
0 |
Net income |
20,556 |
25,336 |
23 |
29,540 |
26,084 |
(12) |
32,800 |
27,513 |
(16) |
31,072 |
Statutory EPS (c) |
|
96.2 |
|
|
99.1 |
|
|
104.5 |
|
118.0 |
P/E – Statutory EPS |
|
24.2 |
|
|
23.5 |
|
|
22.3 |
|
19.7 |
Adjusted EPS (c) |
103.8 |
119.5 |
11 |
131.2 |
120.6 |
(8) |
143.6 |
125.8 |
(12) |
139.3 |
P/E – Adjusted EPS |
|
19.2 |
|
|
19.1 |
|
|
18.3 |
|
16.5 |
Source: GFT Group (actuals), Edison Investment Research (forecasts). Note: Priced as at 17 March.
GFT Group receives a disproportionate level of cash in Q4, as some of the group’s largest customers utilise their budgets at the end of the financial year. Q1 and Q2 typically have weaker cash flows. The only remaining acquisition liabilities relate to Sempla.
Exhibit 4: Financial position
€m |
31-Dec-13 |
31-Mar-14 |
30-Jun-14 |
30-Sep-14 |
31-Dec-14 |
31-Mar-15 |
30-Jun-15 |
30-Sep-15 |
31-Dec-15 |
Cash |
(47.1) |
(44.2) |
(24.7) |
(20.0) |
(38.1) |
(32.5) |
(31.2) |
(56.8) |
(47.0) |
Financial debt |
27.7 |
28.0 |
59.1 |
63.7 |
80.2 |
94.3 |
96.3 |
112.0 |
83.4 |
Net (cash)/debt |
(19.4) |
(16.3) |
34.4 |
43.7 |
42.0 |
61.8 |
65.1 |
55.2 |
36.4 |
Investments |
(1.4) |
(1.5) |
(0.7) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Outstanding acquisition liabilities* |
11.7 |
11.8 |
31.2 |
33.3 |
12.8 |
12.8 |
12.9 |
13.0 |
13.9 |
Adjusted net (cash)/debt |
(9.1) |
(6.0) |
64.9 |
77.0 |
54.9 |
74.6 |
78.0 |
68.2 |
50.4 |
Source: GFT Group accounts. Note: *Includes earnouts and deferred payments. Excludes €1m deferred payment for emagine.
GFT trades at a premium to its peers in terms of EV/EBITDA and P/E, which reflects the group’s strong revenue growth rates and potential for margin expansion.
|
Share price |
Market cap |
EV/sales (x) |
EV/EBITDA (x) |
PE (x) |
|
local curr |
local curr (m) |
Year 1 |
Year 2 |
Year 1 |
Year 2 |
Year 1 |
Year 2 |
GFT Technologies |
22.99 |
563 |
1.58 |
1.44 |
13.3 |
12.2 |
19.1 |
18.3 |
1) European-based IT services / financial sector consulting |
|
|
|
|
|
REPLY (€m) |
129.9 |
1,215 |
1.55 |
1.41 |
10.9 |
9.7 |
19.6 |
17.8 |
Devoteam (€m) |
44.43 |
363 |
0.61 |
0.58 |
7.4 |
6.6 |
17.9 |
15.5 |
First Derivatives (£m) |
1498 |
363 |
3.41 |
3.01 |
17.3 |
14.9 |
31.0 |
27.2 |
Indra Sistemas (€m) |
10.365 |
1,701 |
0.88 |
0.86 |
9.7 |
8.1 |
18.0 |
12.7 |
2) US-based IT services / financial sector consulting |
|
|
|
|
|
|
Accenture ($m) |
107.84 |
70,954 |
2.1 |
2.0 |
12.6 |
11.7 |
20.7 |
18.8 |
Cognizant ($m) |
58.92 |
35,889 |
2.3 |
2.1 |
11.2 |
9.9 |
17.3 |
15.3 |
Luxoft ($m) |
55.49 |
1,825 |
2.6 |
2.2 |
13.9 |
11.6 |
20.6 |
17.6 |
EPAM ($m) |
70.47 |
3,550 |
2.9 |
2.4 |
16.8 |
14.0 |
21.8 |
18.6 |
3) Indian-based IT services / financial sector consulting |
|
|
|
|
|
|
HCL Technologies (Rs m) |
824.15 |
1,162,084 |
2.5 |
2.2 |
11.4 |
9.9 |
15.3 |
13.4 |
Tata Consultancy Svcs (Rs m) |
2425.85 |
4,779,963 |
4.2 |
3.7 |
14.7 |
13.2 |
19.8 |
18.0 |
Wipro (Rs m) |
551.25 |
1,361,932 |
2.4 |
2.2 |
11.1 |
10.0 |
15.0 |
13.8 |
Medians excluding GFT |
|
|
2.4 |
2.2 |
11.4 |
10.0 |
19.6 |
17.6 |
Source: GFT calculated by Edison Investment Research, others Bloomberg data. Note: Priced as at 17 March 2016.
Exhibit 6: Financial summary
|
€000s |
2013 |
2014 |
2015 |
2016e |
2017e |
2018e |
Year end 31 December |
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
Revenue |
|
264,285 |
279,235 |
373,507 |
409,954 |
450,950 |
496,045 |
Cost of Materials |
|
(108,559) |
(52,194) |
(62,486) |
(77,891) |
(85,680) |
(94,249) |
Gross Profit |
|
155,726 |
227,042 |
311,021 |
332,063 |
365,269 |
401,796 |
EBITDA |
|
20,845 |
35,163 |
45,517 |
48,609 |
53,299 |
58,381 |
Adjusted Operating Profit |
|
18,599 |
31,798 |
40,363 |
42,509 |
46,760 |
51,436 |
Amortisation of acquired intangibles |
|
(2,250) |
(4,711) |
(6,105) |
(5,669) |
(5,600) |
(5,600) |
Exceptionals |
|
1,420 |
(654) |
0 |
0 |
0 |
0 |
Associates |
|
(9) |
(12) |
(30) |
0 |
0 |
0 |
Operating Profit |
|
17,760 |
26,421 |
34,228 |
36,840 |
41,160 |
45,836 |
Net Interest |
|
(241) |
(1,015) |
(1,703) |
(1,800) |
(1,400) |
(1,200) |
Profit Before Tax (norm) |
|
18,358 |
30,783 |
38,660 |
40,709 |
45,360 |
50,236 |
Profit Before Tax (FRS 3) |
|
17,519 |
25,406 |
32,525 |
35,040 |
39,760 |
44,636 |
Tax |
|
(3,890) |
(6,819) |
(5,979) |
(8,956) |
(12,247) |
(13,564) |
Net inc from discontinued ops |
|
0 |
1,368 |
(1,209) |
0 |
0 |
0 |
Profit After Tax (norm) |
|
14,468 |
25,332 |
31,472 |
31,753 |
33,113 |
36,672 |
Profit After Tax (FRS 3) |
|
13,628 |
19,955 |
25,336 |
26,084 |
27,513 |
31,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
26.3 |
26.3 |
26.3 |
26.3 |
26.3 |
26.3 |
EPS – normalised (c) |
|
55.0 |
96.2 |
119.5 |
120.6 |
125.8 |
139.3 |
EPS – normalised & fully diluted (c) |
|
55.0 |
96.2 |
119.5 |
120.6 |
125.8 |
139.3 |
EPS – FRS 3 (c) |
|
51.8 |
75.8 |
96.2 |
99.1 |
104.5 |
118.0 |
Dividend per share (c) |
|
25.00 |
25.00 |
25.00 |
27.00 |
31.00 |
33.00 |
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
58.9 |
81.3 |
83.3 |
81.0 |
81.0 |
81.0 |
EBITDA Margin (%) |
|
7.9 |
12.6 |
12.2 |
11.9 |
11.8 |
11.8 |
Adjusted Operating Margin (%) |
|
7.0 |
11.4 |
10.8 |
10.4 |
10.4 |
10.4 |
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
Fixed Assets |
|
80,761 |
148,732 |
173,451 |
169,881 |
166,762 |
161,658 |
Intangible Assets |
|
68,210 |
125,852 |
139,480 |
133,811 |
128,211 |
122,611 |
Tangible Assets |
|
7,666 |
17,780 |
26,488 |
28,587 |
31,067 |
31,563 |
Other |
|
4,885 |
5,100 |
7,484 |
7,484 |
7,484 |
7,484 |
Current Assets |
|
125,616 |
152,921 |
153,357 |
186,498 |
222,338 |
255,807 |
Stocks |
|
0 |
0 |
0 |
0 |
0 |
0 |
Debtors |
|
73,010 |
108,216 |
94,828 |
104,081 |
114,490 |
125,939 |
Cash |
|
47,149 |
38,129 |
46,978 |
70,865 |
96,297 |
118,317 |
Current Liabilities |
|
(70,769) |
(140,614) |
(90,628) |
(100,060) |
(110,669) |
(122,339) |
Creditors |
|
(70,037) |
(94,582) |
(90,017) |
(99,449) |
(110,058) |
(121,728) |
Short term borrowings |
|
(732) |
(46,032) |
(611) |
(611) |
(611) |
(611) |
Long Term Liabilities |
|
(48,460) |
(60,628) |
(111,733) |
(111,733) |
(111,733) |
(111,733) |
Long term borrowings |
|
(27,006) |
(34,131) |
(82,817) |
(82,817) |
(82,817) |
(82,817) |
Other long term liabilities |
|
(21,453) |
(26,497) |
(28,916) |
(28,916) |
(28,916) |
(28,916) |
Net Assets |
|
87,148 |
100,412 |
124,447 |
144,587 |
166,698 |
183,393 |
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
|
9,531 |
23,357 |
54,019 |
48,609 |
53,299 |
58,381 |
Net Interest |
|
384 |
231 |
109 |
(1,800) |
(1,400) |
(1,200) |
Tax |
|
(2,091) |
(8,152) |
(11,424) |
(8,142) |
(11,340) |
(12,559) |
Capex |
|
(5,484) |
(9,680) |
(14,456) |
(8,199) |
(9,019) |
(7,441) |
Acquisitions/disposals” |
|
(15,254) |
(58,472) |
(16,760) |
0 |
1,000 |
(7,000) |
Shares issued |
|
587 |
(1,494) |
(620) |
0 |
0 |
0 |
Dividends |
|
(3,949) |
(6,584) |
(6,584) |
(6,581) |
(7,108) |
(8,161) |
Net Cash Flow |
|
(16,276) |
(60,794) |
4,284 |
23,887 |
25,432 |
22,020 |
Opening net debt/(cash) |
|
(35,912) |
(19,410) |
42,034 |
36,449 |
12,562 |
(12,870) |
HP finance leases initiated |
|
0 |
0 |
0 |
0 |
0 |
0 |
Other |
|
(225) |
(650) |
1,301 |
0 |
0 |
0 |
Closing net debt/(cash) |
|
(19,410) |
42,034 |
36,449 |
12,562 |
(12,870) |
(34,890) |
Source: GFT Group (historicals), Edison Investment Research (forecasts). Note: *€1m receipt in FY17 is a deferred payment relating to the disposal of emagine. The €7m payment in FY18 relates to the acquisition of Sempla.
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