Tinexta — Incorporating Cyber Security

Tinexta’s FY20 results are broadly in line with management’s guidance at the time of the Q320 results in November 2020. As is customary at the start of a new financial year, management provided its guidance for the current financial year, as well as introducing the new annual three-year business plan. These are important given they show how management expects financial results to recover from the COVID-19 affected FY20, as well as being the first time that management has provided detailed financial guidance following the newly created business unit, Cyber Security, as well as other recent and smaller acquisitions.

For FY20, Tinexta’s revenue of €269.0m and reported EBITDA of €77.9m represented year-on-year growth from FY19 of 4.0% (3.2% organic) and 9.3% respectively. The revenue is c 4% ahead of management’s prior revenue guidance of ‘around €260m’ and just below EBITDA guidance of ‘close to €80m’. Our EBITDA forecast was €81m, marginally ahead of guidance. The results confirmed management’s belief that profit growth should, typically, be greater than revenue growth. For completeness, EBITDA before stock options and adjusted EBITDA (ie before non-recurring items) increased by 5.3% y-o-y to €78.8m and 5.7% to €81.2m respectively.

Adjusted net profit growth was 31.7% to €37.9m, helped by a better-than-expected net finance expense given the strong operating and free cash flow generation, discussed below. The normalised tax rate of 29.5% was as expected.

With the results there is a minor change in divisional disclosure; sales made by the parent company are now separately reported and intra-group sales are eliminated on consolidation. As Exhibit 1 highlights, the change is not material between the old and new disclosure for FY19, but as a result we cannot (accurately) compare organic growth rates for the individual business segments consistently through FY20 as we do not have restated financials for the quarters in FY19 and FY20. For the group as a whole, organic revenue growth was 2.8% in Q420 and adjusted EBITDA declined by c 4% due to a very strong comparative from Q419, in particular Innovation and Marketing Services (discussed below). Growth rates for revenue and EBITDA were both lower than the strong Q3 growth rates of 18.5% and 45.9%, which were helped by the bounce back post COVID-19 lockdowns.

Digital Trust’s FY20 organic revenue growth of 8.0% to €115.9m from €107.3m was helped by the ongoing strength of the Enterprise Solutions business with strong growth in the number of customers and/or transactions processed.

Credit Information & Management’s organic revenue increased by 6.5% to €77.3m and its EBITDA increased by 35.4% to €23.7m, a margin of c 30.7% versus FY19’s 24.1%. The business has recovered very well following the macro weakness in H120. The real estate valuation business was negatively affected by COVID-19; however, demand for the core credit information product has been enhanced by the poor macro environment making its use in managing credit strategically more important. The business unit has also been helped by demand for its services that help clients gain access to government financial stimulus in response to COVID-19, ie guarantees of bank loans.

Revenue and EBITDA for Innovation & Marketing Services fell by 5.6% organically in FY20 and by 6.1% respectively due the macro effects of lower volumes in subsidised finance and the contraction in clients’ ability and desire to export, albeit the latter recovered towards the end of FY20.

There was an impressive performance with respect to free cash flow generation, which increased by 60% y-o-y to €66.7m, and represented c 25% of revenue versus 16% in the prior year. The main drivers of improvement were higher profitability and an impressive inflow of working capital versus an outflow in FY19. We highlight that improving free cash flow generation has been a key focus of the new CFO, Oddone Pozzi. Following the strong working capital performance in FY20, the goal for the next three years is to maintain the level of the KPI of 2020, ie there will be only a slight working capital absorption as revenue grows.

Investment in capex and intangibles was broadly consistent with FY19 at 5.5% of revenue.

Tinexta’s net debt position at the end of FY20 improved to €91.9m from €129.1m at the end of FY19, despite a net outflow of c €36.1m on M&A and €10m on the purchase of shares to support the stock option plan. The net debt/EBITDA position of 1.2x was a significant improvement from 1.8x at the end of FY19. Management guides to net debt/EBITDA of approximately 2x by the end of FY21 following the completed acquisitions of the Cyber Security businesses.

Management’s new guidance for FY21 is for revenue of approximately €370m (y-o-y growth of c 38%) and EBITDA of €96m, an increase of c 23% from FY20. FY21 benefits from the first full year of the recently formed Cyber Security business unit. Please see our update note published on 19 October 2020.

Management estimates that Cyber Security will contribute c €76m in revenue and €10m in EBITDA, a margin of c 13%. Pro forma FY20 revenue was €69m and EBITDA was €8m, and management guidance therefore represents growth of c 10% and 25%, respectively. Group EBITDA is expected to grow at a slower rate than revenue, given Cyber Security’s margin is lower than the group average, but will then return to the long-term trend of EBITDA growth higher than revenue growth. The guidance implies that the non-Cyber Security businesses will contribute revenue of c €296m and EBITDA of €86m, including a contribution from recent small acquisitions in Innovation & Marketing Services, eg Queryo, the digital marketing agency, which reported revenue of c €5m and EBITDA of €2.5m in FY20, prior to its acquisition.

In the absence of further M&A, management’s three-year business plan is summarised in Exhibit 2, including some roundings.

In aggregate and in the absence of M&A, management’s three-year business plan estimates CAGRs for revenue and EBITDA in FY21–23e of 18%, indicating revenue of c €448m and EBITDA of €128m. Management states that the estimates are challenging but achievable, while recognising current macro weakness and uncertainty about the near- to medium-term pace of COVID vaccinations. Furthermore, management highlights that potential M&A could increase the CAGRs for both revenue and EBITDA in FY21–23e to 22%, an increase of 4pp per year.

With respect to the estimates, we make the following observations:

Our new estimates are in line with management guidance.

Our DCF-based valuation points to a share price of €27, upside of c 17% to the current share price, using a WACC of 7% and terminal growth rate of 2%. In the DCF we assume 5% revenue growth for FY24 and FY25, post management’s new three-year business plan, before a quick fade down to 2% revenue growth thereafter, and we hold the EBITDA margin flat at 27.9% from FY23.

On our upgraded forecasts, at the current share price Tinexta’s EV/sales multiple for FY21e is 3.1x, which is in line with its previous all-time high achieved in a non-COVID-affected year, ie FY19. The P/E multiple for FY21e of 20.9x is at a premium to the multiples achieved in more recent years except FY20, which was heavily affected by COVID, but below the multiples on which it traded in the formative years of the group. We believe that Tinexta’s improved growth outlook, higher profitability and free cash flow generation following the change in structure of the group warrants a higher valuation.