Breaking News
Get 40% Off 0
👀 Reveal Warren Buffett's stock picks that are beating the S&P 500 by +174.3% Get 40% Off

TXT Acquires Italian Software Testing Business

By Edison Stock MarketsMay 16, 2019 01:08AM ET
www.investing.com/analysis/acquiring-italian-software-testing-business-200421896
TXT Acquires Italian Software Testing Business
By Edison   |  May 16, 2019 01:08AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
ALVG
-0.81%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
CRDI
+0.28%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
TXT
-0.44%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

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.

Acquiring Italian Software Testing Business
Acquiring Italian Software Testing Business

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.

Software & Comp Services
Software & Comp Services

Share Price Performance
Share Price Performance

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.

Review Of Q119 Results
Review Of Q119 Results

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.

Changes To Forecasts
Changes To Forecasts

Financial Summary
Financial Summary

TXT Acquires Italian Software Testing Business
 

Related Articles

TXT Acquires Italian Software Testing Business

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email