GFT reported a solid Q1, with constant currency organic growth of 7.6%. This was slightly below the long-term trend, as the group saw some deferrals in Anglo Saxon regions due to poor results in the investment banking sector and uncertainty relating to the imminent UK vote on the EU. Nevertheless, management expects orders to pick up later this month and in Q3, regardless of the outcome of the BREXIT vote. We have edged our forecasts up with the inclusion of Habber Tec Brazil, which GFT acquired in early April. In our view, if management can continue to maintain the momentum, the stock looks attractive, trading on c 17x our FY17e EPS.
Year end |
Revenue (€m) |
EBT*
(€m) |
EPS*
(c) |
Adj EPS**
(c) |
P/E
(x) |
Yield
(%) |
12/14 |
279.2 |
25.4 |
75.8 |
96.5 |
22.3 |
1.2 |
12/15 |
373.5 |
32.5 |
96.2 |
119.5 |
18.0 |
1.4 |
12/16e |
415.2 |
35.5 |
100.3 |
121.8 |
17.7 |
1.5 |
12/17e |
458.7 |
40.4 |
106.2 |
127.5 |
16.9 |
1.7 |
Note: *Earnings before tax and EPS are statutory, after the amortisation of acquired intangibles and exceptional items. **Adjusted EPS is before amortisation and exceptionals.
Q1 results: Total growth of 10%
Group revenue grew by 10% to €97.4m, reflecting 7.6% organic growth, a 1.3% FX headwind and €3.3m from Adesis, which was acquired in July 2015. In the Americas and UK segment, there was an organic revenue decline of 1.3% (€51.2m), reflecting contract deferrals in the investment banking sector. Consequently, onshore utilisation in the US and UK was below expectations, although capacity utilisation in the group’s nearshore centres remained high. In the Continental Europe segment, organic revenue growth was a healthy 18.2% (€46.1m), reflecting growth in digitisation and business integration projects. Adjusted EBITDA rose by 6.9% to €10.2m to provide a slightly lower margin.
Acquisition of Habber Tec Brazil
In April, GFT acquired Habber Tec Brazil for an undisclosed sum. Habber Tec Brazil specialises in the implementation and ongoing support of business process management (BPM), big data, analytics and mobile solutions and is Brazil’s largest IBM partner for BPM. It adds expertise in BPM integration and mobile solutions, especially in the fields of credit and digital banking applications. While small, Habber Tec Brazil is growing apace, and the company expects FY16 revenues to grow by c 29% to c €7m (c 1.7% of pro forma GFT group revenues). We have incorporated Habber Tec Brazil into our forecasts, resulting in modest upgrades. Otherwise our forecasts are unchanged.
Valuation: Attractive if it can maintain growth
The stock trades on 1.3x FY17e EV/sales and 11.3x EV/EBITDA, broadly in line with its larger global IT services peers, which typically trade in the ranges of c 2.0-2.6x revenues and c 9.2-12.9x EBITDA. Our DCF model (which assumes a WACC of 9%, 10% pa revenue growth to 2020 and 10.4% long-term operating margins) values the shares at €25.35, 18% above the current share price.
Group revenue grew by 10% to €97.4m, reflecting 7.6% organic growth, 3.7% growth from the inclusion of Adesis and a 1.3% FX headwind. Business drivers remain broadly the same – digitisation and integration projects in commercial banking and regulation in investment banking. The Q1 growth rate was slightly below the long-term trend, as the group saw some projects postponed in the UK, the US and Canada as poor results in the investment banking sector and the uncertainty created by the imminent UK vote on the EU delayed decision-making. Nevertheless, management expects orders to pick up later this month and in Q3, regardless of the outcome of the referendum, and we note that Q4 is traditionally the group’s busiest quarter. Rather than being detrimental, management believes that a Brexit outcome could potentially generate more business for the group, as banks would likely reshape their operations. If the outcome of the vote is for Brexit, GFT would expect banks’ IT decision making to remain in London, while some operations could shift to the regions. In aggregate, GFT is indifferent about the outcome of the UK’s EU vote on its business operations.
UK revenues dipped 13% to €35.0m, but this was largely due to one €3.5m account being reallocated to the US, where revenues jumped 40% to €12.6m. Excluding the transferred account, we estimate that UK revenues fell by 4% and the US was flat. Revenues in Spain surged by 85% to €17.4m, including some acquired Adesis revenue, to become the group’s second largest market. Brazil lifted by 48% to €2.0m, while other countries (mainly Mexico) rose by 67% to €3.1m. Revenues in Germany grew by 7% to €11.5m, roughly in line with the group. Headcount increased by 109, or 2.7%, over the quarter to stand at 4,159, with the most growth coming from Italy and Brazil. The headcount represented 28% growth from a year earlier, reflecting the addition of Adesis (300), 32% growth in nearshore centres (Spain, Poland, Brazil, Costa Rica) and a more modest 6% across other areas of the business.
