Piteco — Update 20 October 2016

Piteco is the leading provider of cash management, liquidity management, bank transaction and other treasury management software solutions for medium and large enterprises in Italy. It began its journey over 30 years ago, and today it has more than 650 clients around the world, operating across c 3,000 subsidiaries. Customers include many high-quality Italian names such as Fiat Chrysler Automotive, Finmeccanica, Geox, Lavazza, Moncler, Mondadori, Prada, 3Italia and Wind. Clients also include major international groups operating in Italy, such as Carlsberg, DaimlerChrysler and Reckitt Benckiser. Piteco offers its clients a range of 20 software solutions, and continues to expand its offerings through R&D and via acquisitions. The software suite includes two solutions from the recent acquisition of Centro Data, including data-matching capability.

Piteco operates a traditional enterprise software business model, with an upfront perpetual software licence sale, professional services (consulting, implementation and configuration) along with ongoing maintenance, which is paid by all active customers. The maintenance book (c €6.9m) represents half of annual net sales revenues and, historically, there has been very low customer churn. Of the balance, c 35% of sales is from upselling to existing clients while c 15% is generated from sales to new clients and we forecast company to acquire 35 new clients in FY16.

As for the typical enterprise software vendor, there is always the risk of budget cuts in an economic downturn. However, Piteco’s typical client has a low default risk, the customer base is broadly spread across large enterprises and the bad debt charge is typically less than 0.5% of turnover. The global financial crisis did not adversely affect the group and the annual maintenance charge is a small cost for its customers. Further, exit barriers are high, as this would require a new project, and the software is embedded in its customers’ systems. There is a risk that major enterprise software vendors might take a more proactive interest in the TMS sector. There will be integration risk in the acquisition strategy and increasing currency risk as the company expands abroad.

The stock trades on c 17.8x our earnings in FY16e, which falls to c 15.2x in FY17e and to 13.7x in FY18e. In terms of EV/sales, the stock trades on c 5.4x in FY16e, which falls to c 4.9x in FY17e and to 4.6x in FY18e. Our DCF model, which assumes a long-term adjusted operating margin target of 40% and terminal growth rate of 2%, values the stock at 507c, which is 18% above the current share price. In our view, Piteco’s valuation is supported by its healthy operating margins, strong cash generation, stable growth and attractive risk profile.

While H1 numbers were a touch below budget due to smaller new deals and fewer up-sells to existing clients, it was very busy in terms of engagement. The group has been developing its internationalisation strategy, with an initial focus on Mexico where it has signed a re-seller agreement with PAGAFLEX. It has also been examining other internationalisation options, particularly in the US, and is investigating an acquisition strategy. Meanwhile, in Italy it has fully integrated Centrodata, planning a marketing campaign and also is developing a cloud strategy to target the mid-market.

H1 revenue grew by 11% to €6.5m while the order backlog was up 27%, which underpins the outcome for the year. EBITDA slipped 5% to €2.5m due to increased costs including a study of the US market by an independent research consultancy as well as recurring listing costs. Further, the Mexican expansion has involved additional travel and other costs while the Cloud product has required development costs and the group has taken on an additional sales person. Nevertheless, operating cash flow jumped by 58% to €4.3m, helped by strong working capital inflows due to disciplined working capital management as well as the inclusion of Centro Data maintenance contracts. The group’s financial position improved by €2.2m over the six months to €1.9m net cash, even after paying €1.9m in dividends. The gross cash position was €11.6m, meaning the group already has significant funds to finance its acquisition strategy.

While 16 new contracts were signed in H1, these were mostly smallish deals. However, several large deals were signed post-period end with high-quality names including Arnoldo Mondadori Editore (one of Europe’s top publishing companies), Carrefour (French multinational retailer), Unieuro (the largest Italian chain of consumer electronics and appliances) and Eataly (the largest Italian marketplace in the world), which positions the group for a significantly stronger H2. In total, there are 22 new deals in the year-to-date with an average size in the typical €60-65k range. All of the new deals are perpetual licences and four are hosted cloud deals. We note that Piteco has an agreement with Dedagroup to use Dedagroup’s hosting facilities. The group is still developing its cloud strategy, which will target the Italian mid-market. Piteco typically generates significant up-sells as existing customers purchase additional modules to broaden the functionality. However, in H1 the group’s c 650 existing clients did not sign as much, which we believe was due to the challenging economic backdrop (we note that Italian GDP growth was 0.3% in Q1 and flat in Q2).

Following the acquisition and full integration of Centro Data, the group now has 85 employees. It is planning a major marketing campaign for its new products from this acquisition. This will target c 200-300 major suppliers to supermarket chains.

The group tax charge is benefiting from “patent box” rules. Further, the Italian corporate tax rate is set to fall from 27.5% to 24.0% from FY17. The €96k exceptional item relates to a tax refund from an overpayment in the prior year.

Outlook

H216 has begun strongly with several larger-than-typical deals already signed, which is a much better performance than in H215. We note the group’s pipeline in Italy remains the same – Piteco has identified almost 2,400 target companies in Italy, of which c 1,100 are classified as prospects, and it is actively talking with c 660. The group still aims to move to the main market by H217.

The group’s initial focus of the internationalisation strategy is Mexico, which is showing positive early signs. It has signed a re-seller agreement with PAGAFLEX, which is a unit of Dedagroup, Piteco’s major shareholder. This arrangement enables Piteco to target Mexican enterprises using PAGAFLEX’s sales team. The costs involve translation of the Italian product into Spanish, marketing documents, the training of salesforce and some air travel from Italy. These costs will have a small impact on group margins in FY16.

PAGAFLEX is one of five payment companies authorised by the Bank of Mexico to issue credit cards. PAGAFLEX offers credit cards to Mexican corporates which are entitled to taxation benefits for issuing credit cards as part of the government’s social strategy. The cards enable employers to pay a portion of their workers’ salaries on credit cards that cannot be used to purchase alcohol.

PAGAFLEX’s salesmen target CFOs whom they can also sell Piteco products. Piteco believes it is very easy to for PAGAFLEX salesmen to make a proposal. The first client pilot is about to commence with Grupo Carso, the global conglomerate company owned by Carlos Slim. Piteco has no direct specialist TMS competitors in Mexico, and we understand that most target companies are likely to use the SAP treasury module.

The group is seeking a re-seller or potentially an acquisition to enter the US market. However, at present the focus remains on Mexican market. The market US is fragmented with 20-25 players of which three are large and most are mid-size.

Piteco’s most important annual Italian trade show is the Treasury & Finance Forum Day, organised by Italian Association of Company Treasurers (AITI), which addresses treasurers, CFOs and their colleagues and is in its seventh year. At this year’s event in September, Andrea Guillermaz, Piteco’s sales and marketing director, presented on Piteco’s International Payment Factory implementation project with Geox, (BIT:GEO) the Italian branded footware and apparel producer and distributor. It was a joint presentation with Federica Vello, group treasury manager of Geox. This project is an example of an up-sell of Piteco’s solutions, involving significant additional functionality and a global roll-out.

Listed on the Italian stock exchange, Geox operates in more than 110 countries. With revenues of €874m in FY15, Geox sells c 20m pairs of shoes each year across 1,161 retail stores and 10,000 wholesalers. With 65% of its turnover from abroad, it operates from 40 different group companies, using 150 bank accounts and has 75 different banks.

Geox has been a Piteco customer since 2009 and now uses Piteco to manage all the group’s treasury functions. Prior to the current project, Geox was just using Piteco to centrally manage and process commercial payments. The current project extends this to the management of all payments across the group, including payroll, manual payments, tax, general ledger and fund transfer in addition to commercial payments. Geox manages cash pooling for different 40 group companies. Its payment factory handles 100,000 payment orders every year, 150 reports on bank accounts related to 65 banking counterparties all linked to 15 banking hubs – resulting in 15 separate connections to SWIFT (which provides a network to enable the transfer of financial transactions through a 'financial message'). We note that a payment factory acts as a centralised mechanism for processing payments initiated by group entities and collects and coordinates all payment procedures that companies must organise and execute. To integrate the payment processing solution, Piteco offers the Corporate Banking Communication (CBC) module through which corporate agents can securely authenticate, apply the workflow authorisation shared with several banks and digitally sign any payment arrangement.

Geox decided it wanted to improve efficiency in its payments factory by bringing the heterogeneous processes and systems under a centralised management with a single connection channel. After going to the market and looking at all the options available, Geox chose to combine Piteco EVO (for all its cash management functions) with Piteco CBC. CBC enables efficient workflow management between companies and their domestic and international banks and manages information flow coming from the ERP system, which in this case is SAP.

The project involved three people from Piteco, two to three people from Geox and two to three people from Accenture and took a year to complete. The optimisation process required reviewing and standardisation of Treasury Department’s workflow processes. The application map for Finance and Treasury area, has been redesigned to maximize efficiency and rationalisation of the systems in use. The process also involved streamlining the 15 corporate banking hubs across the group into just five.

Integrations between four platforms were required – SAP as an ERP system, Piteco EVO and Piteco CBC along with SWIFT as the sole platform for communicating with banks. The integration process was carried out in three stages:

Countries in the scope of ‘International Payment Factory’ implementation are: Italy, USA, Holland, Switzerland, Russia, Macao, Portugal, Spain, Norway, Germany, Belgium, France, Luxembourg, UK, Austria, Serbia, Japan, China, Hungary, India, Vietnam, Indonesia, Hong Kong, Turkey, Poland, Greece, Canada and Slovakia.

The pilot project finished in April 2016, with the solution going live in 11 countries. Roll-out of the other four bank hub's is a gradual approach with the second go-live in October 2016 and the third and final one in early 2017.

A project of this scale would typically take three to four years to complete for a competing solution, as the customer would also need to integrate workflow management with digital signature, which is handled by CBC. However, Piteco EVO can be integrated with CBC in a very short time, which significantly speeds up this project.

We have eased our net sales revenue forecasts by 4% in FY16 to €13.7m, by 2% in FY17 to €15.1m and by 2% in FY18 to €16.4m. We note there might be a small increase in costs for a couple of years due to the investment in Mexico and our EBITDA forecasts fall by 8% in FY16 to €6.0m, by 4% in FY17 to €6.9m and by 4% in FY18 to €7.7m. We have also lowered our tax rate assumptions to 21% in FY16 and FY17, conservatively rising to 23% in FY18. Our EPS falls by 8% in FY16 but remain broadly unchanged in FY17 and FY18. Our year-end net cash forecasts are broadly the same €2.9m, €6.3m and €10.2m for F16-FY18. This includes the €4.5m convertible bond as debt, with is now in the money (conversion price is 420c).

Piteco has an excellent track record of delivering steady revenue growth, healthy margins and strong cash generation, despite having had to cope with a very challenging economic backdrop. The group’s turnover growth has outpaced Italian GDP in each of the seven years to 2015, and its turnover has expanded in aggregate by more than 65% over the period when Italian GDP fell by 8%. Piteco has a strong pipeline and growing brand awareness and is now seeking to accelerate growth through acquisition and international expansion. The investment profile is attractive, with a resilient maintenance book ensuring 50% recurring revenues, and with healthy growth prospects from the pipeline, cross-selling, a broadening end market (geographically and into smaller businesses) and via acquisitions.

We note that the stock has performed extremely well since the IPO (330c), rising by 30% to even exceed the convertible bond conversion price (420c). Meanwhile the FTSE MIB index has fallen by 27% over the same period. We highlight the following points on valuation: