Tinexta — Increasing digital exposure

Tinexta (MIL: TNXT)

Last close As at 20/06/2024

EUR17.19

0.54 (3.24%)

Market capitalisation

EUR812m

More on this equity

Research: TMT

Tinexta — Increasing digital exposure

Tinexta has announced three acquisitions that will lead to the creation of a fourth business unit, Cybersecurity. The acquisitions are consistent with the strategy of moving towards providing more digital services in high growth markets (9–10% pa in this case). As a result, they are expected to improve the group’s average organic revenue growth from c 4–5% to more than 8%, and lead to enhanced profit growth as margins expand following some initial dilution. While our forecasts are unchanged ahead of completion of the transactions, mostly in early FY21, in this note we discuss the implications for the forecasts and valuation. On a pro forma basis, EV/EBITDA is 12.8x in FY21e.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

TMT

Tinexta

Increasing digital exposure

Acquisitions

Professional services

19 October 2020

Price

€21.15

Market cap

€982m

Net debt (€m) at 30 June 2020

113

Shares in issue

46.4m

Free float

34%

Code

TNXT

Primary exchange

Borsa Italiana STAR

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

20.3

53.9

67.6

Rel (local)

23.8

61

92.9

52-week high/low

€21.15

€7.28

Business description

Tinexta currently has three business divisions: Digital Trust – solutions to increase trust in digital transactions; Credit Information & Management – information services to help manage corporate credit; and Innovation & Marketing Services – consulting services to help clients develop and/or grow their businesses,

Next events

Q320 results

12 November 2020

Q420 results

February 2021

Analysts

Russell Pointon

+44 (0)20 3077 5757

Fiona Orford-Williams

+44 (0)20 3077 5739

Tinexta is a research client of Edison Investment Research Limited

Tinexta has announced three acquisitions that will lead to the creation of a fourth business unit, Cybersecurity. The acquisitions are consistent with the strategy of moving towards providing more digital services in high growth markets (9–10% pa in this case). As a result, they are expected to improve the group’s average organic revenue growth from c 4–5% to more than 8%, and lead to enhanced profit growth as margins expand following some initial dilution. While our forecasts are unchanged ahead of completion of the transactions, mostly in early FY21, in this note we discuss the implications for the forecasts and valuation. On a pro forma basis, EV/EBITDA is 12.8x in FY21e.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

238.7

52.3

0.77

0.23

27.3

1.1

12/19

258.7

55.0

0.80

0.00

26.5

0.0

12/20e

266.6

53.3

0.80

0.24

26.3

1.1

12/21e

277.5

56.6

0.86

0.25

24.7

1.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Entering cybersecurity

The acquisition of majority stakes in three private Italian companies for an initial cash consideration of €47.2m and implied total current enterprise value of €85.2m, with minority buyouts in FY24, will lead to the creation of a fourth business unit, Cybersecurity. The aim is to build a leading national player given the specialised services of the acquired companies, which are considered best in class. Management is confident that growth will exceed long-term estimates for industry growth of 9–10% pa. The initial focus will be on developing the businesses domestically, but Tinexta’s increasing European exposure should ensure that it can expand outside Italy. There are likely to be significant revenue synergies with Tinexta’s other businesses, notably Digital Trust. On our forecasts the acquisitions will represent 22% of the group’s enlarged revenue and 11% of EBITDA in FY21e.

Forecasts unchanged ahead of completions

Our forecasts for FY20 and FY21 are unchanged until the acquisitions are completed, early in FY21. On a pro forma basis, using implied growth rates from the acquisition multiples, we estimate that Tinexta’s organic revenue growth rate could improve from the current estimate of 4.5% to more than 8%. A lower EBITDA margin from the acquisitions (c 12%) will dilute the average group margin (32.3% before central costs) to 28.6%, but is likely to expand quickly thereafter, according to management.

Valuation: Re-rated due to higher expected growth

The share price has responded positively to the announcement, improving on its already strong year to date performance. On unchanged forecasts the EV/EBITDA multiple for FY21e is 13.5x, and on a pro forma basis it reduces to 12.8x. The multiples are at a premium to historic multiples, which reflects the expected higher growth rates as M&A will change the group’s growth profile.

Creating a fourth business unit – Cybersecurity

Tinexta has announced the acquisition of majority stakes in three Italian private companies, which will lead to the creation of a new, fourth business unit, Cybersecurity. As is typical with Tinexta’s historic M&A strategy, it will initially acquire majority stakes in the companies and has negotiated put/call options over the remaining stakes, which will be exercised in FY24 with pre-agreed multiples based on financial targets for FY23. The three companies to be acquired are as follows:

Corvallis: an initial 70% stake of the Projects & Solutions division of Corvallis. The company is a digital solutions provider and integrator whose customer base is typically larger corporates including financial institutions. At present, cybersecurity is not a major source of revenue for the company, but its strong customer relationships and recurring revenues will be an attractive source of new customers for the other two companies being acquired. Along with Yoroi below, this acquisition is likely to complete in early FY21.

Yoroi: an initial 60% stake of Yoroi will be acquired. Yoroi provides cybersecurity solutions, primarily to SMEs. Post-acquisition, it is expected that, with the help of the other group companies, it will be better able to target larger corporate customers.

Swascan: an initial 51% stake of Swascan will be acquired. Swascan also provides cybersecurity services. It is a relatively young company that has experienced very strong growth. This transaction is likely to complete in FY20 but, due to its size, will not have a material effect on estimates for the year.

The initial cash consideration for the majority stakes is €47.2m, which implies a total current enterprise value of €85.2m. The current value of the total investment, including the final purchase of minorities, will be €104.3m. The acquisition cost of the three businesses can be summarised as follows:

Exhibit 1: Consideration for Cybersecurity acquisitions

€m

Total investment

104.3

Debt assumed (100% of Corvallis debt)

(10.0)

Present value of puts/calls

(46.5)

Equity value

47.8

Earnout

(0.6)

Initial cash

47.2

Initial EV

85.2

PV of growth in put/calls

19.1

Total investment

104.3

Total investment

Debt assumed (100% of Corvallis debt)

Present value of puts/calls

Equity value

Earnout

Initial cash

Initial EV

PV of growth in put/calls

Total investment

€m

104.3

(10.0)

(46.5)

47.8

(0.6)

47.2

85.2

19.1

104.3

Source: Tinexta

What are the attractions of Cybersecurity for Tinexta?

Management sees the acquisitions as a natural progression of its strategy of moving towards providing services with a high digital content (the acquisitions will take the group’s exposure to digital services from 43% to 55%) and higher rates of growth.

The cybersecurity market has a strong growth outlook, which is greater than the aggregate of Tinexta’s existing business exposure. According to management data, the global cybersecurity market will be worth c $121bn in 2020, having grown by just 3% in FY20, which slowed from 10% growth in 2019 due to the effects of COVID-19. Management estimates suggest the global market CAGR will be 10% from 2020 to 2024. The Italian and western European cybersecurity markets are estimated at $2.1bn and $30bn, with forecast CAGRs through 2024 of 9% and 10% respectively. There are many constituent parts of the this widely defined market; Tinexta’s focus will be on delivering services, ie solutions and integration, estimated to represent $1.2bn of the $2.1bn Italian market, rather than providing software and hardware.

Management believes there is clear opportunity to establish itself, initially, as a leading national player in cybersecurity. Its competitors will include the global consultancies Accenture, IBM, Deloitte and PwC, and smaller domestic companies. The companies to be acquired provide specialised services that are considered best in class, thus providing a strong competitive advantage versus its larger peers. To develop and grow the business, there are likely to be partnerships with other key players and further M&A to acquire new competences in rapidly changing markets.

As well as growing the three businesses as one unit, Tinexta will develop an integrated offer with InfoCert, the main subsidiary of its Digital Trust business unit. InfoCert is likely to be a good source of cross-selling opportunities given its large corporate customer base across many verticals. There are likely to be revenue synergies with other group companies, eg cross-selling cybersecurity solutions to its SME clients in the Innovation & Marketing Services business unit.

Much of the initial focus will naturally be on establishing and growing the businesses domestically but Tinexta’s increasing pan-European exposure should enable it to develop and grow this business internationally.

Given its small but established scale in Italy (estimated market share of domestic focus markets of 5%) and no presence in the wider European market, management believes the new business will grow at a faster rate than CAGRs of 9% and 10% in the indicated markets.

Financials of the acquired companies

According to Tinexta, the pro forma financial profile of the businesses to be acquired is as follows:

Exhibit 2: Cybersecurity business pro forma financials for FY19

Revenue (€m)

% of revenue

EBITDA (€m)

% of EBITDA

EBITDA margin

Corvallis

51.3

84%

5.8

87%

11.3%

Yoroi

8.2

13%

0.7

10%

8.5%

Swascan

1.3

2%

0.2

3%

15.4%

Total

60.8

100%

6.7

100%

11.0%

Source: Tinexta

As can be seen, of the companies to be acquired, Corvallis is the most significant contributor to revenue and EBITDA. Management has indicated that revenue will grow to c €67m (c 10.2%) and that EBITDA will grow to c €8m (c 19.4%) in FY20, implying good improvement in the EBITDA margin to 11.9% from 11.0% in FY19. We believe the two smaller business are exhibiting very strong rates of growth, ie greater than 20%, and that Corvallis is growing at a lower, ie single-digit rate.

The low margins are attributed to the relative immaturity of the businesses. Over time, management is confident that the EBITDA margin can improve, leading to higher profit growth.

According to management, acquisition of the initial majority stakes was agreed at 10–11x expected EBITDA in FY20 and exercise of the put/call options will take place in 2024 at a multiple equal to 8x EBITDA in FY23e. We can therefore broadly estimate the implied forecast EBITDA for the acquisitions in FY23 if we assume the weighted average minority interest remains at c 31.6% (see calculation below), which includes the simplifying assumption that the profitability of all three companies grows at the same rate in FY20–23e.

Exhibit 3: Implied EBITDA growth of Cybersecurity

2020

2023

Total

EV

54.8

30.4

85.2

Debt assumed

7.0

3.0

10.0

Equity value

47.8

27.4

75.2

Present value of growth of minority interest

19.1

Present value of minority interest

46.5

Future value of minority interest (8% cost of capital) in 2023

58.6

EV

85.2

58.6

EBITDA*

8.0

23.2

EV/EBITDA

10.7

8.0

Minority interest calculation:

% of 2020 EBITDA

Minority %

Weighted average

Corvallis

87%

30%

26.1%

Yoroi

10%

40%

4.0%

Swascan

3%

49%

1.5%

Total

31.6%

Source: Tinexta, Edison Investment Research. * 2023 EBITDA is total EBITDA assuming minority interest of 31.6%

Calculated EV/EBITDA of 10.7x for the original majority stakes (FY20) is consistent with the 10–11x stated by management. Implied EBITDA of €23.2m in FY23 represents an EBITDA CAGR of c 24% from pro forma EBITDA of €8m in FY20, which is broadly consistent with a revenue CAGR of 15% and a rapid increase in EBITDA margin to c 23% in FY23 as shown in Exhibit 4 below.

Exhibit 4: Potential growth trajectory for Cybersecurity

€m

2020

2021

2022

2023

Revenue

67.0

77.1

88.6

101.9

Growth y-o-y

15.0%

15.0%

15.0%

EBITDA

8.0

11.6

17.7

23.4

EBITDA Margin

11.9%

15.0%

20.0%

23.0%

Growth y-o-y

44.5%

53.3%

32.3%

Source: Tinexta, Edison Investment Research

Implications for Tinexta’s financials

We make no changes to our estimates for FY20 and beyond until the acquisitions are completed. Management will likely provide guidance for the new group structure when it introduces its new three-year business plan and annual guidance at the start of 2021.

Comparative group profiles for Tinexta in FY21 before and after the acquisitions on a pro forma basis are shown in Exhibit 5 below. Note that the two largest transactions, Corvallis and Yoroi, are likely to complete in early FY21, so future estimates will be different from the pro forma for 12 months.

Exhibit 5: Tinexta pro forma financials

€000s

FY21e current

Current mix

FY21e pro forma

Pro forma mix

Revenue:

- Digital Trust

126,941

46%

126,941

36%

- Credit Information & Management

65,022

23%

65,022

18%

- Innovation & Marketing Services

85,578

31%

85,578

24%

- Cybersecurity

77,050

22%

Total

277,541

100%

354,591

100%

Organic revenue growth:

- Digital Trust

10.0%

10.0%

- Credit Information & Management

(5.0)%

(5.0)%

- Innovation & Marketing Services

5.0%

5.0%

- Cybersecurity

15.0%

Total

4.5%

8.3%

EBITDA:

- Digital Trust

35,006

39%

35,006

35%

- Credit Information & Management

13,904

15%

13,904

14%

- Innovation & Marketing Services

40,848

46%

40,848

40%

- Cybersecurity

11,558

11%

sub-total

89,758

100%

101,316

100%

- Other (ie central costs)

(9,240)

(9,240)

Total

80,518

92,076

EBITDA Margin:

- Digital Trust

27.6%

27.6%

- Credit Information & Management

21.4%

21.4%

- Innovation & Marketing Services

47.7%

47.7%

- Cybersecurity

15.0%

sub-total

32.3%

28.6%

- Other (ie central costs)

N/A

N/A

Total

29.0%

26.0%

Source: Edison Investment Research

Based on pro forma numbers, Cybersecurity would represent 22% of group revenue in FY21 and 11% of group EBITDA before ‘other’, ie central costs. Given the higher than expected organic revenue growth in FY21 for Cybersecurity of 15% versus the existing businesses of 4.5%, it would increase the expected organic growth rate for revenue to 8.3% on a pro forma basis for the group as a whole.

Cybersecurity’s expected EBITDA margin of 15% in FY21 is lower than the estimated margin for the rest of the group in FY21 of 32.3%, but the dilution to group margin will reduce as its margin is expected to grow thereafter.

Valuation: Re-rated due to higher anticipated growth

The share price has performed strongly year to date and since the weakness induced by COVID-19. It has reacted very positively to the announcement of the acquisitions to create the new Cybersecurity division. While our forecasts do not incorporate estimates for the acquisitions, we calculate that the EV/EBITDA for the new enlarged group is 12.8x in FY21e. This is a premium to the long-run average since 2014 of 8.5x. We believe that a higher multiple is deserved given the changes in group structure and stronger expected growth rate following M&A.

Exhibit 6: Financial summary

€m

2018

2019

2020e

2021e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

238.7

258.7

266.6

277.5

Operating costs

(172.1)

(181.9)

(189.9)

(197.0)

EBITDA before non-recurring costs

 

 

66.6

76.8

76.7

80.5

EBITDA

 

 

66.0

71.3

76.7

80.5

Normalised operating profit

 

 

54.3

59.0

56.6

59.8

Amortisation of acquired intangibles

(5.8)

(5.9)

(5.8)

(5.8)

Exceptionals

(0.6)

(5.5)

0.0

0.0

Share-based payments

0.0

0.0

0.0

0.0

Reported operating profit

47.9

47.5

50.8

54.0

Net Interest

(2.5)

(4.1)

(1.5)

(2.0)

Joint ventures & associates (post tax)

0.1

(1.1)

(1.1)

(1.1)

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

52.3

55.0

53.3

56.6

Profit Before Tax (reported)

 

 

45.5

42.2

48.2

50.8

Reported tax

(12.6)

(13.4)

(14.2)

(15.0)

Profit After Tax (norm)

36.8

38.3

37.5

39.9

Profit After Tax (reported)

32.9

28.8

34.0

35.8

Minority interests

(0.6)

(0.6)

(0.4)

(0.5)

Discontinued operations

0.0

0.0

0.0

0.0

Net income (normalised)

36.2

37.7

37.1

39.5

Net income (reported)

32.4

28.2

33.5

35.4

Average number of shares outstanding (m)

46.6

47.0

46.1

46.1

EPS - normalised (€)

 

 

0.78

0.80

0.80

0.86

EPS - normalised fully diluted (c)

 

 

77.36

79.71

80.48

85.58

EPS - basic reported (€)

 

 

0.69

0.60

0.73

0.77

Dividend (€)

0.23

0.00

0.24

0.25

Revenue growth (%)

36.6

8.4

3.0

4.1

EBITDA Margin before non-recurring costs (%)

27.9

29.7

28.8

29.0

Normalised Operating Margin

22.8

22.8

21.2

21.5

BALANCE SHEET

Fixed Assets

 

 

307.1

316.7

308.6

300.4

Intangible Assets

272.1

269.9

267.3

264.5

Tangible Assets

8.2

21.2

15.8

10.3

Investments & other

26.8

25.6

25.6

25.6

Current Assets

 

 

143.4

139.4

172.1

207.3

Stocks

1.3

1.1

1.2

1.2

Debtors

86.3

89.8

92.5

96.3

Cash & cash equivalents

35.1

33.6

63.6

94.9

Other financial assets

8.2

6.6

6.6

6.6

Other

12.4

8.2

8.2

8.2

Current Liabilities

 

 

(194.4)

(160.4)

(161.2)

(163.3)

Creditors

(93.9)

(92.7)

(93.4)

(95.5)

Tax and social security

(0.7)

(2.9)

(2.9)

(2.9)

Short term borrowings

(97.4)

(62.0)

(62.0)

(62.0)

Other

(2.4)

(2.9)

(2.9)

(2.9)

Long Term Liabilities

 

 

(110.8)

(146.2)

(146.2)

(146.2)

Long term borrowings

(70.7)

(107.0)

(107.0)

(107.0)

Other long-term liabilities

(40.2)

(39.2)

(39.2)

(39.2)

Net Assets

 

 

145.4

149.4

173.4

198.2

Minority interests

(3.8)

(3.9)

(4.3)

(4.8)

Shareholders' equity

 

 

141.6

145.6

169.1

193.4

CASH FLOW

Operating cash flow

 

 

43.4

55.2

53.5

56.8

Capex

(13.1)

(13.5)

(12.0)

(12.5)

Acquisitions/disposals

(33.2)

(47.5)

(28.0)

0.0

Net interest

(1.4)

(2.5)

(1.5)

(2.0)

Equity financing

1.1

1.1

(10.0)

0.0

Dividends

(12.1)

(16.4)

0.0

(11.1)

Borrowings

17.3

23.7

0.0

0.0

Other

(3.9)

(1.7)

28.0

0.0

Net Cash Flow

(1.9)

(1.5)

30.0

31.3

Opening net debt/(cash)

 

 

103.8

123.8

128.0

98.0

FX

0.0

0.0

0.0

0.0

Other non-cash movements

(18.1)

(2.6)

0.0

0.0

Closing net debt/(cash)

 

 

123.8

128.0

98.0

66.7

Source: Company accounts, Edison Investment Research


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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