Tinexta — Strongest year since FY18

Tinexta’s FY23 results were in line with management’s updated expectations and broadly in line with our most recent estimates, which we marginally upgraded with the Q323 results. Revenue grew by c 11% y-o-y to €396m and adjusted EBITDA by c 9% to €103m. On an underlying basis, revenue growth of 9.7% was slightly behind management’s guidance of 11–15% from the start of the year, but better margin leverage meant that EBITDA growth of 8.6% was within the expected range at that time of 8–12%. We would highlight that momentum in underlying revenue and adjusted EBITDA improved versus the prior year’s c 6% and c 5% growth rates.

We look at the performance of the individual divisions in the next section, but in Exhibit 1 we can see there were some notable differences versus expectations. Overall group profitability (ie adjusted EBITDA) margin was better than we had estimated, albeit it did dip a little from 26.5% in FY22 to 26%. The dip primarily reflects a change in mix with a lower-than-expected margin for the largest and most profitable division, BI, partly compensated for by a better-than-expected margin for smallest and lowest margin division, CS.

A greater relative increase in the interest rates on cash deposits versus what was paid on borrowings in FY23 versus FY22 despite a higher average net debt position in FY23 than the prior year helped to reduce the net financial charge.

The lower absolute dividend of €0.47 (€0.51 in FY22) reflects a slightly higher payout ratio of 34% (FY22: 32%), and the prior year included greater gains recognised on the disposal of Innolva (c €46m) than the (c €36m) gain recognised on the disposal of Re Valuta in FY23.

All Tinexta’s divisions contributed to the overall growth in group revenue but the drivers to that growth were slightly different than expected. On the plus side, DT outperformed with strong underlying growth of c 13% versus 10% guidance. On the negative side, both CS’s (c 15%) and BI’s (c 4%) revenue growth underperformed guidance of 30% and 15%, respectively.

The quarterly results show the typical high Q4 weighting (c 32%) of annual revenue and profits (c 45% of adjusted EBITDA), mainly due to the seasonality of CS and BI – the latter has a very high margin. It was clear as the year progressed that DT was going to exceed guidance. However, growth in FY23 for both CS and BI was a little short of what management had expected.

DT’s revenue growth, which management believes is ahead of market growth, was broad based across its two main product categories: off-the-shelf products and enterprise solutions. From an operations perspective, a new business unit was added to focus on international integration, there was a change in management at CertEurope and the company has increased the number of specialists to develop sales with larger and multinational customers. Ascertia’s performance appears to be encouraging, with management highlighting that it has provided positive surprises and has won some large tenders. DT’s underlying margin improved by 1pp y-o-y to 30.7% in FY23. The minor 10bp dilution in reported margin was due to the first-time consolidation of Ascertia.

CS’s underlying revenue growth of 15% was lower than management expected at the start of the year of 30% growth, but it was ahead of management’s estimate for market growth of 12%. The lower-than-expected revenue was more than made up for by CS’s profit performance of c 45% yoy growth versus guidance of c 43% growth, which was attributable to greater growth in its higher-margin services: advisory, implementation services and managed security services. The key operational accomplishments of FY23 included strengthening of the offer; strategic partnerships with companies such as Google; the launch of the cyber intelligence platform; and the scaling up of the anti-money laundering solution. The division also benefited from cross-selling opportunities with DT.

BI’s financial performance in FY23 demonstrated its typical high Q4 seasonality, but results for the year – organic revenue growth of c 4% and adjusted EBITDA decline of c 5% – were below management’s guidance at the start of the year for growth in revenue of 15% and adjusted EBITDA of 5%. Growth was held back by wider market issues that had been flagged through the year, such as lower rates of deductibility offered by the government on investment made by clients and a lack of financial support by government for increasing exports. Operationally, early in the year, the main subsidiary, Warrant Hub, completed the consolidation of a number of divisional companies to form a complete digital and innovation proposition for clients. Later in the year, Warrant Hub completed the merger with the other main subsidiary, Co. Mark, with the aim of establishing itself as a European leader in integrated consulting services for the sustainable development of companies.

On an absolute basis, free cash flow (cash from operating activities less investment in tangibles and intangibles) declined by 24% to €36.9m, but this was heavily influenced by the effects of M&A in FY23 versus the prior year. On an underlying basis free cash flow from continuing operations increased by c 31% to c €52m.

FY23 was a relatively quiet year from an M&A perspective versus FY22, with the main acquisitions being the 20% stake in Defence Tech, the initial 65% stake in Ascertia and the remaining 40% stake in CertEurope. In December 2023 Tinexta announced the acquisition of an initial 73.9% in ABF Group, Tinexta’s largest ever acquisition with an enterprise value of €155m, which was completed in January 2024.

Net debt by the end of the year was €102m, an increase from c €78m at the end of FY22. This represented c 1x adjusted EBITDA. This was slightly higher than the indicated 0.7–0.8x at the time of Q3 results, due mainly to an increase in the put obligation for CS and a small bolt-on acquisition.

As is typical with the publication of preliminary results, management provided its first detailed guidance for FY24 and for the next three financial years (FY24–26), which is summarised in Exhibit 3. The guidance does not include contributions from any M&A to be announced from here on, but does include the expected contribution from the acquisition of ABF Group, which was completed in January 2024.

Looking at the guidance for FY24, management expects lower, but still very healthy, underlying revenue growth (7%) than Tinexta enjoyed in FY23 (9.7%). Further margin leverage is expected to generate a greater rate of growth in adjusted EBITDA of 10%, which is slightly ahead of FY23’s 8.6% growth. All the divisions are expected to generate strong (ie well above GDP) rates of growth, and all except BI are expected to see progress in their adjusted EBITDA margins. Acquisitions (ie the remainder of the first full year contribution by Ascertia and the first-time contribution by ABF Group) are targeted to boost year-on-year growth in revenue and adjusted EBITDA by 14% and 18%, respectively.

In FY24, in addition to the underlying growth of the market, DT is expected to benefit from its new organisational model that was finalised in February; a strong pipeline of new clients, including outside Europe; further revenue synergies with CS; and benefits from the adoption of eiDAS 2.0. With respect to the latter, the long-awaited update of the electronic Identification, Authentication and Trust Services regulations, adopted by the European Parliament in February 2024, will make cross-border identity verification a reality, and therefore should provide a boost to Tinexta’s growth.

Management expects CS’s growth in FY24 to benefit from continued development of its proprietary platforms, more efficient selling from a unified salesforce and further investment in its own capacity, on top of the strong underlying growth of the market.

The external environment for BI looks more favourable in FY24 given the recent approval by the Italian government to provide incentives, such as tax credits on investment, under the Transition 5.0 Plan for companies that invest in the transition to green energy or improve energy efficiency. This follows similar credits under the Transition 4.0 Plan, which provides tax incentives for companies that invest in the digital transition.

Turning to the new three-year plan for FY24–FY26, management expects strong compound growth rates for revenue of 12–14% and adjusted EBITDA of 17–19%, including double-digit growth for both revenue and adjusted EBITDA, as well as higher margins for all three divisions.

In addition to the above divisional and group revenue and profit guidance, management expects net debt/adjusted EBITDA to increase to 1.7–1.9x by the end of FY24, and then reduce to 0.8–1.0x by the end of FY26 in the absence of any further M&A.

Dividend distributions in FY24 will be 30% of net profit, but this will gradually increase to 40% of net profit by the end of the plan.

We show our revised estimates for FY24 and FY25, and introduce the new estimates for FY26 in Exhibit 4. This draws together all the key drivers to the changes in estimates for FY24 and FY25, such as the change to the FY23 base versus our prior estimates and management’s new guidance for FY24–FY26. Our FY26 estimates include the acquisition of ABF Group, which we have not previously included in our estimates.

At the group level our FY24 and FY25 revenue estimates have increased by c 4% and our adjusted EBITDA estimates by c 10–12%, mainly due to the contribution from ABF Group. As an overall summary, at the divisional level our revenue estimates for FY24 are at the top of management’s guidance for DT, and in the middle of the guided ranges for CS and BI.

The main changes to our divisional estimates in FY24 and FY25 are:

FY23 was a very busy year from an ESG perspective with an initial focus on engagement and assessment involving all of the divisional CEOs and operating units. The ESG KPIs and targets will be disclosed in the company’s FY23 annual report.

The key areas of focus for management are as follows:

Rolling forward our DCF-based valuation to take account of Tinexta’s FY23 results, and using the pro forma net debt that incorporates the acquisition of ABF Group, leads to a reduction in our DCF-based valuation to €28.5/share (€30 previously). Our DCF uses a WACC of 8%, which includes a cost of equity of 9.2% (risk free rate of 3.7%, equity risk premium of 7.8% (source: Damodaran) and a beta of 0.7 (source: LSEG)) and a post-tax cost of debt of 2.7%.

In Exhibits 6 and 7 we show Tinexta’s prospective EV/sales and EV/EBITDA multiples for FY24–FY26 versus its historical multiples (ie its high, average and low multiples in the prior years). The prospective EV/sales multiple drops from 2.4x in FY24 to 2.0x in FY26 and suggests the share price looks undervalued versus its long-term average of 2.5x, especially given management’s expected growth rates. We come to a similar conclusion when we look at the prospective EV/EBITDA multiples for FY24 of 8.7x and FY26 of 6.9x, which are below the long-term average of 10.2x.