Tinexta — Growth in highly innovative areas

Tinexta, which was listed in 2014, has leading or strong market positions in its three longer-standing business units Digital Trust (DT), Innovation & Marketing Services (IMS) and Credit Information & Management (CIM), and is attempting to build a leading domestic position in a new area, Cyber Security (CS), which management believes has above-average growth prospects.

Structural growth drivers for the individual business units include the digitisation of the economy, governments’ desires to increase R&D and innovation, and the internationalisation of trade as companies and SMEs seek to grow and diversify.

Tinexta’s already-attractive medium-term growth profile has been enhanced by its recent entry into cyber security and other M&A including a new venture, with a leading Italian bank, to distribute its CIM and IMS services to a wider customer base, which we expect to provide significant incremental growth by FY25. We forecast an organic revenue CAGR from FY21–23 of c 12%, and c 21% reported EBITDA growth, as we expect margins to improve in all four business units. We expect growth rates to accelerate from FY21 to FY23 due to the phasing of M&A and the revenue ramp from the new venture. We expect that the higher profitability will lead to an improvement in free cash flow generation. The balance sheet is robust, with our forecast for net debt/EBITDA of 2.6x by end FY21 due to recent M&A, and we expect quick deleveraging to 1.0x by FY23.

Our DCF-based valuation is c €41 per share based on our explicit estimates until FY23. We assume lower revenue growth forecasts in FY24 and FY25, albeit still at a robust c 11%, including the ramp in revenue from the new venture, and a quick fade thereafter from 6% revenue growth in FY26 to 2% by our terminal year of FY31. Beyond FY25, we incorporate a flat EBITDA margin of 29.5%, which is conservative compared to Tinexta’s operating history. Our DCF uses a weighted-average cost of capital (WACC) of 7% and a terminal growth rate of 2%. Tinexta’s EV/EBITDA multiples (19.2x, 15.5x and 12.9x) and P/E multiples (32.6x, 25.3x and 20.4x) for FY21e, FY22e and FY23e are at a premium to historical averages, which is warranted by higher growth rates and profitability.

We see the following sensitivities as key determinants of the Tinexta’s prospects:

The business profile of Tinexta (named Tecnoinvestimenti until November 2018) has changed significantly in recent years through a combination of M&A (25 acquisitions since 2013, including the announcement of eight acquisitions in FY20 and one so far in FY21), while maintaining a relatively strong balance sheet, and strong growth both organically and through acquisitions. It is currently focused on four business units, which primarily serve corporate customers of all sizes with digital security, information and consulting services. In order of our expected FY22 revenue contributions, these are:

Tinexta was founded in 2009 when Tecno Holding, owned by the Italian Chambers of Commerce, contributed assets into the company in exchange for a shareholding in Tinexta. Tecno Holding remains the reference shareholder with a stake of 55.8% of the company. The shares were listed on AIM Italia in 2014 and transferred to Borsa Italiana STAR in 2016. The assets contributed included the company InfoCert, which is the foundation of DT, as well as other assets including parking lots, real estate and majority ownership of a construction company. From 2012, the assets were managed more proactively, that is non-core assets such as the parking lots were sold, and management sought to invest in other professional services with a better growth profile, with existing confidence that DT had a strong outlook. In chronological order Tinexta entered CIM in 2012; IMS (previously named Sales & Marketing Solutions) in 2016; and CS in 2020/21.

The change in the business profile has been achieved with a significant level of M&A, a cumulative spend of €331m through the cash flow statement from FY14 through H121, and cumulative investment in tangibles and intangibles of €70m. Tinexta’s M&A strategy typically involves purchasing a majority stake in a company before buying out minorities, protected by put and call options, at a later date. Once Tinexta has established a foothold in a market, it tends to follow up with smaller acquisitions that either expand the existing product or service offer for clients.

M&A has been funded by a combination of cash generation, debt (maintaining a reasonably strong balance sheet) and minor equity issuance (€23m in when it listed on AIM Italia in 2014, and €42m when it moved listing to Borsa Italiana STAR).

Management’s strategy is to further develop the group by expanding domestically and/or internationally, and to offer more services in ‘highly innovative areas’ to existing and potential new clients. To date the strategy has been successful, generating strong revenue and profit growth, and an improvement in post-tax ROIC from 10.2% in FY16 to 16.7% in FY20.

DT provides solutions that enable and increase the confidence (ie trust) of users when signing or sending documents electronically. The services provide surety with respect to the validity of the identities of individuals and businesses online (ie digital identities), the authenticity of electronic documents such as contracts and the secure storage of documents.

DT should be a beneficiary of the economy-wide transition from analogue to digital. This includes the enhanced requirement for online security including knowing who and what one is dealing with, so is well aligned with initiatives such as know your client and anti-money laundering. In addition, there are opportunities that subsequently follow in the streamlining of business processes and infrastructure change. Regulatory tailwinds (see below) are helping Tinexta to take advantage of these trends across the whole of the EU, having been previously a purely domestic Italian business.

The business unit has two main operating companies: InfoCert (99.9% owned) and Visura. In addition, InfoCert has two subsidiaries: Sixtema (80% owned from 1 April 2017), which provides IT and management services; and Camerfirma (51% owned since 1 May 2018), which provides digital trust services in Spain and South America.

External estimates for sizes and growth rates of the digital trust markets are as follows:

InfoCert is the market leader in Italy for certified electronic mail, digital signature, electronic invoicing and digital documents storage. In order to provide these services, InfoCert is registered as a Certification Authority and is accredited by the AgID, the Italian government agency for digital identity.

InfoCert has two main businesses. First is the established core business of off-the-shelf certified email and digital signature that is more suited to smaller clients, for example, individuals and SMEs etc, for which clients pay an annual subscription. Italy is one of three countries in the world that uses certified email, as well as Hong Kong and Switzerland. It was introduced in 2005 to enable parties to communicate securely with local and central government, with the aim of modernising bureaucracy and combatting corruption. Certified email has the same legal value as a letter sent by registered mail with advice of receipt. Over time, the requirements to use certified email have increased. For example, since July 2013, all communications (including invoicing) between companies and public administration must take place via certified email, and since 2019 all invoices between companies but be via certified electronic invoice. In FY20 off-the-shelf products represented 57% of DT’s revenue, versus 64% in FY16.

Second, and most importantly, InfoCert has two products that address the digital trust market for enterprises: Trusted Onboarding Platform (TOP) and GoSign, which we estimate have grown at a CAGR of 24% between FY16 and FY20:

DT’s core products have traditionally been aimed at individuals/professionals with low turnover (spending at most €1k pa) to large enterprises (spending at least €100k pa). From 2021, it will begin to focus on SMEs that are likely to spend somewhere between these sums.

InfoCert’s aspiration is to create the leading pan-European digital trust provider by rolling out its services across other European countries. The EU regulation eIDAS (electronic Identification And trust Services) establishes the framework to ensure electronic interactions between individuals, public authorities and businesses are safer and more efficient regardless of in which country they take place. The framework makes it more straightforward to deliver business services across the EU by promoting interoperability and ensuring that countries mutually recognise each other’s electronic identification and trust services. This offers a significant reduction in costs and time through streamlined processes; safer transmission of electronically signed documents; enhanced document tracking; and increased security of cross-border legal contract execution or transmission of legally binding documents.

Providers of trust services across the EU must register as a qualified trust service provider (QTSP), and are subject to annual audit by a national regulator to ensure compliance with the regulations. InfoCert is registered as a QTSP in Italy.

Management expects to be a consolidator across key focus markets. Outside Italy, InfoCert’s stated ambition is to make acquisitions in France, Germany and Spain as well as in other key countries (the UK, Belgium, Holland, Norway, Sweden, Hungary, Slovakia, Greece, Poland and Romania). Tinexta previously invested in an associate company, LuxTrust, to develop its activities in the Benelux countries and France, but the venture was dissolved in November 2020 as the strategic objectives of the partners diverged. Management has rectified the lost presence in France, the second largest digital trust market in the EU, with its first significant direct move into the market. In July 2021, InfoCert announced the proposed acquisition of a majority (60%) stake in CertEurope and the option to buy the remaining minority stake, subject to earn-out, in FY23, for a total estimated investment of €72.2m, equivalent to 12–13x FY22 EBITDA. CertEurope is one of the three largest Certification Authorities in France. Management quotes an estimate for market growth of 23% over the next few years, which is well ahead of its current medium-term guidance for 7% organic growth for the business unit (see below). CertEurope’s pro forma EBITDA margin for FY20 of 37% compares very favourably to Digital Trust’s FY20 margin of 26.8%. Therefore, the acquisition is accretive to Digital Trust’s revenue growth and margin prospects from FY22 following the expected completion in Q421. Prior to this, in September 2020, Tinexta announced a strategic agreement and the acquisition of a 16.7% shareholding in Authada, with an option to obtain 100% control, to collaborate in developing digital trust activities in Germany.

Visura was acquired in 2016. It resells the core InfoCert digital trust products and services of certified email, electronic signature and invoicing to non-corporates/small professionals, and other software solutions for lawyers (all civil court proceedings must be filed electronically with the Ministry of Justice) and accountants (mandatory filing of financial statements electronically with Chambers of Commerce). The key strategic reason for owning Visura is to gain better access to the professional markets.

As identified above, DT is exposed to favourable structural growth from the digitisation of the economy. However, its near-term performance can be affected by wider economic issues, as seen with the COVID-19 outbreak in Q120. Historically, DT has generated relatively consistent high-single-digit organic revenue growth, and is now Tinexta’s largest source of revenue, and second largest of EBITDA, at an FY20 margin of 26.8% (group average 30.2%). Over the long term, DT has typically demonstrated EBITDA growth ahead of revenue growth, except in FY20 due to COVID-19 disruption.

The group’s three-year business plan for FY21–23, introduced in February 2021, included management guidance for a revenue CAGR of 7% and EBITDA of 12% for DT. FY21 has started strongly with organic revenue growth of 19.4% in Q121 and 10.9% in Q221, against the COVID-19-affected Q120 (2.9%) and Q220 (9.6%) comparatives, which imply a relatively consistent two-year growth rate of 22% or an average growth rate of c 11%, ahead of management’s guidance for the year of 7%. There was some modest year-on-year EBITDA margin compression in Q221 due to product mix changes, ie strong growth from lower-margin off-the-shelf products. We have increased our assumption for organic growth in FY21 to 10% from 7%, above management guidance, but have moderated our margin assumption to 27.1% from 27.7% previously to reflect the lower operational gearing. For FY22, we have incorporated CertEurope with the assumption that its revenue will grow by 10% pa (lower than estimated market growth of 23%), with an EBITDA margin of 35%. In FY22 we estimate a revenue contribution of c €17m and EBITDA of €6m.

IMS has two main operating businesses: Warrant Hub (more than 80% of revenue) and Co.Mark. It was created on the acquisition of Co.Mark in 2016 as Tinexta sought new areas of growth outside the mature CIM business unit. There will likely be further M&A as Tinexta looks to expand to contiguous industries in Italy, in order to enhance its services for clients, and into international markets. IMS is Tinexta’s most profitable business with an FY20 EBITDA margin of 47.1%.

The majority of Warrant Hub’s revenues derive from consulting to help companies gain tax credits and other incentives or contributions principally from governmental institutions (eg the Italian Ministry of Economic Development and the EU). Warrant Hub’s consultants mainly offer expertise in R&D and in government requirements to be successful in gaining subsidies. As for Co.Mark, there is a fixed fee for the work performed and a success fee based on the tax credit/benefit awarded.

Warrant Hub’s subsidiaries provide related services: Warrant Innovation Lab helps with the sharing of R&D and technology ideas; PrivacyLab helps with managing GDPR compliance; and Euroquality (based in Paris) and its affiliate Europroject (based in Sofia) provide similar services to Warrant Hub. In July 2021, Warrant Hub announced the relatively small acquisitions (€4.5m) of Financial Consulting Lab and Financial CLab, which help clients to access finance, and will strengthen its presence in the north of Italy.

The bulk of Co.Mark’s revenue is from consulting to help SMEs, who typically lack the required skills, to identify, develop and grow their export markets. The consultants offer an end-to-end service from a strategic analysis of products and positioning, identification of customers/end markets, negotiations of contracts and managing interactions with customers. The contract is typically annual, paid in monthly instalments with success fees based on the sales boost delivered. Management believes that Co.Mark is the market leader. The Italian government has been supportive of the industry to help SMEs boost exports, by occasionally offering ‘vouchers’ to partially subsidise a small proportion of the spend.

The strategy is to expand geographically (it expanded into Spain in 2015) and offer new services to further differentiate its offer and to provide cross-selling opportunities. The latter is exemplified by the announcement of the purchase of a 60% stake of Queryo Advance in January 2021 for €8.75m, with put call options for the remaining 40% at an estimated value of €6.9m. Queryo provides digital marketing services such as search engine optimisation, web marketing and e-commerce strategy, and represents an important cross-sell opportunity to SMEs. Queryo was founded in 2014 and has grown revenues to €4.8m in FY20 (CAGR of c 80% over that period) and EBITDA to €2.5m. With strong growth expected to continue, it will enhance IMS’s total growth rate.

Exhibit 7 demonstrates both IMS’s strong organic growth since its formation and its economic sensitivity in FY20 due to COVID-19, which mainly affected Co.Mark’s activities, while Warrant Hub was stable. IMS also typically exhibits some seasonality during the financial year due to holidays and the phasing of projects.

Management’s three-year business plan for FY21–23 guides to organic revenue growth of 9% and EBITDA growth of 10% for FY20’s constituent businesses, which rises to 13% and 14%, respectively including the Queryo acquisition. Our forecasts from FY22 include the incremental revenue we expect IMS to generate from CIM’s new venture with Intesa Sanpaolo (see below). FY21 began strongly with c 24% organic growth in Q121, in contrast to COVID-19-affected Q120 (22% decline) and growth moderated to 5.2% in Q221. The two-year growth rate improved from a decline of 4% in Q1 to growth of 3% in Q2.The first quarter is typically a seasonally small quarter from a financial perspective. The improvement in revenue was due to a rebound at lower-margin Co.Mark following the COVID disruption in the previous year. As shown in Exhibit 6 above, IMS’s EBITDA margin was relatively stable at c 47% from FY18–20, but we expect it to be lower at 45% from FY21 due to mix, ie recovery at Co.Mark. Our forecasts are unchanged following Q221 results. Our estimates require c 7% organic revenue growth and EBITDA growth in H221, against more difficult comparatives from H220 as the business recovered post COVID.

CIM has two main operating businesses: Innolva (100% owned) and REValuta (95% owned).

Innolva offers data services that help banks and SMEs with the granting, ongoing assessment and recovery of credit in Italy. It was created in 2017 with the merger of two group companies, Assicom (acquired in 2014) and Ribes (initial stake acquired in 2012), in response to difficult market conditions, consolidation of the customer base and aggressive pricing from competition.

The foundation of Innolva’s database is the financial statements of all companies in Italy from the Chambers of Commerce. All companies are required to file their financial statements in digital form via certified mail. While this means the data is publicly available for everyone, Innolva adds value through enhanced analysis and inclusion of other information including data on debts, judicial and corporate actions, and legal notices regarding bankruptcy etc.

Innolva’s data services are typically sold as an annual subscription, but larger customers will have multi-year deals. In addition to data, Innolva offers debt recovery services.

The core credit information market is highly price competitive, with three players: Cerved is the market leader, and management believes Innolva’s market position is third behind another competitor, Crif. Unlike for Tinexta’s other business units, international expansion opportunities are low.

Innolva has other subsidiaries that offer varying services. One example is PromozioniServizi (acquired in 2018), a consultancy that helps SMEs apply for long-term, lower-cost financing from banks and access guarantees from the Guarantee Fund of Mediocredito Centrale, ultimately owned by the Ministry of the Economy and Finance. It helps the SMEs determine whether they are likely to qualify for the credit and then complete the application process.

In June 2021, Tinexta announced a new venture with Intesa Sanpaolo (IS), a leading bank in Italy that will significantly enhance distribution of Innolva’s and IMS’s services, and is, in our view, transformative to its growth prospects.

IS is contributing 100% of Intesa Sanpaolo Forvalue (ISF) to Tinexta’s Innolva in the CIM business unit in return for an initial 25% stake in the enlarged Innolva. There is an earn-out to increase the holding to 30% after 2025 and a put and call option on the initial holding to protect each party in the event of the venture ending. ISF has a network of over 90 agents who offer non-financial services such as consulting on business projections and project appraisals to SMEs. Tinexta will benefit from offering Innolva’s services (support in obtaining access to funding) and those of its IMS business unit (consulting to grow businesses internationally and digital marketing) through the expanded network, which serves c 150k SMEs.

Tinexta estimates the new venture will create incremental revenue of €55–60m by FY25 across both CIM and IMS. We estimate an EBITDA margin of 36–37%, pointing to at least c €20m of additional EBITDA to Tinexta by FY25, with minorities deducted on only the incremental CIM profit (40% of incremental EBITDA).

The majority of REValuta’s revenue is from the provision of residential property valuation services to banks. Management believes it is one of the largest providers of this service in Italy.

REValuta has multi-year contracts with banks, although these may not be exclusive, under which there is a fixed fee per appraisal. The business is sensitive to the macroeconomic environment and new mortgage volumes. Management looks to expand by winning contracts with new banks, adding appraisers as required and M&A.

CIM’s growth profile reflects its changing business exposure. From FY16 through FY19 the core CIM reported declining revenue due to variable demand from its financial and corporate customers and pricing pressure from competitors. However, good cost control led to an increase in the EBITDA margin, from 18.1% in FY16 to 24.1% in FY19. Early FY20 results suffered from the economic impact of COVID-19, but recovered strongly for the remainder of the year.

Management believes the economic weakness has re-emphasised the need for good data and services in helping to manage credit. In addition, PromozioniServizi has been a significant beneficiary of the COVID-19 pandemic as it tilted towards helping SMEs access the Italian government’s ‘Guarantee Fund for SMEs’ (ie financial support for companies affected by lockdowns), which could continue further into FY21 depending on how the pandemic evolves. REValuta is enjoying a strong rebound due to higher demand for new mortgages and refinancing of existing mortgages, as evidenced in Q221, following a difficult FY20.

The FY21–FY23 business plan indicates a CAGR for revenue of 6%, much better than CIM’s historical growth rate, and EBITDA growth of 7%, implying an improving EBITDA margin. Our estimates reflect the new venture with Intesa, for which we expect no revenue in FY21 but a gradual build from FY22.

In Q121, organic revenue growth of 10.7% was against the quarter with the easiest comparative: Q120’s negative 12.3%. In Q221, the growth rate declined to 8.9%, which reflects the more difficult comparative from Q220. The two-year growth rate improved from a decline of c 3% in Q1 to c 6% in Q2, indicating an underlying improvement in revenue growth, notably due to REValuta and despite the relatively lower contribution from requests to access the Guarantee Fund versus the prior year. Our forecasts for FY22 and FY23 are unchanged following Q221 results, and require 3% organic revenue growth against a more difficult comparative (c 18% in H220).

In October 2020, Tinexta announced it was entering the cyber security market through the acquisition of stakes in three companies, which were considered to have best in class assets and services: 70% of the Projects & Solutions/R&D division of Corvallis, 60% of Yoroi; and 51% of Swascan, for a total initial equity investment of €47.8m, and potential ultimate investment including the buying out of minorities of €104.3m announced (see Edison update note). The stake in Swascan was acquired in October 2020, and the acquisitions of Corvallis and Yoroi were completed in January 2021.

Corvallis is a digital solution provider and integrator whose customer base is typically larger corporates including financial institutions. Cyber security was not a major source of revenue on the acquisition, but its strong customer relationships with recurring revenues were considered an attractive source of new customers for the other companies being acquired.

Yoroi and Swascan both provide cybersecurity solutions across the whole value chain, and post acquisition are expected to gain better traction with larger corporate customers versus their core customer base of SMEs. Swascan is a very young company, founded in 2016, with strengths in security testing and compliance requirements.

We see the acquisitions as a natural progression of Tinexta’s strategy of moving towards providing services with a high digital content and higher rates of growth. Its strategy is to combine the businesses, thereby establishing itself as a leading domestic player in cyber security. It will also develop an integrated offer with InfoCert, which should be fertile ground for cross-selling opportunities, and there may also be revenue synergies with other group companies, for example selling solutions to SME clients of IMS. At the time of the acquisitions, management indicated that it would seek partnerships with other companies (including competitors) that have complementary skills in order to round out the offer and help target specific business verticals. The first such partnership was announced in July 2021 with Leonardo, a leading global company in aerospace, defence and security, with a view to collaborating on cyber security projects in multiple industries.

Management estimates the Italian cyber security market’s CAGR will be 9% from 2019–23, with growth across all services and client industries.

In the FY21–23 business plan, management guides to revenue of c €76m and EBITDA of €10m in FY21, and three-year organic CAGRs of 17% (significantly ahead of market growth of 9%) and 41% respectively from FY20’s pro forma revenue and EBITDA of €69m and €8m. Our forecasts are in line with management’s guidance. Management believes CS will outpace the market primarily due to its significant penetration tester resources versus competitors, and from the potential for revenue synergies with DT and network effects of combining the three companies. The guidance implies revenue of €111m and EBITDA of €21m (a margin of 19%) in FY23. Cyber Security’s higher organic revenue growth estimate is accretive to Tinexta’s total growth, and its lower EBITDA margin versus other group companies (due to the relative immaturity of the businesses) dilutes the total margin. In H121, CS generated revenue of €34.6m and EBITDA of €3.5m, equivalent to 45% and 35% of annual guidance, respectively. This was stated to be in line with management’s expectations. Management guidance implies improving revenue momentum with higher margins versus H121, during which time management was focused on integrating the businesses.

The current board of directors is composed of 11 members including the chairman and chief executive officer.

Chairman: Enrico Salza was chairman of Tecno Holding, the majority shareholder of Tinexta. He is also chairman of Intesa San Paolo Highline (and past chairman of Intesa San Paolo), a member of the board of Italian Banking Association, Assonime (the association of Italian joint stock companies) and the Venice Cini Foundation. He has held positions on the boards of companies including Banca Fideuram (Intesa San Paolo Group), Swedish Match, UBS Italia and Il Sole 24 Ore. He has also been president of the Chambers of Commerce of Turin, national vice president of the Chambers of Commerce and a member of the board of Confindustria.

Chief executive officer: Pier Andrea Chevallard was the managing director of Tecno Holding. In 2015 he became the chief executive officer and general manager of Tinexta (ex Tecnoinvestimenti). From 2001–14 he served as secretary general of the Milan Chamber of Commerce. He was also director of Promos (Special Export Promotion Company of the Chambers of Commerce of Milan), managing director of Parcam and a member of the board of directors of Fiera Milano.

Chief financial officer: Oddone Pozzi has been the CFO of Tinexta since June 2020. Prior to joining Tinexta, Oddone was CFO and board member of Mondadori, co-CEO of Giochi Preziosi Group (2006–14) and CFO of the Ventaglio Group (2004–06).

We believe the key sensitivities for Tinexta are as follows:

We have highlighted the revenue and profit drivers and our estimates in the relevant business sections. Our underlying assumptions for all of the business units from FY21–23 are in line with management’s three-year plan, introduced in February 2021, except for higher organic revenue growth for DT in FY21 as highlighted. Our forecasts for FY22 onwards are higher than the guidance at the start of FY21 due to the inclusion of new revenue and profit from the Innolva and Intesa Sanpaolo venture that has transformed the outlook for CIM, and the agreed acquisition of CertEurope in Digital Trust. H121’s results indicated that DT revenue growth has performed well ahead of management guidance, and there was improving underlying revenue growth for CIM and IMS from Q1 to Q2, while margins were affected by mix changes within the business units.

Following the H121 results, our forecast changes are summarised below, mainly our assumption for higher organic revenue growth for DT in FY21 and the acquisition of CertEurope. Our revenue assumption in FY22 increases by 5% to €439m and EBITDA by 6% to c €120m. Further down the P&L, our estimate for interest has increased due to higher expected net debt following the recent acquisition (see below).

Our forecasts for total group organic revenue growth accelerate from 9.1% in FY21 to 14.6% in FY23, producing an average three-year growth of c 12%. This reflects the inclusion of higher-growth CS from FY22 after its first full year of consolidation (FY21), the ramping up of revenues from the Innolva/Intesa Sanpaolo venture from 2022 towards management’s estimate of incremental revenue of €55–60m by 2025, and the contribution from CertEurope in FY22.

In H121, Tinexta’s organic revenue growth of 12.7% was further boosted by acquisitions, primarily of the CS business unit and Queryo.

Our expected EBITDA margin expansion in all divisions naturally translates to a higher group EBITDA margin after FY21, when it is negatively affected by the first-time inclusion of CS’s lower-than-average margin, which is expected to grow quickly thereafter. This continues Tinexta’s success at enhancing its profitability via M&A and accelerated organic growth. We forecast the group EBITDA margin will expand from 25.8% in the current year to 28.6% in FY23.

Tinexta’s EBITDA margin has increased over the long term, from 20.6% in FY16 to 30.2% in FY20, due to margin expansion in the individual business units as well as mix changes, notably the increasing importance of IMS, which has a higher margin than the group average.

In H121, the overall EBITDA margin declined to 23.8% from 28.2% in H120 due to the first-time inclusion of CS and mix changes within the business units, eg the recovery of Co.Mark in IMS and REValuta in CIM.

Tinexta’s history of organic revenue growth and margin expansion has produced an impressive improvement in ROIC, which is testimony to its M&A activity and, more recently, the new CFO’s focus on specifically targeting more efficient use of working capital. The post-tax ROIC (defined as normalised operating profit relative to average invested capital, ie shareholders’ funds and net debt) has increased from 10.2% in FY16 to 16.7% in FY20.

Tinexta’s operating and free cash flow generation have improved over the long term due to its higher profitability as the business mix has changed, and the more recent control of working capital by the relatively new CFO, which was very beneficial to FY20’s cash flow.

Relative to its revenue, Tinexta’s operating cash generation improved from 9.8% in FY14 to an impressive 30.3% in FY20. The rebasing in FY21 is primarily due to the first-time consolidation of CS from FY21, which has a lower EBITDA margin than the group average but is expected to increase quickly. Management has stated that working capital intensity relative to revenue is likely to be stable going forward. In H121, Tinexta’s free cash flow of €29.7m compares with €28.9m in H120 as lower profitability (inclusion of lower-margin CS) was helped by modestly lower capex, both relative to revenue.

Tinexta’s capital intensity with respect to investment in fixed and intangible assets has been a relatively consistent 4.0–5.5% of sales, which we assume will continue.

The strong and growing free cash flow generation has enabled Tinexta to consistently invest in M&A, a cumulative €331m from FY14–H121, which is likely to continue as it seeks to internationalise and provide new services in contiguous areas for clients.

Before no dividend was paid for FY19 due to the COVID-19 outbreak, the pay-out ratio was roughly one-third of net income, which we assume is continued in our forecast. A share buyback programme of €25m is underway to fulfil the FY20–22 stock option plan.

Tinexta’s net financial position has improved over the long term despite consistent investment in M&A. Since FY18 its year-end net debt/EBITDA ratio had been consistently below 2.0x, which compares favourably with earlier years when it was consistently above 2.0x. At the end of FY20 Tinexta’s net debt was c €92m, equivalent to 1.2x FY20 EBITDA. The completion of the CS acquisition in H121 led to an increase in net debt at end June 2021 to €205m. We forecast end-FY21 net debt of €246m (2.6x net debt/EBITDA) due to the further acquisition of CertEurope before year end without any contribution to EBITDA, dropping to €141m (1.0x net debt/EBITDA) by the end of FY23, excluding any future potential acquisitions.

At the end of FY20, the combined value of goodwill (€215m) and intangibles (€70m) on the balance sheet was €285m, equivalent to 55% of the total asset base of €522m and net asset base of €174m. The acquisition of CS increased goodwill and intangibles to €391m at the end of H121.

Our preferred valuation method for Tinexta is a DCF-based analysis. We also compare it to peers and construct a sum-of-the-parts (SOTP) valuation, but we note that a number of peers have extreme valuations and very different geographic exposure, scale and business models.

While recognising the high sensitivity to the key assumptions, we primarily value Tinexta using a DCF model, which indicates a fair valuation of €40.9 per share. We show a sensitivity analysis below.

Our near-term forecasts to FY23 are detailed in the Financials section above. Between FY23 and FY25, we gradually fade down the revenue assumptions for the business units, and include the ramp up of the recently-announced Innolva venture with Intesa Sanpaolo and acquisition of CertEurope, which produces growth of c 11% for the group in both FY24 and FY25. Beyond FY25 we assume a quick fade down in the group’s annual revenue growth to 6% in FY26 and 2% by FY31. We assume a stable EBITDA margin of 29.5% from FY25, that is assuming no further operational gearing, which is conservative versus Tinexta’s history of operational gearing. We assume a WACC of 7% and a terminal growth rate of 2%.

Exhibit 16 highlights the growth estimates, profitability and valuations of companies with similar industry exposure to Tinexta. Some caution is warranted given many are not direct peers as they do not compete head to head, and have different business mixes and geographic exposure.

To take account of Tinexta’s business mix we have produced a SOTP valuation, using the average multiples for the different peer group segments as above, and applying them to our forecasts for the four business units. We exclude the higher outlier valuations where appropriate so that the valuation is not skewed. Our SOTP suggests a valuation of €35–41 per share.

Exhibits 18 and 19 show Tinexta’s prospective EV/EBITDA and P/E multiples (using current enterprise value (EV) and market value (MV)) against its historical high, average (indicated) and low multiples in any year (using historical EV and MV).

Tinexta’s EV/EBITDA multiples for FY21–23 of 19.2x, 15.5x and 12.9x compare with its long-run average multiple of 8.6x, which excludes the COVID-19 affected FY20 results, and its prior all-time high multiple of 14.6x in FY14. Similarly, its P/E multiples for FY21–23 of 32.6x, 25.3x and 20.4x are ahead of its historical long-term multiples. Its prospective multiples are mainly at a premium to historical multiples, reflecting its improved medium-term growth prospects for revenue and higher profitability, including the incremental revenue and EBITDA beyond our explicit forecast period from the new venture.