Tinexta — Growth affected by temporary issues

Tinexta reported total revenue growth of c 11% in H124 to €203m and a c 9% decline in adjusted EBITDA to c €34m. On an underlying basis, revenue grew by just over 2% to €203m and adjusted EBITDA fell by c 14% to c €34m. The decline in adjusted EBITDA carried through to a lower reported operating profit of c €1m, from c €15m in H123, and a reported loss before tax of €0.1m versus a profit of €14.5m H123.

The results highlight weaker revenue trends in Q224, with overall revenue growth of over 8% to c €105m in Q224 versus Q124’s revenue growth of over 14%. The main cause for the slowdown in growth was the weaker underlying growth, which moved to a small negative for the period, that was more than offset by the important contribution from M&A of over 8%. The underlying revenue weakness was focused in two (CS and BI) of the three divisions, which are discussed in more detail in the following section. The weaker revenue growth in the period and resulting margin changes for the individual divisions led to a c 17% decline in adjusted EBITDA in Q224 to €19m. We remind readers that the three divisions have different levels of profitability on an annual basis (FY23: DT 30%, CS 17% and BI 37%), and the high Q4 weighting of revenue for both CS and BI typically leads to volatile margins between the financial quarters at the divisional and group level.

Tinexta’s higher net financial charges reflect the growth in its net financial position versus H123 (see Cash flow and balance sheet section below).

The key takeaway from Tinexta’s H124 results is that on an underlying basis, DT continued to generate strong revenue growth in Q224, but CS and BI were weaker than Q124. M&A, chiefly the acquisitions of Ascertia and ABF Group, were the main drivers of growth, albeit the contribution from the latter was lower than management had expected due to external influences.

DT saw a nice improvement in organic revenue growth to 10% in Q224, from Q124’s c 8%, and was up against a tough comparative from Q223 of over 13%. The growth was across the board from LegalMail solutions, LegalCert solutions as well as Trusted OnBoarding Platform solutions for the enterprise market. There was a slightly lower revenue contribution from M&A, primarily Ascertia and Camerfirma Colombia, of c €2.6m in Q224 versus Q124’s €5.6m, which management attributed to the normal seasonality of the businesses. DT’s underlying profitability was broadly stable but a small loss from M&A, due to the aforementioned seasonality, led to a lower adjusted EBITDA margin of 26.7% versus 28.9% in Q223. For the half, the overall year-on-year increase in DT’s profitability reflected an improved underlying margin and the contribution from the higher-margin (c 31%) acquisitions.

CS’s revenue marginally declined by c 2% y-o-y in Q224, taking growth for the first six months to over 6%. For H124 management cited good growth from the resale of third-party products in implementation services, in cyber and digital resilience among others, as well as new sales through new internally developed platforms. The c 35% decline in adjusted EBITDA for Q224, taking the H124 decline to c 15%, was attributed to mix changes (ie more lower-margin products sold), as well as the dilutive effect from temporary greater use of third-party products.

BI’s revenue growth of c 8% in Q224 to c €35m was solely attributable to the c 18% contribution from M&A (three acquisitions including ABF Group) as underlying revenue fell by c 9%. Both were below management’s expectations, but, importantly, are viewed as temporary.

First, looking at BI’s underlying growth, the revenue decline was attributed to phasing issues in subsidised financing that were consistent with the commentary at the time of the Q124 results. Some underlying weakness was anticipated due to less attractive terms for its clients on existing government-supported, subsidised finance schemes for digital investment. This has been compounded by the deferred launch of new and additional subsidised finance schemes for energy investments, which have much more attractive terms for Tinexta’s clients. Management had expected some contribution from the latter in Q224, but now expects to see the first benefits in Q324. It remains confident that it can generate the same anticipated revenue for the year as previously, hence guidance for the year has not changed.

ABF Group’s revenue contribution of €5.6m and adjusted EBITDA loss of €1.3m were below management’s expectations, due to political changes in France (the government change in January and dissolution of the National Assembly at the end of June for election) and significant budget revisions at the end of February. These issues led to a postponement of national public financing decisions (France 2030), which has led to a delay in the launch of new project tenders and uncertainty over the maintenance of budgets for ongoing project tenders. Management believes these have delayed the expected growth from ABF Group by six months and therefore has downgraded its estimates for ABF Group in FY24 (see Guidance section below), with some flow through to outer years.

BI’s adjusted EBITDA fell by c 20% to €9.1m in Q224 due to a combination of the revenue declines above, the resulting mix changes (higher contribution from lower-margin business versus higher-margin subsidised finance) and operating costs being higher than expected.

The decline in profitability was the main reason for free cash flow from continuing operations almost halving to c €14m from c €8m in H123.

The main drivers to the increases in the net financial position to c €277m from €102m at the end of FY23 in addition to the free cash generation were acquisitions and put options of €158m and dividend payments of c €29m. On a trailing 12-month basis this represented 2.8x adjusted EBITDA.

Due to ABF Group’s H124 underperformance and the now anticipated delay to its revenue growth opportunities, management has reduced its FY24 expectations for ABF Group to revenue of c €25–29m (from c €37m) and adjusted EBITDA of c €10–12m (from c €18m). These represent downgrades for the subsidiary of c 27% and c 39%, respectively, at the mid-points of the new ranges.

At the start of the year, management was guiding to FY24 revenue growth of 21–23% (including 7% from organic) and adjusted EBITDA growth of 28–32% (including 10% from organic). The new updated guidance, which includes only the above change to expectations for ABF Group, is summarised as follows:

Both sets of guidance do not include any further changes to the group structure from M&A since the start of the year, except for the known incremental contribution from Ascertia for seven months of FY24 having been consolidated since the start of August 2023, as well as ABF Group. The guidance therefore excludes the contributions by acquisitions such as Camerfirma Colombia and Lenovys, which have been consolidated since April 2024. Our reconciliation of the changes between the two sets of guidance is as follows:

In June 2024, management exercised the call option to acquire the remaining c 40% stake of the selling shareholders of Defence Tech Holding (DTH) following the acquisition of an initial 20% (associate) holding at the end of December 2022. The exercise of the call option has triggered a mandatory takeover of the remaining shares. In FY23, Defence Tech Holding generated revenue of €22.4m and adjusted EBITDA of €9m, a margin of c 40%. Tinexta’s management anticipates revenue growth for the business of c 12% through FY26, with a slightly lower adjusted EBITDA margin of 29%, thereby indicating revenue of over €31m in FY26 and adjusted EBITDA of c €9m. We will incorporate Defence Tech into our estimates when the mandatory takeover is complete.

In addition to the above guidance for the income statement, the natural follow on is for management to have adjusted its guidance for expected net financial position for the year-end to 1.9x adjusted EBITDA from 1.7–1.9x previously.

We have reduced our FY24 estimates to the mid-point of the new guided range for ABF Group, and flow these through to forecasts for future years as follows:

Incorporating the lower estimates, updated financial position and moving the valuation forward leads to a reduction in our DCF-based valuation to c €27 per share from €29.3 previously. Our estimated weighted average cost of capital (WACC) of 8% is unchanged as we incorporate a lower risk-free rate of 3.6% from 3.8%, equity risk premium of 6.8% from 7.8% (source: Damodaran) and higher beta of 0.8 from 0.7 (source: LSEG Data & Analytics), and we use a terminal growth rate of 2%. The sensitivity of the valuation to changes in the assumptions for the WACC and terminal growth rate are as follows:

We can see in Exhibits 7 and 8 the year-to-date reduction in the share price of c 40% has led to Tinexta’s prospective multiples moving back below pre-COVID multiples.

Tinexta’s portfolio of companies has changed dramatically over time, so picking the right point in time from which to compare multiples is a little complicated, but management believes the group is now exposed to higher growth categories, and we note management’s guidance suggests a gradual improvement back towards prior (FY19 and FY20) levels of profitability. The prospective EV/sales multiples for FY24–26 of 1.5–1.8x compare with average multiples (figures shown in charts) of 2.5x and 2.9x in FY19 and FY20, and its prospective EV/EBITDA multiples of 5.2–6.6x compare with 8.3x and 9.5x in the same years. Both suggest potential for re-rating if management delivers on its medium-term growth expectations.