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TXT e-solutions — Strong cash flow supports dividend boost

TXT e-solutions (Euronext STAR Milan: TXT)

Last close As at 19/04/2024

9.88

▲ −0.06 (−0.60%)

Market capitalisation

129m

More on this equity

Research: TMT

TXT e-solutions — Strong cash flow supports dividend boost

FY16 results confirmed that the PACE acquisition has been successfully integrated and TXT Next continues to see good underlying growth. Despite weaker trading for TXT Retail in H116, TXT managed costs well to achieve profitability and cash generation ahead of our forecasts. The company continues to internationalise both businesses and we believe it could make further bolt-on acquisitions in the TXT Next business.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

TXT e-solutions

Strong cash flow supports dividend boost

FY16 results

Software & comp services

13 March 2017

Price

€9.29

Market cap

€109m

$1.07:€1

Net cash (€m) at 31 December 2016

5.4

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

10.2

22.2

22.4

Rel (local)

5.5

13.0

11.9

52-week high/low

€9.3

€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

Shareholders meeting

21 April 2017

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

FY16 results confirmed that the PACE acquisition has been successfully integrated and TXT Next continues to see good underlying growth. Despite weaker trading for TXT Retail in H116, TXT managed costs well to achieve profitability and cash generation ahead of our forecasts. The company continues to internationalise both businesses and we believe it could make further bolt-on acquisitions in the TXT Next business.

Year
end

Revenue (€m)

PBT*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

61.5

5.7

0.40

0.25

23.2

2.7

12/16

69.2

8.1

0.55

0.30

16.9

3.2

12/17e

74.9

8.0

0.53

0.32

17.5

3.4

12/18e

77.9

8.8

0.59

0.33

15.7

3.6

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

PACE acquisition boosts FY16 performance

TXT reported revenue growth of 12.4% (1.8% organic). TXT Retail struggled with a poor trading environment in H116 and despite a pick-up in H216, saw a 1.6% revenue decline in FY16. TXT Next generated 33% growth and even without PACE, saw 6.5% organic growth. EBITDA was 3% higher than forecast and with lower than expected finance costs, the company reported normalised EPS 8.5% ahead of our forecast (+35.6% y-o-y). The company announced a dividend of €0.3 for FY16 (+20% y-o-y), ahead of our €0.26 forecast. Boosted by the PACE acquisition, international revenues grew 23% to make up 60% of FY16 revenues, up from 55% a year ago.

Minor changes to earnings forecasts

We continue to forecast revenue growth of c 8% for both divisions in FY17. Our EBITDA forecast is unchanged. Higher net interest income and lower depreciation drives an increase in our normalised EPS forecast of 7%. We introduce an FY18 forecast for 4.1% revenue growth and 10.8% EPS growth. We have increased our dividend forecast for FY17 by 18.5%. With FY16 net cash coming in €2.7m ahead of our forecast, we increase FY17 net cash by 79% to €7.2m despite the higher dividend payout.

Valuation: International expansion to drive upside

On our revised earnings forecasts, TXT trades at an EV/sales and P/E premium to European IT services companies, but at a discount to specialist supply chain planning (SCP) software suppliers. Based on the growth and profitability profiles of both groups, we would expect TXT to trade somewhere in the middle of the two groups. With the addition of PACE, the mix of revenues is shifting in favour of higher-margin licence sales, which should drive up valuation multiples over time. We also note a forecast dividend yield of more than 3%. Triggers for share price appreciation include large licence wins in TXT Retail, evidence of growing North American and Asia Pacific market share and further international wins in TXT Next. We highlight TXT’s strong cash position, providing a strong position from which to undertake bolt-on acquisitions or fund internal product development.

Review of FY16 results

Exhibit 1: Results highlights

FY16e

FY16

% difference

% y-o-y

Revenues (€m)

69.3

69.2

-0.3

12.4

TXT Retail

36.3

36.1

-0.7

-1.6

TXT Next

33.0

33.1

0.2

33.0

Gross margin (%)

53.3

53.7

0.4

Gross profit

37.0

37.1

0.4

14.7

EBITDA (€m)

8.5

8.7

3.1

30.9

EBITDA margin (%)

12.2

12.6

0.4

Normalised EBIT (€m)

7.8

8.0

2.3

36.7

Normalised EBIT margin (%)

11.2

11.5

0.3

Normalised net income (€m)

5.9

6.4

8.5

34.8

Normalised EPS (€)

0.50

0.55

8.5

35.6

Reported basic EPS (€)

0.45

0.48

6.4

42.8

Net cash (€m)

2.7

5.4

101.2

-35.0

Dividend (€)

0.26

0.30

15.4

20.0

Source: TXT e-solutions, Edison Investment Research

TXT reported FY16 revenues in line with our forecast, showing reported growth of 12.4% and organic growth of 1.8%. Gross margins were marginally higher than forecast and operating expenses (pre-amortisation and depreciation) were slightly lower than forecast. This resulted in an EBITDA margin of 12.6%, compared to 10.8% in FY15. We have treated €0.5m in legal and M&A costs as exceptional. The company shifted to net interest income from net expense, giving a further boost at the normalised EPS level compared to our forecast. Due to good working capital management, cash flow was significantly stronger than we forecast, resulting in year-end net cash of €5.4m despite paying €5.4m for the PACE acquisition in April. The company raised its dividend 20% y-o-y to €0.30, ahead of our forecast.

Business update

TXT Retail

The division saw revenues decline 1.6% in 2016. Trading was weaker in H116 as retailers delayed investment. There was also a large licence signed in Q215 making comparisons tougher. Divisional gross margin of 63.7% was lower than the 64.2% in FY15 due to the mix of software and services.

Trading improved in the second half of the year and the company has successfully expanded its geographic reach with contracts signed in China and India. In Q416, TXT signed contracts with Not Your Daughter’s Jeans – NYJD Apparel (US), Group Royer (French footwear retailer expanding in Europe, China, India and Vietnam), Charles Vögele (Swiss fashion retailer operating in Switzerland, Germany and Eastern Europe), Rusta AB (Swedish home living retailer operating in Sweden and Norway), Auchan China, Mizuno Europe (UK), Dochki Sinochki (Russian baby and child product retailer) and Stockmann (Russian chain of department stores acquired from Debenhams).

The division is focusing R&D on developing its next generation solution which contains in-memory processing – this feature should further differentiate TXT from its peers.

TXT Next

The division saw revenue growth of 33%, of which 6.5% was organic. Gross margin increased from 35.5% in FY15 to 42.7% in FY16, reflecting the higher software component within PACE. PACE has performed in line with expectations. The company is looking to combine the consultants from the original TXT Next services business with PACE’s software business to offer a wider range of services to PACE’s customer base. In 2016, the division signed new licence and service contracts with customers including Boeing (US), Pilatus (Switzerland), Reiser Simulation and Training (Germany), Goodrich Control Systems (UK) and Icelandair.

Outlook and changes to forecasts

We have made small changes to our FY17 revenue forecast reflecting the divisional split of revenues in FY16. We introduce a conservative 4% revenue growth rate for FY18 – successful cross-selling within TXT Next post the PACE acquisition could see this moving higher. The mix of software and services in TXT Next results in higher gross margins in FY17. This compensates for higher opex in FY17, as we increase our R&D and commercial cost forecasts. We leave our EBITDA forecast unchanged. A small reduction in depreciation and switching from net interest expense to net income boosts our PBT forecast. Overall, this results in a 7% increase in our normalised EPS forecast, although this remains marginally below the FY16 level. For FY18, we forecast 10% growth in normalised EPS. As the FY16 dividend was higher than expected, we have increased our FY17 and FY18 forecasts. The stronger end FY16 net cash position flows through to FY17 and increases further in FY18.

Exhibit 2: Changes to forecasts

FY17e old

FY17e new

% change

% y-o-y

FY18e new

% y-o-y

Revenues (€m)

74.7

74.9

0.3

8.3

77.9

4.1

TXT Retail

39.0

39.0

-0.1

7.9

40.5

4.0

TXT Next

35.7

35.9

0.7

8.7

37.4

4.2

Gross margin (%)

53.3

54.2

0.8

54.1

0.0

Gross profit

39.8

40.6

1.8

9.3

42.2

4.0

EBITDA (€m)

8.51

8.51

0.0

-2.4

9.37

10.1

EBITDA margin (%)

11.4

11.4

0.0

12.0

0.7

Normalised EBIT (€m)

7.7

7.9

2.0

-1.2

8.7

10.9

Normalised EBIT margin (%)

10.3

10.5

0.2

11.2

0.7

Normalised net income (€m)

5.8

6.2

6.8

-2.8

6.9

10.8

Normalised EPS (€)

0.50

0.53

7.1

-2.4

0.59

10.8

Reported basic EPS (€)

0.42

0.46

8.4

-3.9

0.51

12.6

Net cash (€m)

4.0

7.2

79.3

34.2

11.4

58.8

Dividend (€)

0.27

0.32

18.5

6.7

0.33

3.1

Source: TXT e-solutions, Edison Investment Research

Exhibit 3: 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

74,878

77,941

Cost of sales

(22,351)

(24,854)

(26,455)

(29,189)

(32,039)

(34,320)

(35,756)

Gross profit

24,148

27,706

27,955

32,351

37,113

40,558

42,185

EBITDA

 

 

5,322

6,263

5,324

6,659

8,715

8,508

9,365

Operating Profit (before amort and except)

 

 

4,283

5,241

4,284

5,820

7,955

7,858

8,715

Amortisation of acquired intangibles

0

(285)

(285)

(285)

(549)

(637)

(637)

Exceptionals and other income

939

0

1,468

0

(500)

0

0

Other income

0

0

0

(740)

0

(500)

(500)

Operating Profit

5,222

4,956

5,467

4,795

6,906

6,721

7,578

Net Interest

(37)

(435)

(249)

(151)

105

100

100

Profit Before Tax (norm)

 

 

4,246

4,806

4,035

5,669

8,060

7,958

8,815

Profit Before Tax (FRS 3)

 

 

5,185

4,521

5,218

4,644

7,011

6,821

7,678

Tax

(188)

121

(1,046)

(762)

(1,456)

(1,501)

(1,689)

Profit After Tax (norm)

4,092

4,927

3,226

4,739

6,386

6,207

6,876

Profit After Tax (FRS 3)

4,997

4,642

4,172

3,882

5,555

5,320

5,989

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

53

59

EPS - normalised fully diluted (c)

 

 

34

41

28

40

55

53

59

EPS - (IFRS) (c)

 

 

45

40

36

33

48

46

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

54.2

54.1

EBITDA Margin (%)

11.4

11.9

9.8

10.8

12.6

11.4

12.0

Operating Margin (before GW and except) (%)

9.2

10.0

7.9

9.5

11.5

10.5

11.2

BALANCE SHEET

Fixed Assets

 

 

18,570

17,850

18,019

18,132

25,428

24,761

24,094

Intangible Assets

16,621

15,370

15,078

14,692

21,296

20,629

19,962

Tangible Assets

1,154

1,118

1,249

1,361

1,598

1,598

1,598

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

41,372

46,884

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

28,720

29,895

Cash

15,819

14,821

12,304

9,080

7,570

9,405

13,643

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

36,606

39,367

CASH FLOW

Operating Cash Flow

 

 

2,760

7,630

5,404

2,412

10,676

7,952

10,176

Net Interest

(37)

(435)

(249)

(151)

105

100

100

Tax

64

(1,615)

(1,344)

(1,461)

(2,022)

(1,501)

(1,689)

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)

1,836

4,238

Opening net debt/(cash)

 

 

(10,266)

(6,023)

(8,575)

(8,465)

(8,259)

(5,371)

(7,206)

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)

(7,206)

(11,444)

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Schumannstrasse 34b

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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

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

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

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 8249 8342

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Australia

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

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205, 95 Pitt Street

Sydney NSW 2000

Australia

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