Piteco — Resilience demonstrated

During H120 Piteco SpA was the star performer within the group. It generated strong revenue and EBITDA growth of 11% and 24%, respectively, as the business continued to deliver good growth and to benefit from recent acquisitions. While the COVID-19 pandemic slowed growth somewhat, the business performed well. Although the economic environment remains uncertain, we expect the business to return to its prior growth trajectory in FY21 if there are no further lockdowns in its main markets. We continue to see balance sheet headroom for further M&A, which could strengthen the growth outlook (albeit with execution risks). Piteco continues to trade at a discount to Italian and international software players.

Piteco Group reported strong revenue and EBITDA growth during H120. We provide more detail on the key takeaways from the H1 results below. Piteco SpA confirmed its leadership in the Italian market, with excellent growth (revenues up 11%, EBITDA up 24%). The COVID-19 pandemic temporarily slowed growth in the banking digital payments segment, and hence Juniper. This business grew revenues by only 1% vs H119. Myrios also witnessed a sector slowdown in the financial risk management segment, and hence its revenues were only up 4% in H120.

We recognise the strength of H1 despite the COVID-19 pandemic and therefore raise our forecasts. While Piteco Group did experience a pandemic-related slowdown across all its divisions, Myrios and Juniper were the most heavily affected, as expected. Their greater exposure to the financial segment resulted in more of the new projects being pushed back and delayed, as detailed below.

Piteco SpA is the core corporate treasury business, which includes the group’s treasury management software activities. Before the pandemic we expected Piteco SpA to sign 44 new clients in FY20, compared to 40 new clients in FY19. In March we cut our forecast to a conservative 38, and now believe the business is on track to replicate the FY19 result, and hence forecast 40 new clients. We note 21 new clients were signed during H120.

At the height of the lockdown, Piteco’s employees were not visiting client sites and all work was either paused or done remotely. Client visits have now resumed. Piteco is gearing up for a major release, with Piteco Evo 5.0 due to be rolled out in H2. Existing clients can request an upgrade to Piteco Evo 5.0, and we believe there will be a sales opportunity, as the upgrade will require a visit by a Piteco team member, who could upsell further services and modules. This could, of course, be disrupted by a second wave of the pandemic requiring further lockdowns. EveryMake was acquired in March and has been fully integrated into Piteco SpA. A new product has been launched recently called Intelligent Data Matching (IDM) aimed at financial companies.

Myrios offers financial risk management solutions, with its business targeted at banks (60% of revenue) and large corporates (40% of revenue). Myrios Switzerland was set up in February 2019 to help internationalise Piteco’s existing products. Myrios’s growth was subdued in H120, with revenues up 4% (vs revenues up 33% in FY19). We expect growth to accelerate in H2 and return to double digits, and a bounce back in FY21 unless there are further lockdowns in Myrios’s main markets.

Myrios’s growth in the banks business is outstripping that with large corporates, and hence we expect the proportion of business targeted at banks to grow over time. A large number of contracts with banks have been pushed back or put on hold due to the COVID-19 pandemic, and hence we expect a bounce back in FY21.

Juniper is a US digital payments software business focused on the correspondent banking space. We continue to forecast a flat year in FY20 as new clients choose to conserve cash and defer projects to FY21, but we expect a bounce back in FY21. Similarly to Myrios, a new contract has been pushed back, and hence we expect an element of catch-up in FY21.

We expect robust group revenue growth (7.5% CAGR 2020–23e) to translate into solid earnings progression (normalised EPS CAGR of 16%). A favourable business mix should continue to help drive EBITDA margin improvement (Myrios has higher margins and a higher growth rate than the Piteco base business). Our forecasts only reflect organic growth for the group, but we believe further acquisitions could strengthen the outlook.

Piteco Group has expanded significantly via acquisitions over the last few years with four deals in five years (Centro Data in 2015, Juniper in 2017, Myrios in 2018 and EveryMake in March 2020). With good cash flow generation, leverage ratios well below the covenant thresholds and the prospect of further organic growth in the next few years, we expect the company to continue to consider further acquisitions.

Existing bank loans have the covenants of net debt/EBITDA <3x and net debt/equity <1x. Hence, based on our FY20 forecasts, both covenants suggest a net debt ceiling of c €30–40m (assuming no new EBITDA contribution from acquisitions) versus our year-end FY20 forecast of c €10m (excluding the value of the put options related to Myrios and Juniper, which are not considered in the covenant calculations and are worth c€13m), leaving c €20–30m of balance sheet headroom.

We raise our revenue and EBITDA forecasts. While there remains uncertainty about any future lockdowns in Piteco’s markets, the group has fared well in the pandemic. Piteco’s business was not directly affected by the coronavirus outbreak; indeed, its products can help steer financial and treasury decision making at times of crisis. That said, the uncertainty of the lockdowns caused a softening in demand for Piteco’s products, as new and existing customers chose to conserve cash and delay upgrading their internal systems. As a reminder, Piteco’s customers are medium- and large-scale corporates, so are less likely to face a longer-term liquidity crisis. In addition, its customers do not operate in the sectors that were most affected by the temporary restrictions, such as leisure and tourism.

We now assume that FY20 growth is stronger than we had feared back in March. We still forecast a reduced growth rate compared to FY19, but H1 has amply demonstrated Piteco’s capability of weathering the COVID-19 pandemic. We also raise our FY21 forecasts as we expect the business to bounce back. We illustrate the main changes to our forecasts below, with the strongest upgrade to FY21 as we expect it to benefit from the contracts that were delayed during FY20.

We believe the key attractiveness of Piteco is its ability to generate high profit margins while providing customers with a flexible and cost-effective solution. The historical growth track record, earnings growth outlook and sustained cash-flow generation support further investment opportunities that could strengthen the growth outlook. The stock is trading on 13.6x EV/EBITDA and 16.8x P/E for FY21, at a discount to large international software peers, and smaller Italian software peers. We have updated our Italian software peer group to better reflect Piteco’s competitors.

Our DCF-based valuation rises to €8.20/share as we raise our forecasts and also roll forward our DCF to start in FY21. This is based on a 5% CAGR for net revenues over 10 years, a long-term EBITDA margin of 42%, a WACC of 9% and a terminal growth rate of 2%. We have revised and adjusted our cash flow assumptions based on Piteco’s strong track record on cash conversion.

The key upside or downside risks to our forecasts are higher or lower customer acquisitions at Piteco Spa, stronger or slower than expected revenue acceleration at Myrios or Juniper, higher or lower contributions from international clients (Myrios Switzerland) and higher or lower margins. Furthermore, we believe M&A activity would represent a significant growth opportunity and generate execution risks. The COVID-19 pandemic is the largest unknown at present, with the scale and duration of any further lockdowns – and related economic downturn – potentially affecting the business.