TXT e-solutions — Focus turns to TXT Next

TMT

TXT e-solutions

Focus turns to TXT Next

H117 results

Software & comp services

10 August 2017

Price	€12.03
Market cap	€141m

Net cash (€m) at end H117		5.5

Shares in issue	11.7m
Free float	45.5%
Code	TXT

Primary exchange	Borsa Italiana (STAR)
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	11.4	(6.8)	61.7
Rel (local)	7.2	(8.2)	23.9

52-week high/low

€13.0

€7.0

Business description

TXT e-solutions has two divisions: TXT Retail, which provides software solutions for supply chain management in the international retail and consumer-driven industrial sectors; and TXT Next, which provides IT, consulting and R&D services to Italian aerospace, high-tech manufacturing, banking and finance customers.

Next events

Q317 results

7 November 2017

Analysts

Katherine Thompson	+44 (0)20 3077 5730
Dan Ridsdale	+44 (0)20 3077 5729

tech@edisongroup.com

Edison profile page

TXT e-solutions is a research client of Edison Investment Research Limited

TXT reported H117 revenue growth of 8.9% y-o-y, with a small decline in Q217 revenues of 1.1%. The company has agreed to sell the TXT Retail business for €85m with completion expected by the end of October. While we continue to include TXT Retail in our forecasts until the deal completes, we provide an illustration of the TXT Group income statement taking into account the disposal.

Year end	Revenue (€m)	PBT* (€m)	FD EPS* (€)	DPS (€)	P/E (x)	Yield (%)
12/15	61.5	5.7	0.40	0.25	30.0	2.1
12/16	69.2	8.1	0.55	0.30	21.9	2.5
12/17e	73.8	7.4	0.47	0.32	25.6	2.7
12/18e	79.4	8.9	0.55	0.33	21.9	2.7

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

H117: Cost growth outpaced revenue growth

TXT grew revenues 8.9% y-o-y in H117 (21.7% growth in Q117 and -1.1% in Q217). Organic growth was 3.7% in H117. TXT Retail grew 2.6% y-o-y in H117; TXT Next grew 16.2%. Higher growth in operating expenses in the period resulted in a 5.5% decline in EBITDA and 7.9% decline in EBIT y-o-y. The company ended H117 with net cash of €5.5m. Management expects a positive development of revenues and profits for both divisions in Q317. We have revised our forecasts to reflect Q217 performance, higher tax rates, and higher revenues for TXT Next in FY18. Our normalised EPS forecasts fall by 12.7% in FY17e and 6.7% in FY18e.

Sale of TXT Retail for €85m

The company has agreed to sell TXT Retail for €85m in cash with completion of the deal by the end of October. Our forecasts will include TXT Retail until the deal completes, but we have provided an illustration of the TXT Group income statement assuming completion on 31 October. The amount of special dividend to be paid out in FY18 has not yet been specified, but we assume a proportion of the proceeds will be retained to support investment in TXT Next and TXT Sense.

Valuation: Good price for TXT Retail

On our revised forecasts, TXT is trading on a P/E of 25.6x FY17e and 21.9x FY18e. We estimate that proceeds of €85m value TXT Retail on an EV/EBITDA multiple of 20.6x for FY17e and 17.5x for FY18e. We estimate that the remaining business is valued on an EV/EBITDA multiple of 10.4x FY17e and 13.7x FY18e. On a special dividend pay-out of €50m (which leaves €35m in the business to support growth plans), we estimate the remaining business would be valued on a P/E of 27.2x FY17e and 35.1x FY18e. This appears high, but does not take into account the use of the remaining €35m of proceeds for value-enhancing acquisitions.

Review of H117 results

Exhibit 1: H1 results highlights

€m	H117a	H116a	Change
Revenues	36.1	33.2	8.9%
TXT Retail	18.2	17.8	2.6%
TXT Next	17.9	15.4	16.2%
Gross margin	53.1%	52.2%	0.8%
EBITDA	3.4	3.6	-5.5%
EBITDA margin	9.5%	10.9%	-1.4%
Normalised EBIT	3.1	3.3	-7.9%
Normalised EBIT margin	8.4%	10.0%	-1.5%
Reported EBIT	2.6	2.8	-7.6%
Reported EBIT margin	7.1%	8.4%	-1.3%
Net cash	5.5	0.5	1000.0%

Source: TXT e-solutions, Edison Investment Research

TXT grew revenues 8.9% y-o-y in H117, 21.7% growth in Q117 and -1.1% in Q217. Organic growth was 3.7% (Q117: 11.4%; Q217: -1.1%). The gross margin improved over the period, even though the mix of licences and services was unchanged. Operating costs (excluding depreciation and amortisation) increased 14.8% y-o-y, resulting in a decline in EBITDA and EBITDA margins over the period. Net cash at the end of H117 had increased marginally from the €5.4m at the end of FY16, as the dividend totalling €3.5m was paid in H1.

TXT Retail

TXT Retail saw revenue growth of 2.6% in H117, with 14.1% growth in Q117 and a 6.8% decline in Q217. Divisional gross margin of 62.4% was 0.5 percentage points higher than a year ago. For the first time, the company has provided a split of EBITDA by division. TXT Retail generated EBITDA of €1.47m in H117, a margin of 8.1% (versus the group margin of 9.5%).

TXT Next

TXT Next saw revenue growth of 16.2% in H117, with 38.0% growth in Q117 and 0.3% growth in Q217. PACE was integrated from 1 April 2016; organic growth for H117 was 6% and for Q117 was 8%. The divisional EBITDA of €1.95m equated to a margin of 10.9%.

In May, the company announced that it had created a new sub-division within TXT Next called TXT Sense. This is a start-up business with proprietary technology for augmented and virtual reality. The plan is to market this technology to the industrial, communication and service sectors.

Changes to forecasts

We have left our H217 forecasts substantially unchanged, bar an increase in the tax rate from 22% to 27% reflecting the higher rate incurred year-to-date. Taking into account lower than expected Q2 revenues, this results in an overall decline in our revenue forecast for FY17e of 1.8%. This flows down to a decline in EBITDA of 6.2% and a reduced EBITDA margin forecast from 11.4% to 10.9%.

Based on management’s increased focus on TXT Next after the disposal of TXT Retail, we have increased our revenue growth assumptions for TXT Next in FY18 from 4.5% to 8.1% and increased our tax rate assumption from 22% to 28%.

Exhibit 2: Changes to forecasts

	FY17e old	FY17e new	change	y-o-y	FY18e old	FY18e new	change	y-o-y
Revenues (€m)	75.2	73.8	-1.8%	6.8%	78.5	79.4	1.2%	7.5%
TXT Retail	38.8	37.8	-2.6%	4.6%	40.4	40.4	0.0%	7.0%
TXT Next	36.4	36.1	-1.0%	9.1%	38.1	39.0	2.4%	8.1%
Gross margin	53.9%	53.7%	-0.2%	0.1%	53.9%	53.8%	-0.1%	0.1%
Gross profit	40.6	39.7	-2.2%	6.9%	42.3	42.7	1.0%	7.7%
EBITDA (€m)	8.6	8.1	-6.2%	-7.4%	9.5	9.6	1.0%	18.4%
EBITDA margin	11.4%	10.9%	-0.5%	-1.7%	12.1%	12.0%	0.0%	1.1%
Normalised EBIT (€m)	7.9	7.3	-6.8%	-7.9%	8.7	8.8	1.0%	20.2%
Normalised EBIT margin	10.5%	9.9%	-0.5%	-1.6%	11.1%	11.1%	0.0%	1.2%
Normalised net income (€m)	6.2	5.4	-12.7%	-15.1%	6.9	6.4	-6.7%	18.3%
Normalised EPS (€)	0.53	0.47	-12.7%	-14.8%	0.59	0.55	-6.7%	18.4%
Reported basic EPS (€)	0.46	0.41	-10.3%	-13.7%	0.51	0.51	-0.6%	24.7%
Net cash (€m)	7.2	6.9	-3.8%	28.5%	11.4	9.7	-14.8%	41.1%
Dividend (€)	0.32	0.32	0.0%	6.7%	0.33	0.33	0.0%	3.1%

Source: Edison Investment Research

Disposal of TXT Retail business

On 24 July, TXT announced that it had agreed to sell its retail business to Aptos, a North American retail software company. TXT will receive cash proceeds of €85m, which will be adjusted for working capital and cash in the business on the date of completion. There is no deferred or contingent consideration. The deal is expected to complete by the end of October.

TXT will also be entitled to exercise an option to buy up to 10% of the number of shares sold in an IPO, at the IPO price. This option will have a duration of three years from the disposal date.

Based on our current forecasts for TXT Retail, this values the business at an EV/sales multiple of 2.3x for FY17e and 2.1x for FY18e. Assuming that TXT Retail EBITDA margin is the same as the group average for both years, this equates to an EV/EBITDA multiple of 20.6x FY17e and 17.5x FY18e.

Illustration of remaining business

We have made a first attempt at forecasting how the remaining TXT business will look post-acquisition. We have made the following assumptions to arrive at our estimates:

■

We use the revised TXT Next forecasts described above.

■

We assume that all TXT Retail results until the date of disposal are recorded in discontinued operations. We use our revised TXT Retail forecasts and a disposal date of 31 October. We apply the same tax rate as the group tax rate.

■

We have assumed the remaining group EBITDA margin in FY18 is lower than the existing group average, as it will bear in full the costs of being a public company.

■

We use cash proceeds of €85m and make no working capital adjustments.

■

We assume the proceeds are retained in full, although we expect a proportion to be paid out as a special dividend next year. We use a 0.5% interest rate for the proceeds.

Exhibit 3: TXT Group income statement post disposal – illustration

€m	FY17e	FY18e
Revenues	36.06	38.98
Gross profit	15.78	16.91
EBITDA	4.63	3.51
D&A	(0.35)	(0.35)
Adjusted EBIT	4.28	3.16
Acquired amortisation	(0.35)	(0.35)
Share-based payments	(0.24)	0.00
Exceptionals*	0.00	0.00
Reported EBIT	3.69	2.81
Net interest	0.17	0.53
Adjusted PBT	4.46	3.68
Reported PBT	3.86	3.33
Tax	(1.04)	(0.93)
Normalised tax	(1.20)	(1.03)
Adjusted PAT	3.25	2.65
Reported PAT	2.82	2.40
Discontinued operations	1.55	0.00
Reported net income	4.37	2.40
Adjusted EPS (€)	0.28	0.23
Reported EPS (€)	0.37	0.21

No. shares (m)	11.7	11.7
Share price (€)	11.88
P/E – uses adjusted EPS	42.6	52.2

Source: Edison Investment Research. Note: *not yet known – would expect this to include gain on disposal of TXT Retail plus associated costs.

The company expects to propose a special dividend when FY17 results are approved at the March 2018 annual shareholders’ meeting. Management has not specified how much of the sale proceeds will be paid out as a dividend, and we expect a proportion of the proceeds will be retained to fund acquisitions for the TXT Next business and to invest in the growth of the newly created TXT Sense business.

In the table below, we show the implied EV/EBITDA multiples for the remaining business and the impact on the P/E multiples and share price of a special dividend of €50m.

Exhibit 4: Valuation impact

€m		FY17e	FY18e
Current market cap	138.4
Net cash at end FY16 plus proceeds	90.4
EV	48.1
EV/EBITDA (x)		10.7	14.2

Assume special dividend	50
New market cap	88.4
New implied share price (€)	7.58
P/E – uses adjusted EPS less net interest on €50m		27.2	35.1

Source: Edison Investment Research

Exhibit 5: Financial summary

	€000s	2012	2013	2014	2015	2016	2017e	2018e
Year end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		46,499	52,560	54,410	61,540	69,152	73,827	79,383
Cost of sales		(22,351)	(24,854)	(26,455)	(29,189)	(32,039)	(34,151)	(36,662)
Gross profit		24,148	27,706	27,955	32,351	37,113	39,676	42,721
EBITDA		5,322	6,263	5,324	6,659	8,715	8,068	9,551
Operating profit (before amort and except)		4,283	5,241	4,284	5,820	7,956	7,329	8,812
Amortisation of acquired intangibles		0	(285)	(285)	(285)	(550)	(637)	(637)
Exceptionals and other income		939	0	1,468	0	(500)	0	0
Other income		0	0	0	(740)	0	(243)	0
Operating profit		5,222	4,956	5,467	4,795	6,906	6,449	8,175
Net Interest		(37)	(435)	(249)	(151)	105	100	100
Profit before tax (norm)		4,246	4,806	4,035	5,669	8,061	7,429	8,912
Profit before tax (FRS 3)		5,185	4,521	5,218	4,644	7,011	6,549	8,275
Tax		(188)	121	(1,046)	(762)	(1,456)	(1,768)	(2,317)
Profit after tax (norm)		4,092	4,927	3,226	4,739	6,387	5,423	6,416
Profit after tax (FRS 3)		4,997	4,642	4,172	3,882	5,555	4,781	5,958

Average number of shares outstanding (m)		11.0	11.5	11.5	11.7	11.7	11.7	11.7
EPS – normalised (c)		37	43	28	41	55	47	55
EPS – normalised fully diluted (c)		34	41	28	40	55	47	55
EPS – (IFRS) (c)		45	40	36	33	48	41	51
Dividend per share (c)		18.2	22.7	22.7	25.0	30.0	32.0	33.0

Gross margin (%)		51.9	52.7	51.4	52.6	53.7	53.7	53.8
EBITDA margin (%)		11.4	11.9	9.8	10.8	12.6	10.9	12.0
Operating margin (before GW and except) (%)		9.2	10.0	7.9	9.5	11.5	9.9	11.1

BALANCE SHEET
Fixed assets		18,570	17,850	18,019	18,132	25,428	24,672	23,916
Intangible assets		16,621	15,370	15,078	14,692	21,296	20,590	19,884
Tangible assets		1,154	1,118	1,249	1,361	1,598	1,548	1,498
Other		795	1,362	1,692	2,079	2,534	2,534	2,534
Current assets		36,769	34,914	34,892	38,946	37,085	40,665	45,735
Stocks		1,388	1,451	1,820	2,075	3,146	3,246	3,346
Debtors		19,562	18,642	20,768	27,791	26,369	28,317	30,448
Cash		15,819	14,821	12,304	9,080	7,570	9,101	11,940
Other		0	0	0	0	0	0	0
Current liabilities		(20,651)	(17,864)	(17,451)	(18,349)	(21,051)	(22,347)	(24,432)
Creditors		(15,155)	(14,512)	(15,297)	(17,528)	(20,243)	(21,539)	(23,624)
Short-term borrowings		(5,496)	(3,352)	(2,154)	(821)	(808)	(808)	(808)
Long-term liabilities		(8,666)	(6,965)	(6,491)	(5,105)	(7,180)	(7,180)	(7,180)
Long-term borrowings		(4,301)	(2,896)	(1,685)	0	(1,391)	(1,391)	(1,391)
Other long-term liabilities		(4,365)	(4,069)	(4,806)	(5,105)	(5,789)	(5,789)	(5,789)
Net assets		26,022	27,935	28,969	33,624	34,282	35,810	38,039

CASH FLOW
Operating cash flow		2,760	7,630	5,404	2,412	10,676	7,915	9,405
Net interest		(37)	(435)	(249)	(151)	105	100	100
Tax		64	(1,615)	(1,344)	(1,461)	(2,022)	(1,768)	(2,317)
Capex		(405)	(483)	(615)	(763)	(738)	(620)	(620)
Acquisitions/disposals		(8,450)	19	0	0	(5,403)	(600)	0
Financing		1,690	(755)	(597)	2,215	(828)	0	0
Dividends		0	(2,107)	(2,615)	(2,678)	(2,931)	(3,496)	(3,729)
Net cash flow		(4,378)	2,254	(16)	(426)	(1,141)	1,531	2,839
Opening net debt/(cash)		(10,266)	(6,023)	(8,575)	(8,465)	(8,259)	(5,371)	(6,902)
HP finance leases initiated		0	0	0	0	0	0	0
Other		135	298	(94)	220	(1,747)	0	0
Closing net debt/(cash)		(6,023)	(8,575)	(8,465)	(8,259)	(5,371)	(6,902)	(9,741)

Source: TXT e-solutions, Edison Investment Research

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Frankfurt +49 (0)69 78 8076 960

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