Tinexta — Strong FY19 with more challenging FY20 ahead

Tinexta performed strongly in FY19 as revenue and EBITDA were ahead of management’s guidance, introduced at the start of the year, and broadly in line with our more optimistic forecasts. Revenue of €258.7m and baseline EBITDA of €71.3m, compare with guidance of greater than €250m and €68–70m, respectively, and represented growth of 8.0% and 8.1%, respectively. On an organic basis, revenue growth was 5.9% and clean (or adjusted) EBITDA growth, ie before non-recurring items, was 7.8%. Acquisitions contributed 2.5% to revenue growth and 2.2% to clean EBITDA. The clean EBITDA margin increased by 180bp from 27.9% to 29.7% in FY19. Versus our forecasts, revenue for Digital Trust and Innovation & Marketing Services and clean EBITDA for Credit Information & Management and Innovation & Marketing Services were both better than expected.

The Virtual Stock Option plan represented a cost of €3.6m in FY19 versus €0.4m in FY18, therefore this produced a small decline of c 1% in operating profit. Adjusted operating profit, which excludes non-recurring items etc., increased by 8.6%. Higher finance charges and a new loss from associates led to a decline in reported PBT of c 8% to €42.2m. Adjusted net profit increased by 8.6%. Due to the COVID-19 outbreak, the company, like many others, has decided not to pay a dividend for FY19, representing a cash saving of c €9m.

Management is seeking authority to buy back shares to utilise for a new management stock option plan.

The table below highlights how Tinexta and its business units performed through FY19.

Following Q319, in which organic revenue fell by 2.5%, growth rebounded to 11.8% in Q419, typically a seasonally more important quarter. Notable here were the high growth rates of Digital Trust at 12.9% and Innovation & Marketing Services at 24.1% and improving momentum at Credit Information & Management.

Digital Trust’s organic growth accelerated through every quarter during FY19 so that the total organic growth rate for the year was 11.1%, with the consistent message from management that the growth is broad-based including rapid growth in Enterprise Solutions for large companies. H219 growth of 12.1% was against a high comparative of 9.7% growth in H218, underlying the favourable market backdrop and Tinexta’s market position.

Credit Information & Management’s organic revenue decline of 3.8% in Q419 is a significant improvement from the double-digit declines through the middle of FY19. It remains negative due to the ongoing pricing pressure in the corporate sector. We believe the banking sector customer base is performing better than the corporate sector. A bright spot are the businesses acquired in FY18 that performed well in Q420.

Innovation & Marketing Services was expected to have a strong Q419 after Q319 and it did not disappoint with c 52% organic revenue growth in the quarter. The key driver of this growth was Warrant Hub, which provides consulting services with respect to obtaining tax credits for research and development projects. Co.Mark, which provides consulting services to help SMEs grow their businesses, continues to contract modestly against a strong comparative.

For the group, the clean EBITDA margin increased from 27.9% in FY18 to 29.7% in FY19. This was driven by mix, with Digital Trust increasing in importance, as well as improving EBITDA margins for Digital Trust (from 26.3% in FY18 to 27.7% in FY19) and Credit Information & Management (from 21.2% in FY18 to 24.2% in FY19). The management of Credit Information & Management have performed very well by increasing EBITDA absolutely, from €33.1m in FY18 to €38m in FY19 and increasing the EBITDA margin despite an organic revenue decline of 7.5% through the year.

Tinexta generated €41.7m of free cash flow (operating cash less investment in capital and intangibles) in FY19, growth of 38% from the €30.3m of free cash flow in FY18. The group is larger due to the organic revenue growth of 5.9% and acquisition-related revenue growth of 2.5%, but its free cash flow generation (relative to sales) also improved from 12.6% in FY18 to 16.1% in FY19. The improved cash flow generation was due to the improving underlying EBITDA margin, lower cash tax paid and relatively stable capital investment. The lower cash taxes, which oscillate every year because the Italian system causes a one-year lag, exaggerated the increase in free cash flow in FY19. Most likely there will be a higher cash tax outflow in FY20.

At the year-end, the net debt position was €128m and net debt/EBITDA of 1.8x was similar to the 1.9x at the end of 2018, despite spending €47.5m on buying in minority interests during the year.

When preliminary results for FY19 were released in February, management introduced guidance for FY20 and medium-term guidance for FY22. The FY20 guidance was for revenue greater than €270m (implied growth of 4.4% from FY19) with EBITDA growth of 8% and the FY22 guidance was for revenue greater than €300m (implied annual growth for FY21 and FY22 of over 5%) and EBITDA to grow at a faster rate than revenue. Due to the outbreak of COVID-19, the guidance has been withdrawn as management feels it is not yet possible to quantify the economic effects of the virus on the group companies. We believe new guidance for FY20 that will take account of the current slowdown will be issued with the release of Q120 financial results on 12 May 2020.

As management has withdrawn guidance for FY20, below we attempt to analyse the potential sensitivity of the business units to the economic downturn from COVID-19.

The national quarantine in Italy has been in effect since 9 March and, at the time of writing has be extended again, so that it is scheduled to expire on 3 May. The length of the quarantine and rate of general economic recovery in Italy is therefore uncertain. Our broad assumption is that the lockdown will have the greatest impact on Tinexta’s business in March and April with a gradual recovery back to more typical underlying growth rates by Q320 or Q420 described later for each business unit. Tinexta generates c 97% of its revenue in Italy.

As Tinexta was founded in 2009 and the group structure has evolved quickly through M&A since 2012, there is no public history of how the individual business units and the total group trade through an economic downturn and how quickly they might recover. The impact on some businesses is likely to be more severe than a ‘typical’ economic slowdown given the speed of the outbreak of the virus and extent of the quarantine, which can, say, limit how quickly costs can be reduced to offset a slowdown or loss of revenue.

Our understanding is that the majority of businesses are continuing to pursue new business opportunities where possible, but there is likely to be a lag in new business wins following a rapid downturn.

Exhibits 2 and 3 show the contribution of each business unit’s revenue and clean EBITDA to the annual total for FY19 on a quarterly basis. This is important as some quarters are more important to the full-year results than others.

In FY19, Q2 and Q4, representing 26% and 30% of annual revenue, respectively, were more important from a financial perspective than Q1 and Q3.

By business unit the only outlier in FY19 was Credit Information & Management, whose Q1 was more significant but that reflects the organic revenue decline due to competitive pricing issues etc from Q219 through Q419. In FY18, the annual revenue split by quarter for Credit Information & Management was slightly more balanced: Q1 25%, Q2 26%, Q3 22% and Q4 27%.

Management does not disclose on a consolidated basis how much of the group’s revenue is recurring, but we estimate it is c 60–70%.

To conclude, a complete one-month shutdown of an individual business unit, in any quarter, would represent 2–3% of total annual revenue, except in Q4 when it would represent 3–4% of total annual revenue. We discuss the likely sensitivity of the business units below.

Looking at profitability, there was a similar pattern to revenue in FY19: Q2 and Q4 were the most important, but the weightings are more skewed to these quarters than was the case for revenue. The three business units before the central ‘Other’ costs, generated 28% and 33% of annual EBITDA in Q2 and Q4 of FY19, respectively. Again, Credit Information & Management was the outlier versus other business units.

We also highlight the operational gearing for each business unit through FY19: ie the drop-through of incremental revenue to incremental EBITDA versus the comparative period. We use this as a potential initial indicator of how profitability may be affected as future revenue is potentially lost, albeit the cost dynamics are likely to be different in a growing rather than declining environment. Through the year, Digital Trust’s operational gearing averaged 39% and Innovation & Marketing Services averaged 53%. The negative numbers produced for Credit Information & Management reflect an increasing margin while organic revenue was declining.

To date, management has not provided any commentary on how it might seek to offset revenue weakness through cost-saving initiatives beyond it will manage costs accordingly. It is worth reiterating that management is already centralising and streamlining the group’s cost structure following a period of M&A.

Exhibit 4 highlights the structure of Tinexta’s cash operating cost base, ie excluding depreciation and amortisation and non-recurring items, relative to sales. It also highlights how the individual line items have changed over time, due to the changing group profile through M&A, the different performance of the business units, and internal investment/cost saving initiatives.

The cost of raw materials relates to the purchase of IT products, intended for resale to customers, wholly in the Digital Trust business unit, therefore it is reasonable to assume that these vary directly with the level of sales and will not significantly affect profitability in the event of not trading.

Service costs include the purchase of access to databases, professional services, maintenance, utilities, travel and lodging, telephony, consultancy, advertising, banking and auditor fees etc. Therefore, there is a mixture of fixed, semi-variable and variable costs.

Personnel costs can be assumed to be semi-variable and the Italian government has offered subsidies to employers during quarantine, including a subsidy for employees that have children, but the extent to which Tinexta will benefit from this is uncertain. The breakdown of employees for FY19 is not yet available as the annual report has not been published. In FY18, c 4% of employees were temporary and 17% of employees were part time.

Contract costs are the release of the year’s share of incremental capitalised cost assets for obtaining or fulfilling long-term contracts. These are likely to vary with the level of revenue recognition on contracts.

Having looked at the group-level drivers, we now turn our attention to the individual business units as each is likely to be affected differently by an economic downturn.

The main business is InfoCert, which provides certified electronic mail, digital signature, electronic invoice and digital documents storage. The key driver of growth are the enterprise solutions, with other services such as certified electronic mail being stable and should not be affected by a downturn, given they are essential, low-cost services that principally generate revenues through annual subscription fees. As can be seen from the total organic growth profile, the enterprise solutions are in structural growth driven by the greater digitisation of the economy and the streamlining of client operations. There is likely to be some impact to the growth rates as potential new clients defer capital investment plans overall, but InfoCert’s products help clients to reduce costs through digitisation so will continue to represent a good solution for clients in tougher times and over the long term. There is an undisclosed element of revenue that varies with the level of transactions or digital documents generated and certified by InfoCert, which is likely to vary with overall economic activity.

The other businesses – Sixtema, Visura, and Camerfima, which represent approximately one-third of the business unit – are also likely have some GDP sensitivity given they offer services including consulting.

Prior to this downturn we were assuming 10% organic revenue for Digital Trust in FY20, lower than the 11.1% growth reported for FY19. Our central assumption is that the sale of new enterprise solutions will be more difficult due to the quarantine and that the level of transactions will contract with the economy. We forecast that growth remained resilient at 10% for the first two months of the year but then dropped to zero in March. In Q2 we assume sales of new enterprise solutions do not happen and there is some loss of transactions revenue so that revenue declines by 3%. We then assume no growth in Q3 before reverting to 10% growth in Q4. These produce a total organic growth rate for FY20 of 3.6%.

We assume operational gearing of 30%, namely, 30% of incremental revenue drops through to EBITDA, which produces an EBITDA margin of 27.8% in FY20 versus 27.7% in FY19. The assumption of 30% is lower than the c 40% experienced in FY19 to reflect some cost savings by management.

To provide some indication of the sensitivity, each incremental 5% reduction in the quarterly organic growth rate in Q3 and Q4 would reduce the FY20 EBITDA forecast for the business unit by 1.2–1.5% respectively.

There are two main operating businesses: Innolva and its subsidiaries, and REValuta.

Innolva, roughly three-quarters of the business unit, provides data services that help banks and SMEs with the granting, ongoing assessment and recovery of credit in Italy. The financial services clients pay subscriptions for credit information but corporate clients are pay-as-you-go. This business is likely to be highly sensitive to changes in economic growth. In addition, through Promozioni Servizi, Innolva offers consultancy to SMEs to obtain government loan guarantees, that permit banks to grant low interest rate loans.

REValuta, approximately one-quarter of the business unit, provides residential property valuation services to banks. The business has multi-year contracts with banks and there is a fixed fee per appraisal. It will be highly sensitive to new and re-mortgage volumes.

Before this downturn, we assumed no organic revenue growth for this division for FY20. We now forecast that Innolva contracted by 20% in March and will contract by 25% in April then 5% for the remainder of Q220 and FY20. We assume REValuta will declined by 25% in March and by 100% in April, 50% in May and 25% in June, before returning to zero growth in Q320 and Q420.

For FY20, the quarterly forecasts for organic revenue for the total business unit are Q120 -12%, Q220 -37%, Q320 -3.8% and Q420 -3.8%, to give a total organic decline for FY20 of c 14%. When coupled with FY19 revenue being below our expectations the downgrade to our estimates for revenue in FY20 is c 17%. We forecast a greater impact to profitability from declining revenue in FY20 than FY19 given it may be more difficult to reduce costs in a second year of revenue declines. We forecast operational gearing of 30%, producing an EBITDA margin of 23.1% in FY20 versus 24.2% in FY19.

To provide some indication of the sensitivity of these forecasts, each 5% reduction in the organic growth rate for Q3 and Q4 would reduce the EBITDA forecast for the business unit in FY20 by 1.5% and 2.1% respectively, reflecting the seasonality of the business unit.

This business unit includes the Warrant Hub and Co.Mark subsidiaries, which are roughly 80% and 20% of the business unit’s revenue respectively.

Most of Warrant Hub’s revenue is derived from consulting to help companies gain tax credits and other incentives from government institutions to subsidise R&D etc. There are two revenue sources: a relatively small upfront fee for the work prior to the application and a more significant success fee, which is a percentage of the benefit received by the client. It is this that makes the margin for the business volatile between the financial quarters; the quarterly EBITDA margin varied between 39% and 52.6% in FY19. The consultants can work remotely but depend on clients continuing to work. The company is heavily exposed to clients in the industrial north, therefore there is likely to have been an important impact on business during the quarantine. We assume that Warrant’s revenue declined by 25% during March and will decline by 25% in April and 10% in May and will grow by 5% in June before returning to growth of 10% in Q320 and 15% in Q420. We would expect a reasonably quick return to more normal growth rates given the importance of the tax credits to clients.

Co.Mark is a consultancy that helps SMEs to identify, develop and grow export markets. The services are delivered by weekly half-day visits by the consultants to the clients. The contracts are annual and paid in monthly instalments and there is a minor success fee based on the sales boost delivered. As the business depends on site visits to the clients, it is likely to be significantly affected by the quarantine. How quickly the business returns will depend on the financial strength and sentiment of customers and their willingness and ability to pursue international growth. A new government tax voucher scheme to help companies to internationalise their businesses is likely to boost demand for Co.Mark’s services after a weaker FY19 due, in part, to the absence of a similar scheme. We assume that Co.Mark’s revenue fell by 100% in March and will fall 100% in April, 50% in May and be flat year on year in June, before growing by 10% in Q320 and 15% in Q420.

Before this downturn, we were forecasting 5% organic revenue growth for Innovation & Marketing Services in FY20 versus the 12.9% delivered in FY19. The assumptions above produce quarterly organic growth rates of Q120 -9.9%, Q220 -18.0%, Q320 10% and Q420 15% and an annual decline for FY20 of c 1%. We assume operational gearing of 40% for FY20, which gives an expected EBITDA margin of 47.6%, in line with 47.6% in FY19.

To provide some indication of the sensitivity of the forecasts, each 5% reduction in the quarterly organic growth rate in Q3 or Q4 would reduce the FY20 EBITDA forecast for the business unit by 0.8% or 1.5% respectively, given the different seasonal weightings of those financial periods.

Pulling the above together and considering FY19 results versus our forecasts, our new forecasts for FY20 and FY21 are summarised below.

In total, our revenue forecast for FY20 is reduced by 7.5%, with all divisions downgraded and the largest downgraded being at Credit Information & Management from where we move our organic revenue assumption from zero to -13.9%, bringing the total FY20 downgrade to 16.9% after FY19 was slightly below our forecast. Our forecast for divisional EBITDA is reduced by 7.5% too, with the greatest contributor to the downgrade again being Credit Information & Management, which is the smallest division. We assume there will be a reduction in Other, central, costs of c 25% to take account of potential savings management is likely to introduce at the Q120 results on 12 May 2020, which limits the EBITDA downgrade to 5.5%.

Our tax rate assumption increases from 29% to 29.5%.

We continue to assume a dividend will be paid for FY20, following the cancellation of the dividend that we had expected for FY19, given our cash flow forecast has not materially changed as a result of the above and there are no changes to our capex assumptions. Excluding the c €28m expected buyouts of minorities in FY20, which we do not typically model until they occur, the forecast for net debt/EBITDA at the end of December 2020 is 1.1x. Including the minority buyout, the net debt/EBITDA would be 1.5x.

In the year to date, the share price peaked at €13.78 before losing 48% of its value and troughing at €7.28. At the current share price of €9.8, the EV/sales multiples for FY20 and FY21 of 2.3x and 2.2x compare with its long-term average since its IPO of 1.8x, which looks low given its better medium-term growth outlook and higher EBITDA margin of 29.7% in FY19 versus 18.8% in FY15.

The EV/EBITDA multiples for FY20 and FY21 are 7.7x and 7.3x versus the long-term average of 8.5x since the IPO.

The extent and duration of the COVID-19 pandemic, its potential impact on the economy and the phasing and size of unannounced cost savings by management create some uncertainty with respect to forecasts and may help account for the reduction in multiples year-to-date.