GFT Group: Cautiously Optimistic

Cautiously optimistic

GFT (XETRA:GFTG) posted a strong set of H1 results, with organic revenue growth of 18% and margins strengthened in both divisions. GFT, the group’s solutions business, continued to grow apace, with H1 organic revenue growth of 32% (40% in Q1 and 26% in Q2), while emagine saw a small revenue decline but returned to profit. We are maintaining our forecasts, which are based on conservative assumptions, and we note the group benefits from a number of strong growth drivers as management scales up the business internationally. Hence, following the correction in the share price, the valuation looks appealing at c 10x our FY15 earnings.

GFT Group Chart

Interim results: GFT solutions revenues up 26% in Q2

The GFT solutions division’s total H1 growth, after the inclusion of GFT Italy, acquired in May 2013, was 65% at €114.1m and the EBT margin lifted by 0.4% to 10.3%. emagine’s revenues slipped by 5% to €42.7m, while the margin rose to 2%. Following the acquisition of c 98% Rule Financial for c €60m just before the period end, the number of group employees doubled to 2,983 from 1,503 a year earlier, including c 660 from Rule. The group swung to a net debt position of €34.4m at 30 June from €16.3m net cash at 31 March, after the initial €43.7m paid for Rule. In addition, a further €17.1m is to be paid for Rule in November, and acquisition liabilities remain over the remaining Rule 2% minority interest and GFT Italy.

Forecasts: Conservatively maintained

The company maintained its guidance given at the time of the acquisition of Rule in June. This is for FY14 revenues of €352m (including €42m from Rule), EBITDA of €29.5m and EBT of €23m (see our April outlook note for the GFT definitions). The guidance implies a 2% decline in revenues from continuing businesses in H2, over H1. However, given the considerable geopolitical and economic uncertainties that could potentially encourage banks to defer their decision making, we believe it is wise to be conservative. Hence, we have maintained all our forecasts, except that year-end net debt rises by €2.4m to €28.7m, as we have made adjustments to the group balance sheet for the acquisition of Rule, in line with the accounts.

Valuation: Remains cheap compared with its peers

The stock trades on 0.7x FY15 EV/revenues and 7.5x EBITDA. These numbers look favourable when compared to c 1.3-2.3x sales and c 9.4-9.8x EBITDA for larger global IT services businesses. Our DCF model (which assumes a WACC of 11%) values the shares at €11.04 (previously €11.07), which is 28% ahead of the current share price. The fall is mainly due to the increased acquisition cost of Rule.

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