With the acquisition of Assioma, Textron Inc (NYSE:TXT) continues to deploy its substantial cash pile. The deal doubles the size of its financial institution-focused software testing business and is earnings accretive. The company announced strong Q119 revenue and net income growth, with a particularly good performance from the Aerospace, Aviation & Automotive business. We have revised our forecasts to reflect the acquisition and Q1 results, with EPS upgrades of 31% and 22% in FY19 and FY20 respectively.
Doubling the size of the Banking & Finance division
On 1 May, TXT acquired Assioma, an Italian software testing business focused on the Italian banking sector. On a pro forma basis, this doubles the size of the Banking & Finance division and increases its profitability. The deal will cost up to €9.3m, with €4.3m already paid out in cash, and €0.3m in cash and €2.3m worth of shares in escrow until the end of May. Up to €2.4m is payable for earnouts over the medium term, treated as long-term debt in our forecasts.
Impressive organic growth in Q119
TXT reported Q119 revenue growth of 26.5% y-o-y, and 17.3% organic growth. The Aerospace, Aviation & Automotive (AAA) division was the biggest contributor to organic growth, up 20% y-o-y, with Banking & Finance up 6.6% on an organic basis. The cost base increased at a slightly faster rate than revenues (mainly due to a 63% increase in R&D spend), resulting in normalised EBIT growth of 13.4% y-o-y. Marking to market the €100m invested in multi-segment insurance funds resulted in financial income of €1.3m in Q119, which was the main factor in the 163% increase in net income y-o-y. We have revised our forecasts to reflect Q1 results and the Assioma acquisition, resulting in upgrades to normalised EPS of 31% in FY19 and 22% in FY20. Management confirmed that it continues to seek appropriately priced acquisitions in both divisions.
Valuation: Accretive acquisitions to drive upside
TXT is trading on EV multiples that are at a c 30% discount to peers – by FY20 EBITDA margins are forecast to be broadly in line with peers, although EBIT margins are lower. As the company still has a large proportion of the cash from the sale of TXT Retail (we estimate €50m in net cash by the end of FY19), its P/E multiples are inflated versus peers. We expect this premium to reduce as the company makes earnings-enhancing acquisitions.
Assioma doubles size of Banking & Finance business
TXT has acquired Assioma, an Italian software testing business, with a completion date of 30 April. Assioma will be consolidated from 1 May.
Deal to cost up to €9.3m
TXT has paid initial cash consideration of €4.3m. It has also put €0.3m cash and treasury shares worth €2.3m in escrow (due for release by end May), for a total initial consideration of €6.9m. The shares are being issued at an agreed value of €8.982 per share, ie 253,846 shares. Contingent consideration of up to €2.4m is payable in two tranches based on the achievement of specific operational goals in the medium term.
Background on Assioma
Assioma was founded 30 years ago by current CEO Giovanni Daniele De Stradis. The business currently has 150 employees based in offices in Bari, Milan and Turin. Customers include banks such as Intesa San Paolo, Unicredit (MI:CRDI) Leasing, UBI, ING Direct, Widiba, BPM Group, Allianz (DE:ALVG) and AXA. In 2018, the Assioma group generated revenues of €9.4m, EBITDA of €1.3m (13.9% margin) and net income of €0.9m.
Integration plans
Assioma will continue to trade under its own name and be run by Mr De Stradis. Over time, he will develop integration opportunities with TXT’s Banking & Finance division, which also provides software testing services into Italian financial institutions.
TXT reported 26.5% y-o-y growth in group revenues in Q119. Stripping out the €0.9m contributed by Cheleo (acquired in Q318), the business grew 17.3% y-o-y. Software licenses, subscriptions and maintenance revenues totalled €1.5m, up 31.8% y-o-y and 13.0% on an organic basis. Services revenues totalled €10.4m, up 25.7% y-o-y and 17.9% on an organic basis. On a divisional basis, Aerospace, Aviation & Automotive grew 20.3% y-o-y (all organic) and Banking & Finance grew 49.2% (6.6% organic). Total operating costs before depreciation and amortisation increased 28.5% y-o-y, with R&D seeing the largest increase (+63% y-o-y). This resulted in EBITDA increasing at a slower rate of 9.2% y-o-y and the margin falling from 12.6% to 10.9%. TXT reported financial income of €1.278m (Q118: €17k) as the investment in multi-segment insurance funds was revalued upward during the quarter. This resulted in a net income increase of 162.9% y-o-y.
Changes to forecasts
Management expects an acceleration in revenue growth in Q219, from organic revenues and the Cheleo and Assioma acquisitions. EBITA is expected to be substantially higher than in Q218.
We have revised our underlying forecasts to reflect the revenues reported in Q119 (slightly reducing software revenues but increasing services revenues) and to reflect a higher ongoing level of R&D. Within financial income, we have also factored in a €1m upward revaluation of the multi-segment insurance fund investments for FY19. The company had previously noted that these suffered a downward revaluation of c €1m in FY18, but had nearly recovered the whole amount in Q119.
We have factored in the Assioma acquisition from 1 May 2019. As TXT expects to record the earnouts as long-term debt, we have increased our long-term debt forecasts accordingly. Based on our forecasts for FY20, the acquisition doubles the size of the Banking & Finance business and results in margin expansion on a divisional and group basis. We forecast that TXT will have net cash of €50m by the end of FY19, providing a substantial level of funding for further acquisitions in either the Banking & Finance or Aerospace, Aviation & Automotive divisions.
