Piteco SpA — Cash-generation engine powers onwards

Piteco is the leading provider of treasury management software (TMS) solutions in Italy. Piteco has more than 600 mostly Italy-based TMS clients operating across 2,500 subsidiaries. Customers include many high-quality Italian names such as Fiat Chrysler Automotive, Lavazza, Leonardo, Moncler, Prada and Wind Tre. Clients also include GUESS, the American multinational clothing company, and major international groups operating in Italy, such as Allianz. Piteco offers its clients solutions from a range of 20 software modules. Piteco continues to expand its offerings through R&D and via acquisitions, including Myrios FM in 2018. Piteco also owns a US payments software provider, Juniper Payments, that operates in the niche area of correspondent banking.

Piteco operates a traditional enterprise software business model, with an upfront perpetual software licence sale, professional services and ongoing maintenance. There is also a SaaS option and c 70% of Myrios’ revenues are SaaS. Additionally, 90% of Juniper Payments’ revenues are recurring in nature. In all, we estimate that 65% of FY19 group revenues are recurring. The business has strong EBITDA margins (40.9% in FY18 rising to 42.7% in FY19e) and is highly cash generative. FY18 operating cash flow before interest and tax was €7.2m with free cash flow estimated at €5.6m.

Following the formation of a populist government in Italy, there may be periods of uncertainty about economic and fiscal policy. As for the typical enterprise software vendor, there is always the risk of budget cuts in an economic downturn and this is accentuated by the subdued economic environment in Italy and Europe. However, Piteco’s typical client has a low default risk and the customer base is broadly spread across large enterprises. 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 is integration risk in the acquisition strategy and increasing currency risk as the company expands abroad. Juniper is exposed to a backdrop of declining number of financial institutions in the US.

Our DCF model, (which assumes a long-term margin target of 40%, WACC of 9% and a terminal growth rate of 2%), values the stock at 655c, which is c 22% above the current share price. The acquisitions of Juniper and Myrios boost the growth prospects of the business, with potential growth rates of >10% and >20% respectively. However, these deals also add to the risk profile, especially as debt has been temporarily elevated. However, the group has strong operating margins and a track record of cash generation and, if targets are met, net debt should fall back quickly.

The Piteco group has three business lines:

The group’s headquarters are in Milan, and it has additional corporate treasury offices in Padua, Rome, Turin and Geneva. Juniper is based in Wichita, Kansas, and also has an office in Nebraska.

Following the acquisition of Myrios late last year, the group now has more than 120 employees, including c 85 in the traditional Piteco treasury business, 20 with Juniper and 15 with Myrios. We note that historically, the group had very low staff turnover. Following the successful IPO in July 2015, the shares remain very tightly held with 27% free float (diluted basis) and management interests retain 75.4%. Chairman Marco Podini and his sister Maria Luisa Podini directly and indirectly hold nearly 66.8%, including via Dedagroup (55.4%), which is a large Italy-based information and communications technology (ICT) company. Additionally, the senior management (CEO, CFO and sales director), all of whom have been with the company for at least 15 years, each hold 2.86%.

Piteco’s treasury business operates a traditional enterprise software business model, with an upfront perpetual software licence sale, professional services (consulting, implementation and configuration) along with ongoing support and maintenance. The annual maintenance charge is 15–20% of the initial software licence and is billed on 1 January each year. Churn on the maintenance book is very low and hence customers have a long duration. Piteco’s traditional treasury business also has a SaaS option, which is growing very quickly, albeit from a low base. Myrios operates a rental business model with long-term contracts (typically a minimum three- to five-year term). The Myrios software is always installed on premise and there is a high level of customisation.

Juniper operates on a SaaS basis, with 90% of revenue generated from contracted monthly billing, similar to a subscription service, and linked to volumes. Juniper provides the ‘right to use’ by end-users via its customer contracts and bills the customer directly while the customer bills the end-users. The remaining 10% of revenue is generated from upfront fees, customisation fees and technical consulting and support. The average initial contract term is five years and the average renewal term is four years. LT charges a one-time fee for the implementation, which typically takes four to six months. This fee is primarily determined by the modules chosen and the size of the deployment, but also covers the length of term and the amount of customisation required.

Overall, we estimate that 65% of the group’s FY19e revenues are recurring in nature, with the balance in licence sales and professional services.

The group is expanding both domestically and internationally. There remains a huge opportunity to grow the customer base in Italy, with c 1,100 prospects, and through cross-selling to existing customers new solutions that have been developed internally, acquired or are partnership solutions. A SaaS solution has been added in recent years to provide customers with greater choice, and this offering has been growing quickly, albeit from a low base. The SaaS offering is a standardised solution that enables customers to reduce their total cost of ownership, notably saving on hardware costs, and secure a swift deployment. Piteco has established a partner network, which consists of systems integrators and value-added resellers, to extend the offering to smaller clients. This enables Piteco’s sales team to focus on larger prospects, which involve a similar level of attention to convert. The acquisition of Juniper in 2017 was Piteco’s first significant foray into the US marketplace. Piteco is seeking to hire an international sales director to drive the international sales with a focus on North America. We note that Piteco’s software is already operating in the US, via US branches of some of its Italian customers and Piteco made a significant international sale to GUESS, the US multinational retailer, in 2018.

In February, the group set up a new subsidiary, Myrios Switzerland, based in Geneva, to target European corporates via Piteco’s 56%-owned Myrios. The unit will offer all Piteco’s software solutions for treasury management, digital payments and financial risk management. We see this as an attempt to drive Myrios’s growth outside Italy, while also testing the appetite for the group’s corporate treasury offerings in the broader European marketplace.

Group turnover grew by 19% to €20.2m, while net sales revenue increased by 18% to €19.4m. This included a full period contribution from Juniper (eight months in FY17) and an initial 2.5 months contribution from Myrios. Corporate treasury grew net sales revenue by 3.5% to €14.0m (total sales grew by 4.5% to €14.8m), including 5.8% growth in H2. Juniper Payments recorded revenue of €4.6m and EBITDA of €1.9m (41% margin) while Myrios grew sales by 10% and EBITDA by 17%, generating revenue of €0.8m with a 58% EBITDA margin. The group operating cash flow, after interest and tax, expanded by 40% to €6.2m, representing 32% of net sales revenue and 75% of EBITDA. The group ended FY18 with net debt (including acquisition liabilities) of €26.8m, up from €9.0m a year earlier. This includes €11.5m put options on the minority interests in Juniper Payments (€2.3m) and Myrios (€9.2m).

The annual dividend was maintained at 15c, reflecting a 59% payout ratio. FY19 has started well with four new contracts signed in January and management says it expects to generate a general increase in results across the group in FY19, both in terms or revenues and margins.

The company has expanded significantly via acquisitions, incorporating Centro Data in 2015, Juniper in 2017 and Myrios in 2018. The Centro Data acquisition added two modules to Piteco’s solution suite: a tool for the matching of financial data, MATCH.IT; and a securities back-office application, AT.PRO. The Juniper acquisition brought to the group a US payments software provider that operates in the niche area of correspondent banking. Myrios, the latest acquisition, designs and implements high-value software solutions primarily focused on the Italian banking industry.

In July 2018, Piteco announced the acquisition of Myrios, a small Italian software business. Myrios was established in Turin in 2010 by Marco Pecetto along with four other partners with the aim to deliver sophisticated risk solutions to large corporates. However, the target market soon evolved to the finance sector. Myrios has developed Myrios FM (Financial Modelling), which is a highly flexible and scalable software solution for the finance and risk management areas.

Myrios FM’s key areas of functionality cover deal management across a broad range asset classes (forex, debt, commodities and securities), hedge accounting and risk analysis. Myrios competes with Murex, a large French provider of technology solutions for trading, treasury, risk, and post-trade operations for financial markets.

Details on the acquisition are provided in the prospectus issued for the listing on MTS.

Piteco knew Myrios well, as the two companies had a collaboration agreement for several years. The companies have a similar culture and Piteco had been trying to acquire the business for two years. Myrios was subscale and needed to find a larger organisation to help it manage its growth. Piteco’s management believes the potential for Myrios is very strong and that it acquired it for an attractive price and hence we believe it is very satisfied with the acquisition.

Myrios has performed tremendously well since its inception in 2010, growing at c 20% pa, with very attractive margins. In FY16, it grew revenue by 27% to €2.8m, generating EBITDA of €1.5m for a 55% EBITDA margin. Myrios has 30–40 clients and 70% of revenues are recurring rental revenue, with the balance in professional services (methodological-functional advisory).

The acquisition significantly boosts Piteco’s exposure to the financial services sector, an area in which Piteco has previously been weak. We note Piteco’s parent company, Dedagroup, has c 30% exposure to the banking sector.

There are c 150 large and medium-sized banks in Italy and c 200 small banks. Piteco believes Myrios can make a significant inroad into this addressable market, aided by the backing of Piteco’s infrastructure and management. In addition, Piteco is seeking to expand Myrios into the international markets, and in February it established a Swiss office.

Piteco paid an initial €6.9m plus net financial position (c €0.5m) for 56% of Myrios. There is an earnout based on 8.75x the average EBITDA over FY18–19 less what has already been paid (estimated additional cost €3.5m over FY19 and FY20). There is a put option on the last 44% over 2020–24 based on 8.75x to 10.5x EBITDA, depending on the revenue CAGR, with 10.5x payable if revenue CAGR exceeds 20%. Of the 44% minority, half will be paid in shares with the balance in either shares or cash, and the put option was valued at €9.2m at end-FY18. The initial 44% was funded by a €7m loan by ICCREA BancaImpresa.

Piteco upgraded to a full listing late last year to boost liquidity and increase its profile. The free float (diluted basis) has increased from 17% to 27% and the shares and convertible bonds began trading on the MTA market on 25 September 2018.

A major reason for transferring the listing to MTA was to boost liquidity and hence encourage greater interest in the shares from institutional investors. Further, investors are no longer bound to a minimum number of 500 shares, and can buy or sell any amount.

Piteco believes its TMS can play an important role in the integration of services offered by fintech companies. Piteco’s goal is to offer its customers an integrated platform for managing their treasury functions in an innovative way. The collaborations with AirPlus and Ebury are the first fintech companies integrated and Piteco anticipates adding more in due course. The key solutions of AirPlus and Ebury have been integrated into Piteco Evolution (Piteco Evo) to add additional important B2B functionality to the core solution. These solutions add highly attractive functionality for treasurers and CFOs, particularly of SMEs, in bringing efficiencies to travel expenses and foreign exchange transactions. Consequently, this provides an added selling point for Piteco Evo.

Piteco signed an agreement with AirPlus International, a Lufthansa company that specialises in the provision of payment solutions to the global travel industry, for the integration of Piteco Evo with A.I.D.A. of AirPlus. A.I.D.A. is a virtual credit card platform operated in association with MasterCard.

The A.I.D.A. solution involves the creation of a single-use virtual credit number, eg, for shopping on the internet on certain market places, that is linked to a corporate account. This generates significant efficiencies, due to integration and automisation of business processes for the increasingly numerous purchases made on the internet by corporates. As A.I.D.A. is already completely integrated with Piteco Evo, this saves the customer from having to integrate A.I.D.A. with another business solution. The customer also benefits from an additional line of credit and improved cash flow through 55–58 days of free credit.

Ebury is a UK fintech foreign exchange broker that enables SMEs to make and receive payments in foreign currencies at more favourable exchange rates than offered by a traditional bank. Through its cloud-based platform Ebury provides payments in more than 140 currencies. The availability of minor currencies is particularly attractive to some of Piteco’s clients who need to make regular payments to employees and/or suppliers, eg in North Africa. Small transactions are completely automated and with real time pricing.

Treasury management systems (TMS) are software solutions used by corporate treasuries and finance departments to manage transactions and support their decision making. A TMS typically covers front, middle and back-office processes. In other words, the TMS processes a transaction, handles settlement and generates accounting entries. Further, a TMS provides analysis, risk management and reporting of the transactions and the ongoing positions. Historically, these functions were to a large degree handled by spreadsheets, but as with elsewhere in the software world, these are gradually being replaced by purpose-built specialist applications using modern technologies. Nearly all large enterprises have a TMS, while, as you move down the scale to smaller companies, a much greater proportion are still using spreadsheets.

Apps Run the World forecasts the treasury and risk management (TRM) applications market to reach $3.9bn by 2022, compared with $3.3bn in 2017 at a compound annual growth rate of 3.5%. Meanwhile IDC forecasts the worldwide treasury and risk management applications market to grow by 4.9% to reach $2.7bn in 2022. These numbers understate the potential size of the market, given the large number of enterprises at the lower end of the market that still use spreadsheets.

There are differing views over what constitutes a TMS as exemplified by these two market research companies, which include different companies in their respective surveys, eg, appsruntheworld.com includes ION (Wall Street Systems solution is focused on corporate finance and risk management, mainly in the financial sector) while the world’s largest corporate TMS provider, SunGard, is part of FIS.and does not compete with Piteco. We note that Murex and Finastra (which combines Misys and D+H) are focused on the financial sector, while the world’s largest corporate TMS provider, SunGard, is part of FIS.

Piteco has traditionally focused on large- and mid-cap companies in Italy operating in the industrial and services segments. Its client base includes a substantial number of companies listed on the Italian Stock Exchange. Piteco does not target the banking sector, which is a very specialised market. Within its areas of focus, the customer base is diversified across many sectors, with its heaviest weightings in mechanics and steel, chemicals & pharma, services, consumer goods, food, fashion and utilities, which together represent 62% of the group TMS total. Piteco leads the TMS market in Italy, and does not have any significant competition in its home market. 55% of the c 600 corporations using Piteco’s software have turnover exceeding €500m, while 98% have turnover exceeding €100m. Piteco’s software is already in operation in more than 40 countries, via multinational companies, such as Leonardo, which is using Piteco’s software in the UK and the US. The sales team will typically target a company’s CFO or treasurer.

Piteco is the leading player in the Italian TMS market. There are a number of small local competitors and Piteco has occasionally lost clients to them. DocFinance is a competitor, but it is focused on very small companies with revenues below €100m. Other Italian competitors include Formula, a general-purpose software house, offering the Sage XRT Treasury suite alongside Formula branded systems, and Albasoft, a small-sized company offering software treasury called GOLD directed to small businesses. Large international vendors find it a difficult market to penetrate although Piteco has seen a little more competition from Kyriba. We understand that SunGard has no strategy in Italy in the TMS segment. We also note that SAP, the ERP vendor, offers a TMS module, but we believe Piteco’s module is less rigid, more cost effective with the key advantage of the high level of customisation in Piteco’s solution.

When new customers sign up, Piteco’s software typically replaces one of the following:

The main competitors in the US are software giant FIS (FIS Quantum, FIS Integrity, SunGard) which sells to large corporates and banks, ION (Reval, WallStreet Suite, IT2, Citi Financials) and Kyriba, a mid-sized multi-tenant SaaS company. ION’s Wall Street Systems (Numerix) is not seen as a direct competitor, as its focus is more on corporate finance and risk management rather than cash management. Another US competitor, GTreasury, is smaller than Piteco. In our view, Oracle, the leading supplier of ERP systems in the US, does not have as strong a treasury management solution as SAP, with which Piteco competes in Italy.

The 2017 Deloitte survey of the global treasury community highlights the opportunity to replace spreadsheets since over 20% of each TMS functional area is still being managed in spreadsheets (ie no system in Exhibit 4). Operating TMS functions in spreadsheets leaves companies vulnerable to operational and fraud risks. According to Kyriba, in 2018, global treasury teams were wasting an average of 4,812 hours per year using traditional spreadsheets to manage their cash, payments and accounting operations.

FY18 net sales revenue grew by 18% to €19.4m including a full period from Juniper and an initial 2.5 months’ contribution from Myrios. Corporate treasury grew net sales revenue by 3.5% to €14.0m (total sales grew by 4.5% to €14.8m), including 5.8% growth in H2. Recurring fees represented 56% of total sales, indicating the Maintenance and Hosted SaaS generated €8.3m of revenue. Juniper Payments recorded revenue of €4.6m and EBITDA of €1.9m (41% margin) while Myrios grew sales by 10% and EBITDA by 17%, generating revenue of €0.8m with a 58% EBITDA margin.

The group operating cash flow, after interest and tax, expanded by 40% to €6.2m, representing 32% of net sales revenue and 75% of EBITDA. The group ended FY18 with net debt of €26.8m, up from €9.0m a year earlier (including acquisition liabilities). This includes €11.5m put options on the minority interests in Juniper Payments (€2.3m) and Myrios (€9.2m).

Corporate treasury signed 37 new clients in FY18, up from 30 in FY17. Nine of the new customers were acquired through the partner channel. 31 of the new contracts were in traditional format and six were cloud, of which two were private cloud (customised for the customer) and four were SaaS (standard product on a shared platform). The two private cloud deals are with very large enterprises and averaged c €285k each over three to four years. The indirect network is not currently available on the cloud.

New customers included GUESS, which selected the Piteco solution for the realisation of an international treasury project covering the US, Europe, Canada, Mexico and the Far East. The Piteco solution was chosen over strong competition from major US and international TMS software players. The high level of customisation that Piteco offers and its significant level of experience in the fashion vertical were important factors in the win. In the Italian market, new customers included Dolce & Gabbana, Marcegaglia Group, SIA Spa and AC Milan.

The annual dividend was maintained at 15c, reflecting a 59% payout ratio, and indicating that management wants to focus on debt reduction in the short term.

FY19 has started well with four new contracts signed in January and management says it expects to generate a general increase in results across the group in FY19, both in terms or revenues and margins.

Juniper Payments recorded revenue of €4.6m compared with €2.9m for an eight-month period in FY17. The growth reflected a c 4.5% currency headwind – the average 2018 exchange rate was c $1.18/€, but the dollar has since strengthened to $1.13/€, which provides a tailwind for FY19.

It was an intense year at Juniper, focused on account management with the company working side by side with clients to ensure everyone was happy. The team has been working on broadening the offering to sell more products to the customer base. Additionally, Piteco has been working with Dedagroup, Piteco’s major shareholder, to integrate the Juniper offering into Dedagroup’s core banking offering with a goal to improve client servicing. Dedagroup is a leading Italian ICT group owned by the Podini family and Dedagroup’s EPL business unit provides proprietary core banking systems to American credit unions.

The group had a pilot operating in the Mexico, but this has been put on the back burner following the acquisition of Juniper. Piteco is now looking for an international sales director to focus on generating new business, primarily in North America.

We have added Myrios to our forecasts. We have also consolidated Myrios in the balance sheet, which includes the put option over the 44% minority interest, which is added to net debt. We forecast Myrios will generate 16% revenue growth in FY19, falling to 15% in FY19 and 13% in FY21. Growth for Myrios could exceed 20% if it meets more aggressive objectives to acquire Italian bank customers. Within Corporate Treasury, we have cut services revenues as the business lacked a large high-services deal in FY18, and we have increased SaaS revenues, albeit from a low base. We forecast Corporate Treasury to grow 8% in FY19 and FY20. We forecast Juniper to grow 13% in FY19, aided by a stronger dollar, which falls to 10% in FY20 and 9% in FY21.

In all, our group net sales revenue forecasts rise by 15% in FY19 to €24.0m and by 16% in FY20 to €26.3m. Excluding Myrios, we have eased net sales revenues by 3% in FY19 and by 2% in FY20. Adjusted EBITDA rises by 19% in FY19 and FY20, which reflects the addition of the high-margin Myrios. We have also moved up depreciation while net interest charge rises sharply due to the increased debt position.

We now forecast the group to end FY19 with net debt of €20.4m (previously €1.3m net cash). This is after including the outstanding acquisition liabilities for Juniper and Myrios. The net debt also includes c €5.3m debt component on the convertible bonds, which convert at 420c up until July 2020. This net debt position, including acquisition liabilities, falls to €8.6m (previously €5.9m net cash) at end-FY20 on our assumption that all outstanding convertible bonds convert in FY20.

Accounting changes: we expect the impact of IFRS 15 (revenue from contracts with customers) will be very small, while IFRS 16 (leases) will have a modest impact to EBITDA in the area of rental cars, as the company spends c €0.3m per year on rental cars.

Depreciation and amortisation: we forecast amortisation of acquired intangibles of €1.448m across the forecast period. In FY19, we forecast normal depreciation of €0.1m and amortisation of development costs of €0.3m for total depreciation and amortisation of €1.9m.

Interest: this includes the convertible bonds’ annual interest of €225k and the new loan to finance the Myrios acquisition. We have increased our net interest forecast by €450k in FY19 and €400k in FY20.

Taxation: the group continues to benefit from ‘patent box’ tax rules in Italy. And we forecast a tax rate of 13% in FY19 rising to 15% in FY20% and to 17% in FY21.

The group generated a healthy cash position with limited short-term financial liabilities. Assuming the convertible bonds convert in FY20, net debt is forecast to decline quickly, given the group’s strong cash generation.

Following the formation of a populist government in Italy, there may be periods of uncertainty about economic and fiscal policy. 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 debts charge is typically less than 0.5% of turnover. We also note the global financial crisis did not adversely affect the group. In fact, the financial crisis has highlighted the importance that enterprises need to have an effective TMS in place to ensure strong internal controls and risk management capabilities. Further, exit barriers are high, as switching systems would require a new project. The software is embedded in its customers’ systems and the annual maintenance charge is a relatively small cost for its customers. We highlight the following sensitivities:

Piteco has built up 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 10 years to FY18, and its turnover doubled over the period when Italian GDP has declined. Piteco has a strong pipeline and growing brand awareness and is accelerating its growth prospects through strategic acquisitions and international expansion. The investment profile is attractive, with a resilient maintenance book and c 65% recurring revenues, and with healthy growth prospects from the pipeline, cross-selling, a broadening end market (geographically and into smaller businesses) and via acquisitions.