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TXT e-solutions — On the acquisition trail

TXT e-solutions (Euronext STAR Milan: TXT)

Last close As at 21/11/2024

9.88

▲ −0.06 (−0.60%)

Market capitalisation

129m

More on this equity

Research: TMT

TXT e-solutions — On the acquisition trail

TXT reported year-on-year revenue and EBITDA growth in Q118, with a particular boost to software licence sales. The change in the largest shareholder has prompted changes to the board, and is likely to mark the start of a series of acquisitions to accelerate the growth of the TXT Next business.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

TXT e-solutions

On the acquisition trail

Q118 results

Software & comp services

16 May 2018

Price

€12.42

Market cap

€146m

Net cash (€m) at end-Q118

87.9m

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

12.8

21.7

(1.2)

Rel (local)

8.5

13.3

(11.1)

52-week high/low

€13.5

€9.2

Business description

TXT e-solutions operates through TXT Next, which provides IT, consulting and R&D services to aerospace, aviation, banking and finance customers.

Next event

H118 results

2 August 2018

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

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

TXT reported year-on-year revenue and EBITDA growth in Q118, with a particular boost to software licence sales. The change in the largest shareholder has prompted changes to the board, and is likely to mark the start of a series of acquisitions to accelerate the growth of the TXT Next business.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

33.1

4.0

0.27

0.30

45.8

2.4

12/17

35.9

3.0

0.19

1.00

66.8

8.1

12/18e

39.1

3.0

0.19

0.16

66.9

1.3

12/19e

41.9

3.5

0.22

0.17

57.6

1.4

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

Q118 results: Making good progress

TXT reported 4.9% year-on-year revenue growth and 6.4% EBITDA growth in Q118. The EBITDA margin increased to 12.6% from 12.4% a year ago. With the adoption of IFRS 16 from the start of 2018, higher depreciation has resulted in a 14.9% decline in normalised EBIT. The company closed the quarter with net cash of €87.9m. We have revised our forecasts to reflect higher R&D and commercial costs in Q1, as well as higher than forecast gross margins. This results in a 10.2% increase in our FY18 normalised EPS forecast, and a 5.6% cut to our FY19 forecast.

Expect pick-up in M&A

Laserline, owned by Enrico Magni, recently acquired a 25.6% stake in the company from E-business Consulting. Mr Magni is keen to take an active role in the business and was recently appointed to TXT’s board. A €1 per share dividend was recently paid out, leaving the company with a large proportion of the proceeds from the TXT Retail disposal to invest in growing the company. The company expects to generate organic growth from the existing business combined with the acquisition of niche software and specialist engineering service providers to the aerospace and aviation, and banking and finance markets. Two acquisition targets are currently being evaluated.

Valuation: Factors in accretive acquisitions

On price-based valuation metrics, TXT continues to trade at a premium to peers as 60% of its market cap is made up by the net cash balance of €87.9m. Until the bulk of TXT’s cash is put to use on value-accretive acquisitions, we would expect the stock to trade at a significant premium to peers on a P/E basis. On an EV basis, TXT trades at a small premium to peers, with forecast EBITDA and EBIT margins slightly below the peer group average.

Review of Q118 results

Exhibit 1: Quarterly results highlights

€m

Q117

Q118

y-o-y

Revenues

9.0

9.4

4.9%

Licences & maintenance

0.7

1.1

54.3%

Services

8.2

8.3

0.4%

Gross margin

44.8%

45.1%

0.2%

EBITDA

1.1

1.2

6.4%

EBITDA margin

12.4%

12.6%

0.2%

Normalised EBIT

1.0

0.9

(14.9%)

Normalised EBIT margin

11.4%

9.2%

(2.1%)

Net income from continuing operations

0.5

0.5

5.0%

Discontinued operations

0.1

0.0

(100.0%)

Reported net income

0.6

0.5

(15.0%)

Net cash

8.8

87.9

898.9%

Source: TXT e-solutions

TXT reported a 4.9% y-o-y revenue increase, driven by a pick-up in software licensing, resulting in a 20bp expansion of the gross margin. Operating costs were essentially flat y-o-y, resulting in a 6.4% increase in EBITDA and a 20bp increase in EBITDA margin. As flagged the last time we wrote, the implementation of IFRS 16 for lease accounting from 1 January 2018 has resulted in a higher depreciation charge. The company incurred a tax rate of 30% on reported PBT and generated 5% growth in net income from continuing operations.

Changes to forecasts

The company expects organic revenue growth in Q218, with profitability in line with the same period a year ago due to higher investment in international sales and R&D. We have revised our forecasts to reflect Q118 results. We have increased our gross margin assumptions to more accurately reflect the levels achieved in recent quarters. We have increased operating costs to reflect the higher level of R&D and commercial costs in Q118. For FY18, the increase in gross profit outweighs the increase in opex, resulting in a 10.2% upgrade to our normalised EPS forecast. For FY19, the situation is reversed, resulting in a 5.6% cut to our normalised EPS forecast.

Exhibit 2: Changes to forecasts

FY18e old

FY18e new

change

y-o-y

FY19e old

FY19e new

change

y-o-y

Revenues (€m)

39.2

39.1

(0.3%)

9.0%

42.1

41.9

(0.5%)

7.1%

Gross margin

41.9%

43.5%

1.6%

(0.1%)

42.1%

43.1%

0.9%

(0.4%)

Gross profit

16.4

17.0

3.4%

8.7%

17.7

18.0

1.7%

6.2%

EBITDA (€m)

3.8

4.1

8.5%

16.6%

4.8

4.6

(3.4%)

12.0%

EBITDA margin

9.7%

10.6%

0.9%

0.7%

11.4%

11.0%

(0.3%)

0.5%

Normalised EBIT (€m)

2.6

2.9

10.8%

(10.1%)

3.6

3.4

(5.8%)

17.3%

Normalised EBIT margin

6.6%

7.3%

0.7%

(1.5%)

8.5%

8.0%

(0.4%)

0.7%

Normalised net income (€m)

2.0

2.2

10.2%

(0.1%)

2.7

2.5

(5.5%)

16.5%

Normalised EPS (€)

0.17

0.19

10.2%

(0.2%)

0.23

0.22

(5.6%)

16.2%

Reported basic EPS (€)

0.14

0.16

12.1%

(97.3%)

0.20

0.19

(6.3%)

19.3%

Net cash (€m)

76.5

76.8

0.3%

(12.0%)

77.8

78.0

0.2%

1.5%

Dividend (€)

0.16

0.16

0.0%

(84.0%)

0.17

0.17

0.0%

6.3%

Source: Edison Investment Research


Board changes reflect new share ownership

As we have previously written, in February, TXT received notice that its largest shareholder, E-business Consulting, had agreed to sell its 25.62% stake to Laserline for €10.5 per share. Laserline is an Italian company specialising in car security technology and services, and is owned by Enrico Magni, an Italian entrepreneur. On 28 February, Mr Magni confirmed he would be seeking active involvement in the board, and that he was happy with the current company structure and for TXT to remain public.

At the AGM on 19 April, independent directors Teresa Cristiana Naddeo and Andrea Lanciani stepped down from the board and Mr Magni and Valentina Cogliati were appointed to the board.

TXT’s founder and chairman, Alvise Braga Illa, has confirmed that he is handing his executive powers over to Mr Magni and will remain on the board in a non-executive capacity.

On the acquisition trail

The company retained the majority of the €85m proceeds received from the sale of TXT Retail, after paying out dividends totalling €11.7m, and we are forecasting a net cash position of €76.8m by the end of FY18. The appointment of Enrico Magni to the board has prompted a more ambitious M&A strategy, with acquisitions possible in the aerospace and aviation markets, as well as banking and finance. The company noted that it is currently evaluating two acquisition targets and has a significant cash balance to fund this strategy.


Exhibit 3: Financial summary

€000s

2012

2013

2014

2015

2016

2017

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

46,499

52,560

54,410

61,540

33,060

35,852

39,067

41,855

Cost of sales

(22,351)

(24,854)

(26,455)

(29,189)

(18,954)

(20,224)

(22,087)

(23,826)

Gross profit

24,148

27,706

27,955

32,351

14,106

15,628

16,980

18,030

EBITDA

 

 

5,322

6,263

5,324

6,659

4,260

3,536

4,124

4,620

Operating Profit (before amort and except) 

4,283

5,241

4,284

5,820

3,954

3,180

2,860

3,356

Amortisation of acquired intangibles

0

(285)

(285)

(285)

(264)

(439)

(439)

(439)

Exceptionals and other income

939

0

1,468

0

(557)

0

0

0

Other income

0

0

0

(740)

0

(69)

0

0

Operating Profit

5,222

4,956

5,467

4,795

3,133

2,672

2,421

2,917

Net Interest

(37)

(435)

(249)

(151)

48

(208)

150

150

Profit Before Tax (norm)

 

 

4,246

4,806

4,035

5,669

4,002

2,972

3,010

3,506

Profit Before Tax (FRS 3)

 

 

5,185

4,521

5,218

4,644

3,181

2,464

2,571

3,067

Tax

(188)

121

(1,046)

(762)

(661)

(710)

(720)

(859)

Profit After Tax (norm)

4,092

4,927

3,226

4,739

3,170

2,170

2,167

2,524

Profit After Tax (FRS 3)

4,997

4,642

4,172

3,882

2,520

1,754

1,851

2,208

Average Number of Shares Outstanding (m)

11.0

11.5

11.5

11.7

11.7

11.7

11.7

11.7

EPS - normalised (€)

 

 

0.371

0.428

0.281

0.406

0.271

0.186

0.185

0.216

EPS - normalised fully diluted (€)

 

 

0.340

0.411

0.276

0.403

0.271

0.186

0.186

0.216

EPS - (IFRS) (€)

 

 

0.454

0.403

0.364

0.333

0.475

5.874

0.158

0.189

Dividend per share (c)

0.18

0.23

0.23

0.25

0.30

1.00

0.16

0.17

Gross margin (%)

51.9

52.7

51.4

52.6

42.7

43.6

43.5

43.1

EBITDA Margin (%)

11.4

11.9

9.8

10.8

12.9

9.9

10.6

11.0

Operating Margin (before GW and except) (%)

9.2

10.0

7.9

9.5

12.0

8.9

7.3

8.0

BALANCE SHEET

Fixed Assets

 

 

18,570

17,850

18,019

18,132

25,428

8,860

9,076

7,793

Intangible Assets

16,621

15,370

15,078

14,692

21,296

7,332

6,888

6,445

Tangible Assets

1,154

1,118

1,249

1,361

1,598

793

1,453

613

Other

795

1,362

1,692

2,079

2,534

735

735

735

Current Assets

 

 

36,769

34,914

34,892

38,946

37,085

109,426

100,593

103,174

Stocks

1,388

1,451

1,820

2,075

3,146

2,528

2,628

2,728

Debtors

19,562

18,642

20,768

27,791

26,369

17,215

18,196

19,494

Cash

15,819

14,821

12,304

9,080

7,570

89,683

79,769

80,952

Other

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(20,651)

(17,864)

(17,451)

(18,349)

(21,051)

(13,612)

(15,323)

(16,286)

Creditors

(15,155)

(14,512)

(15,297)

(17,528)

(20,243)

(12,937)

(14,048)

(15,011)

Short term borrowings

(5,496)

(3,352)

(2,154)

(821)

(808)

(675)

(1,275)

(1,275)

Long Term Liabilities

 

 

(8,666)

(6,965)

(6,491)

(5,105)

(7,180)

(4,781)

(4,781)

(4,781)

Long term borrowings

(4,301)

(2,896)

(1,685)

0

(1,391)

(1,688)

(1,688)

(1,688)

Other long term liabilities

(4,365)

(4,069)

(4,806)

(5,105)

(5,789)

(3,093)

(3,093)

(3,093)

Net Assets

 

 

26,022

27,935

28,969

33,624

34,282

99,893

89,565

89,900

CASH FLOW

Operating Cash Flow

 

 

2,760

7,630

5,404

2,412

10,676

119

4,155

4,185

Net Interest

(37)

(435)

(249)

(151)

105

(208)

150

150

Tax

64

(1,615)

(1,344)

(1,461)

(2,022)

379

(720)

(859)

Capex

(405)

(483)

(615)

(763)

(738)

(661)

(420)

(420)

Acquisitions/disposals

(8,450)

19

0

0

(5,403)

82,250

0

0

Financing

1,690

(755)

(597)

2,215

(828)

(6)

(440)

0

Dividends

0

(2,107)

(2,615)

(2,678)

(2,931)

(3,496)

(11,738)

(1,874)

Net Cash Flow

(4,378)

2,254

(16)

(426)

(1,141)

78,377

(9,013)

1,182

Opening net debt/(cash)

 

 

(10,266)

(6,023)

(8,575)

(8,465)

(8,259)

(5,371)

(87,320)

(76,806)

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

135

298

(94)

220

(1,747)

3,572

(1,500)

0

Closing net debt/(cash)

 

 

(6,023)

(8,575)

(8,465)

(8,259)

(5,371)

(87,320)

(76,806)

(77,989)

Source: TXT e-solutions, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by TXT e-solutions and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by TXT e-solutions and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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New York +1 646 653 7026

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Sydney +61 (0)2 8249 8342

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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FY17 results reflected the declining impact of regulatory changes on demand in Germany. International sales continued to grow in FY17 and the company saw good demand for its Duratec product line. Vectron’s push into marketing services is progressing well: bonVito is close to profitability and the new GetHappy app is currently being trialled in Leipzig. We view the full launch and then uptake of the app as the key drivers of the share price.

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