GFT — Update 15 August 2016

GFT

Underlying organic growth expands to 19% in Q2

Q2 results

Software & comp services

15 August 2016

Price	€20.52
Market cap	€540m
Net debt (€m) at 30 June 2016	70.3

Shares in issue	26.3m
Free float	64%
Code	GFT

Primary exchange	Frankfurt (Xetra)
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	17.0	(2.8)	(3.1)
Rel (local)	8.8	(10.6)	(1.2)

52-week high/low

€32.3

€16.4

Business description

GFT (legal name: GFT Technologies) is a global technology services business primarily focused on banks and insurance companies.

Next events

UBS Best of Germany	13-14 September 2016
Q3 results	10 November 2016
German Equity Forum	21-23 November 2016

Analysts

Richard Jeans	+44 (0)20 3077 5700
Katherine Thompson	+44 (0)20 3077 5730

tech@edisongroup.com

Edison profile page

GFT is a research client of Edison Investment Research Limited

Revenue growth picked up in Q2, despite the challenging banking sector backdrop, as strong demand for digitisation projects in the commercial banking sector in Europe outweighed project deferrals in the Anglo Saxon investment banking markets. Consequently, management edged up revenue guidance but eased profit guidance. Management expects investment banking IT activity to recover in H2 or FY17, as the sector needs to invest in IT to remain competitive. We have lowered our EPS in FY16 and FY17, while FY18 is broadly maintained. Given that management’s long-term outlook is sustained, we believe the shares are attractive on c 14x our FY18 earnings.

Year end	Revenue (€m)	EBT* (€m)	EPS* (c)	Adj EPS** (c)	P/E (x)	Yield (%)
12/14	279.2	25.4	75.8	96.5	21.3	1.2
12/15	373.5	32.5	96.2	119.5	17.2	1.5
12/16e	420.0	33.0	92.9	115.2	17.8	1.6
12/17e	460.0	39.4	103.4	125.4	16.4	1.8

Note: *Earnings before tax and EPS are statutory, after the amortisation of acquired intangibles and exceptional items. **Adjusted EPS is before amortisation and exceptionals.

Q2 results: Total group revenue up 23% in Q2

Q2 organic revenue grew by 19.2% at constant currencies, or 17.1% after the currency headwind due to the decline in sterling. Revenue from Adesis Netlife, acquired in June 2015, along with an initial contribution from Habber Tec, took total Q2 group revenue to €110.6m. Q2 adjusted EBITDA rose by 11% to €11.4m, reflecting a 106bp decline in the margin. For the full H1 period, organic revenue grew by 13.5%, before a 1.7% currency headwind, to €199.8m. The acquisitions took the total H1 revenue to €208.0m, up 16.4%. While net debt rose from €36.4m to €70.3m over H1, we note that the group generates its strongest cash flows in H2. Outstanding acquisition liabilities of €15.9m take the adjusted net debt to €86.2m.

Forecasts: Revenues edged up, profits eased

We have edged up our FY16 revenues and eased profits along with management guidance. Revenues for subsequent years also rise, and we forecast margins to gradually recover over the following years. This results in EPS falling by 5% in FY16 and 2% in FY17 while FY18 is flat. We have reduced acquisition costs to €6.7m from €10m. Consequently, we are now forecasting the group to end FY16 with net debt of €22.7m (previously €23.6m), although we note that the actual cash position is very sensitive to the timing of payments received around the year end.

Valuation: Attractive if it can sustain the growth

The stock trades on 1.26x FY17e EV/sales and 11.0x EV/EBITDA, broadly in line with its larger global IT services peers, which typically trade in the ranges of c 1.9-2.3x revenues and c 9.3-12.3x EBITDA. Our DCF model (which assumes a WACC of 9%, 10% pa revenue growth to 2020 and 12% long-term EBITDA margins) values the shares at €26.46 (previously €25.35), 29% above the current share price. The increase mainly reflects the slightly higher revenue, lower depreciation assumptions and lower than expected price for Habber Tec.

Q2 results review and revised guidance

Q2 constant currency organic revenue accelerated to 19.2% in Q2, from 7.6% in Q1, as strong demand for digitisation projects in the commercial banking sector in Europe outweighed weak Anglo Saxon investment banking markets. Commercial banks require modern digital infrastructure to reduce costs, improve sales strategies and boost customer loyalty. However, investment banks have been deferring IT projects because of the uncertainties around the UK referendum on the EU and the subsequent Brexit vote, as well as because of the poor financial results across the sector. The deferrals resulted in lower utilisation on the Anglo Saxon markets, and this weighed on margins. The postponed projects are mostly digital innovation projects such as blockchain, which the group classifies as “sun deck” projects, and GFT has not been seeing a slowdown in compliance projects and core banking. While Brexit will bring uncertainties for some years, GFT does not expect to lose business as a result; in fact Brexit could create more opportunities around further regulations or banks changing their corporate structures.

UK revenue slipped by 9% in H1 to represent 36% of group revenue from 45% a year earlier, but the UK remains the group’s largest market. Around one half of UK revenue is billed in sterling, with the balance in euros. It is closely linked to US revenues as customers’ budgets can move freely. The two fastest growing markets are Spain and Brazil, where the group has significant offshore centres. Spain grew by 54% organically in H1 while Brazil grew 66% organically. The group’s Italian business grew by 12%, including its business with the European Commission, but by 4% when just including business in Italy.

Group headcount rose to 4,493 from 4,159 over the quarter, which includes 102 added via the Habber Tec acquisition. The headcount is 31% higher than a year earlier, when it was 3,421.

GFT acquired Habber Tec Brazil in April for €6.85m, along with a deferred payment of up to €6.3m (which has been estimated as €1.72m). There were transaction costs of €120k associated with the acquisition. The group’s €420k investment in parkpocket has been fully written down because parkpocket failed to secure a third round of funding. This was a one-off investment by GFT.

Exhibit 1: Quarterly analysis

€000s	FY14	Q115	Q215	Q315	Q415	FY15	Q116	Q216	H216e	FY16e
GFT (continuing)	279,220	88,510	90,250	89,910	98,370	367,040	94,086	105,669	198,448	398,204
Adesis Netlife				2,810	3,610	6,420	3,300	3,750	9,496	16,546
WG Systems (Habber Tec)								1,220	4,030	5,250
Other/misc	15	0	0	0	50	50	0	0	0	0
Total revenue	279,235	88,519	90,243	92,720	102,030	373,507	97,386	110,639	211,975	420,000
Cost of materials	(52,194)	(16,229)	(14,968)	(15,329)	(15,963)	(62,489)	(14,614)	(15,963)	(32,423)	(63,000)
Gross profit	227,042	72,290	75,274	77,391	86,067	311,021	82,772	94,676	179,552	357,000
Op costs before depreciation	(191,801)	(62,735)	(65,029)	(65,886)	(71,853)	(265,504)	(72,554)	(83,285)	(154,591)	(310,430)
Adjusted EBITDA	35,240	9,555	10,245	11,504	14,213	45,517	10,218	11,391	24,961	46,570
Depreciation	(3,365)	(1,222)	(1,237)	(1,280)	(1,415)	(5,154)	(1,356)	(1,405)	(2,839)	(5,600)
Adjusted operating profit	31,875	8,333	9,008	10,224	12,798	40,363	8,862	9,986	22,122	40,970
Operating Margin	11.4%	9.4%	10.0%	11.0%	12.5%	10.8%	9.1%	9.0%	10.4%	9.8%
Net interest	(1,015)	(313)	(423)	(338)	(630)	(1,703)	(344)	(503)	(1,253)	(2,100)
Edison profit before tax (norm)	30,860	8,020	8,585	9,886	12,169	38,660	8,518	9,483	20,869	38,870
Associates	(12)	(4)	(5)	(14)	(8)	(30)	(15)	22	(8)	0
Amortisation of acq’d intangibles	(4,711)	(1,136)	(1,227)	(1,355)	(2,387)	(6,105)	(1,467)	(1,522)	(2,880)	(5,869)
Exceptionals - acquisition costs	(1,040)	0	0	0	0	0	0	0	0	0
Exceptionals - earnout adjustments	309	0	0	0	0	0	0	0	0	0
Exceptionals - other	0	0	0	0	0	0	0	(421)	0	0
Profit before tax (FRS 3)	25,406	6,881	7,353	8,517	9,774	32,525	7,036	7,563	17,982	33,001

Source: GFT (actuals), Edison Investment Research (forecasts)

Guidance

GFT has increases its revenue guidance for FY16 by 2.4% to €420m, while EBITDA guidance falls by 4.1% to €46.6m. Also, depreciation guidance falls while the interest charge rises.

GFT is maintaining its longer-term objective to generate €800m revenues by 2020, representing 10% pa organic revenue growth and nearly €200m of revenues from acquisitions. The group’s targeted EBITDA margin for 2020 is 12%, which compares with our FY16e EBITDA margin of 11.1%. This reflects recovering utilisation rates in the investment banking part of the business.

Exhibit 2: Presentation of GFT and Edison definitions, based on GFT guidance

	Actual	Actual	Previous GFT guidance	New GFT guidance	Edison
€m	FY14	FY15	FY16e	FY16e	FY16e
Group revenue	279.235	373.507	410.000	420.000	420.000
Profit measures:
GFT	38.268	48.857
Holding company	(4.081)	(3.370)
(A) Operating profit (GFT definition)	34.187	45.486	48.569	46.570	46.570
Add back: exceptional items, misc	1.040	0.000	0.000	0.000	0.000
Add back: associates	0.012	0.030	0.000	0.000	0.000
Adjusted EBITDA (Edison definition)	35.239	45.516	48.569	46.570	46.570
(E) Normal depreciation	(3.365)	(5.154)	(6.100)	(5.600)	(5.600)
Adjusted operating profit (Edison definition)	31.874	40.362	42.469	40.970	40.970
Total net interest	(1.015)	(1.703)	(1.800)	(2.100)	(2.100)
Profit before tax norm (Edison definition)	30.859	38.659	40.669	38.870	38.870
(B) Earn-out accruals	0.309	0.000	0.000	0.000	0.000
(C) PPA order book (amort of acquired)	(1.675)	(0.931)	(0.069)	(0.069)	(0.069)
(F) PPA amortisation (amort of acquired)	(3.036)	(5.174)	(5.600)	(5.800)	(5.800)
Exceptional items, misc	(1.040)	0.000	0.000	0.000	0.000
Associates	(0.012)	(0.030)	0.000	0.000	0.000
EBT (GFT definition)	25.406	32.524	35.000	33.001	33.001
(D) EBITDA (GFT definition) (A+B+C)	32.821	44.555	48.500	46.501	46.501
EBIT (GFT definition) (D+E+F)	26.421	34.227	36.800	35.101	35.101

Source: GFT, Edison Investment Research

Forecasts

We have edged up FY16 revenues by 1%, while subsequent years rise more modestly. We have refined the mix of cost of sales and operating costs, reflecting a lower use of contractors. This results in EBITDA falling by 5% in FY16 and by 2% in FY17 and remaining flat in FY18, and there is a similar impact on the adjusted EPS.

While the tax rate declined to a modest 12% in Q2, we are conservatively maintaining our tax forecasts.

Exhibit 3: Forecast changes

(€000s)	2016e			2017e			2018e
	Old	New	% change	Old	New	5 change	Old	New	% change
Existing GFT revenues	392,499	398,204	1	431,749	434,318	1	474,923	477,750	1
Adesis Netlife revenues	17,456	16,546	(5)	19,201	18,047	(6)	21,121	19,852	(6)
Habber Tec Brazil	5,250	5,250	0	7,700	7,635	(1)	8,470	8,398	(1)
Total revenue	415,204	420,000	1	458,650	460,000	0	504,515	506,000	0
Growth (%)	11.2	12.4		10.5	9.5		10.0	10.0
Gross profit	336,316	357,000	6	371,506	391,000	5	408,657	430,100	5
Gross margin (%)	81.0	85.0		81.0	85.0		81.0	85.0
Operating expenses before depreciation	(287,213)	(310,499)	8	(317,293)	(338,100)	7	(349,274)	(370,898)	6
(A) EBITDA (GFT definition)	49,103	46,501	(5)	54,214	52,900	(2)	59,383	59,202	(0)
Margin (%)	11.83	11.07		11.82	11.50		11.77	11.70
(B) Normal depreciation	(6,100)	(5,600)		(6,650)	(5,980)		(7,063)	(6,578)
PPA amortisation	(5,600)	(5,800)		(5,600)	(5,800)		(5,600)	(5,800)
EBIT (GFT definition)	37,403	35,101	(6)	41,963	41,120	(2)	46,720	46,824	0
EBIT margin (%)	9.0	8.4		9.1	8.9		9.3	9.3
Growth (%)	9.3	2.6		12.2	17.1		11.3	13.9
Net interest	(1,950)	(2,100)		(1,600)	(1,700)		(1,400)	(1,450)
Earnings Before Tax (GFT definition)	35,453	33,001	(7)	40,363	39,420	(2)	45,320	45,374	0
(C) Taxation	(9,047)	(8,551)		(12,410)	(12,209)		(13,748)	(13,817)
Net income	26,406	24,450	(7)	27,953	27,211	(3)	31,571	31,557	(0)
Adjustments for normalised earnings:
(D) PPA order book adjustment	(69)	(69)		0	0		0	0
Share based payments	0	0		0	0		0	0
(E) Associates	0	0		0	0		0	0
(F) Exceptional items	0	0		0	0		0	0
(G) Adjusted EBITDA (Edison)(A-D-E-F)	49,172	46,570	(5)	54,214	52,900	(2)	59,383	59,202	(0)
(H) Adjusted operating profit (Edison)(G+B)	43,072	40,970	(5)	47,563	46,920	(1)	52,320	52,624	1
Adjusted operating margin (%)	10.4	9.8		10.4	10.2		10.4	10.4
Profit before tax norm (Edison)(H+C)	41,122	38,870	(5)	45,963	45,220	(2)	50,920	51,174	0
Statutory EPS (c)	100.3	92.9	(7)	106.2	103.4	(3)	119.9	119.9	(0)
Adjusted EPS (c)	121.8	115.2	(5)	127.5	125.4	(2)	141.2	141.9	0

Source: GFT, Edison Investment Research

Financial position

GFT receives a disproportionate level of cash in Q4, as some of its largest customers utilise their budgets at the end of the financial year. Q1 and Q2 typically have weaker cash flows. Notably, this year the group has one particularly large fixed-price project that is expected to complete later this year, and GFT will receive payment on completion.

The remaining acquisition liabilities relate to Sempla and Habber Tec. The group limits its net debt to around 2x EBITDA, which leaves cash acquisition headroom of c €23m on our estimates.

Exhibit 4: Financial position

	31-Dec-14	31-Mar-15	30-Jun-15	30-Sep-15	31-Dec-15	31-Mar-16	30-Jun-16
Cash	(38.1)	(32.5)	(31.2)	(56.8)	(47.0)	(42.9)	(42.2)
Financial debt	80.2	94.3	96.3	112.0	83.4	91.9	112.6
Net (cash)/debt	42.0	61.8	65.1	55.2	36.5	49.0	70.3
Investments	0.0	0.0	0.0	0.0	0.0	0.0	0.0
Outstanding acquisition liabilities*	12.8	12.8	12.9	13.0	13.9	14.1	15.9
Adjusted net (cash)/debt	54.9	74.6	78.0	68.2	50.4	63.1	86.2

Source: GFT accounts. Note: *Includes earn-outs and deferred payments. Excludes €1m deferred payment for emagine.

Peer analysis

GFT trades at a modest premium to its peers in terms of EV/EBITDA and P/E, which reflects the group’s attractive offshore/nearshore business model and strong revenue growth rates.

Exhibit 5: Peers

	Share price	Market cap	EV/sales (x)		EV/EBITDA (x)		PE (x)
	local curr	local curr (m)	Year 1	Year 2	Year 1	Year 2	Year 1	Year 2
GFT Technologies	20.52	540	1.38	1.26	12.5	11.0	17.8	16.4
1) European-based IT services/financial sector consulting
REPLY (€m)	121.8	1,139	1.42	1.30	10.4	9.1	17.6	15.7
Devoteam (€m)	42.61	349	0.58	0.54	7.1	6.3	17.9	15.2
First Derivatives (£m)	1939	476	3.68	3.35	18.7	16.8	34.1	31.5
Indra Sistemas (€m)	11.71	1,922	0.95	0.92	11.0	8.9	22.1	14.3
2) US-based IT services/financial sector consulting
Accenture ($m)	113.03	73,681	2.2	2.0	12.7	11.9	21.0	19.3
Cognizant ($m)	58.2	35,324	2.3	2.1	11.1	10.2	17.2	15.7
Luxoft ($m)	53.76	1,785	2.1	1.8	12.3	9.8	18.6	15.3
EPAM ($m)	68.4	3,481	2.8	2.3	14.9	12.3	22.8	19.3
3) Indian-based IT services/financial sector consulting
HCL Technologies (Rs m)	814.2	1,148,638	2.2	2.0	10.2	9.2	14.2	12.8
Tata Consultancy Svcs (Rs m)	2738.45	5,395,918	4.2	3.8	15.2	13.7	20.4	18.4
Wipro (Rs m)	543.75	1,343,450	2.1	1.9	10.3	9.3	15.1	13.6
Medians excluding GFT			2.2	2.0	11.1	9.8	18.6	15.7

Source: GFT calculated by Edison Investment Research, others Bloomberg data. Note: Priced as at 15 August 2016.

Exhibit 6: Financial summary

	€'000s	2013	2014	2015	2016e	2017e	2018e
Year end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		264,285	279,235	373,507	420,000	460,000	506,000
Cost of Materials		(108,559)	(52,194)	(62,486)	(63,000)	(69,000)	(75,900)
Gross Profit		155,726	227,042	311,021	357,000	391,000	430,100
EBITDA		22,256	32,822	44,556	46,501	52,900	59,202
Adjusted EBITDA		20,845	35,240	45,517	46,570	52,900	59,202
EBIT		17,760	26,421	34,228	35,101	41,120	46,824
Adjusted Operating Profit		18,599	31,875	40,363	40,970	46,920	52,624
Amortisation of acquired intangibles		(2,250)	(4,711)	(6,105)	(5,869)	(5,800)	(5,800)
Exceptionals		1,420	(731)	0	0	0	0
Associates		(9)	(12)	(30)	0	0	0
Operating Profit		17,760	26,421	34,228	35,101	41,120	46,824
Net Interest		(241)	(1,015)	(1,703)	(2,100)	(1,700)	(1,450)
Profit Before Tax (norm)		18,358	30,860	38,660	38,870	45,220	51,174
Earnings Before Tax		17,519	25,406	32,525	33,001	39,420	45,374
Tax		(3,890)	(6,819)	(5,979)	(8,551)	(12,209)	(13,817)
Net inc from discontinued ops		0	1,368	(1,209)	0	0	0
Profit After Tax (norm)		14,468	25,409	31,472	30,319	33,011	37,357
Profit After Tax (FRS 3)		13,628	19,955	25,336	24,450	27,211	31,557


Average Number of Shares Outstanding (m)		26.3	26.3	26.3	26.3	26.3	26.3
EPS - normalised (c)		55.0	96.5	119.5	115.2	125.4	141.9
EPS - normalised & fully diluted (c)		55.0	96.5	119.5	115.2	125.4	141.9
EPS - FRS 3 (c)		51.8	75.8	96.2	92.9	103.4	119.9
Dividend per share (c)		25.00	25.00	30.00	33.00	36.00	40.00

Gross Margin (%)		58.9	81.3	83.3	85.0	85.0	85.0
EBITDA Margin (%)		8.4	11.8	11.9	11.1	11.5	11.7
Adjusted Operating Margin (%)		7.0	11.4	10.8	9.8	10.2	10.4

BALANCE SHEET
Fixed Assets		80,761	148,732	173,451	180,451	177,871	173,083
Intangible Assets		68,210	125,852	139,480	143,680	137,880	132,080
Tangible Assets		7,666	17,780	26,488	29,288	32,508	33,520
Other		4,885	5,100	7,484	7,484	7,484	7,484
Current Assets		125,616	152,921	153,357	178,897	212,060	244,630
Stocks		0	0	0	0	0	0
Debtors		73,010	108,216	94,828	106,632	116,787	128,466
Cash		47,149	38,129	46,978	60,714	83,721	104,612
Current Liabilities		(70,769)	(140,614)	(90,628)	(102,659)	(113,010)	(124,914)
Creditors		(70,037)	(94,582)	(90,017)	(102,048)	(112,399)	(124,303)
Short term borrowings		(732)	(46,032)	(611)	(611)	(611)	(611)
Long Term Liabilities		(48,460)	(60,628)	(111,733)	(111,733)	(111,733)	(111,733)
Long term borrowings		(27,006)	(34,131)	(82,817)	(82,817)	(82,817)	(82,817)
Other long term liabilities		(21,453)	(26,497)	(28,916)	(28,916)	(28,916)	(28,916)
Net Assets		87,148	100,412	124,447	144,957	165,188	181,066

CASH FLOW
Operating Cash Flow		9,531	23,357	54,019	46,570	52,900	59,202
Net Interest		384	231	109	(2,100)	(1,700)	(1,450)
Tax		(2,091)	(8,152)	(11,424)	(7,774)	(11,305)	(12,794)
Capex		(5,484)	(9,680)	(14,456)	(8,400)	(9,200)	(7,590)
Acquisitions/disposals*		(15,254)	(58,472)	(16,760)	(6,662)	1,000	(7,000)
Shares issued		587	(1,494)	(620)	0	0	0
Dividends		(3,949)	(6,584)	(6,584)	(7,898)	(8,688)	(9,477)
Net Cash Flow		(16,276)	(60,794)	4,284	13,736	23,007	20,891
Opening net debt/(cash)		(35,912)	(19,410)	42,034	36,449	22,713	(294)
Other		(225)	(650)	1,301	0	0	0
Closing net debt/(cash)		(19,410)	42,034	36,449	22,713	(294)	(21,185)

Source: GFT (historicals), Edison Investment Research (forecasts). Note: *€1m receipt in FY17 is a deferred payment relating to the disposal of emagine. The €7m payment in FY18 relates to the acquisition of GFT Italy.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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