PiteCo SpA (MI:PITE) generated solid organic revenue and EBITDA growth in H1 (+7/+8%) and benefitted strongly from recent acquisitions. We expect organic growth to continue for Piteco Spa and we forecast acceleration for Myrios and Juniper. We see balance sheet headroom for further M&A, which could strengthen the growth outlook (albeit with execution risks). Piteco continues to trade at a discount to Italian and international software peers.
Organic growth and recent M&A boost H1 results
Piteco group reported 23/31% H1 revenue/EBITDA growth year-on-year (y-o-y) thanks to organic progress (+7/+8% y-o-y) and the full benefit of the acquisition of Myrios (acquired in October 2018). Overall, we believe H1 revenue and EBITDA are in line with our largely unchanged FY forecasts, while below the EBITDA level the run-rate of D&A was higher than suggested by our forecasts, due to the non-cash impact of the Myrios acquisition (IFRS3 – business combination).
8% two-year revenue CAGR, balance sheet headroom
Our forecasts reflect rather stable organic growth for the corporate treasury core business (Piteco Spa) with an acceleration, already from H219, for recently acquired Myrios (finance and risk management solutions), mainly thanks to recent commercial success with both corporates and bank clients. We expect robust revenue growth (8% CAGR 2019e–21e) for the group to translate into solid earnings progression (we forecast normalised EPS CAGR of 10%). Further acquisitions could strengthen the growth outlook. Based on our FY20 forecasts, we estimate balance sheet headroom of at least €25–30m. Our forecasts for revenue and EBITDA are broadly unchanged whereas FY19e–21e net income declines by an average 8%, reflecting an increase in D&A.
Valuation: At a discount to peers
We believe the key attractiveness of Piteco is its ability to generate high profit margins while providing customers with a flexible and cost-effective solution. The historical growth track record, the earnings growth outlook (10% EPS CAGR 2019e–21e) and sustained cash-flow generation (10% FCF yield) supports further investment opportunities that could strengthen the growth outlook. The stock is trading on 9x EV/EBITDA and 13x P/E for FY20, at a discount to large international software providers as well as small Italian software companies. Our DCF-based valuation is broadly unchanged at €6.7/share.
Business description
Piteco is Italy’s leading company in designing, developing and implementing software for treasury, finance and financial planning management. In addition to the core corporate treasury software (Piteco Spa), the product offering has increased thanks to the acquisitions of Myrios (finance and risk management) and Juniper (digital payment and clearing house).
Solid growth in H119
Piteco generated solid organic revenue/EBITDA growth in H1 (+7/+8%) and strongly benefitted from recent acquisitions. Overall, we see H1 revenue and EBITDA as consistent with our marginally updated FY expectations. We expect organic growth to continue for Piteco Spa, while we forecast an acceleration for Myrios and Juniper. We see balance sheet headroom for further M&A, which could strengthen the growth outlook (albeit with execution risks). Piteco continues to trade at a discount to Italian and international software players.
Organic growth and Myrios acquisition drive H1 results
Piteco reported strong revenue and EBITDA growth for H1 thanks to organic development and the full benefit of the acquisition of Myrios (October 2018). Overall, we believe H1 revenue and EBITDA are in line with our FY forecasts, while below the EBITDA, the run-rate of D&A was higher than our expectations. Respectively, H1 revenues and EBITDA represent 45% and 41% of our largely unchanged FY forecasts, which we believe makes sense as historical results for Piteco have been skewed towards H2 (as most projects are completed and billed in H2 and the sale of new licences is concentrated in Q4, when clients have more visibility on their budgets). We provide more detail on the H1 results key trends below.
Revenues grew 23% y-o-y to €11.1m. Myrios contributed €1.4m (16%) to revenue growth whereas organic growth was c +7% y-o-y.
EBITDA growth of 31% y-o-y to €4.3m was driven by strong revenue growth and margin expansion (to 39% in H119 from 37% one year earlier) also thanks to the higher margins of Myrios (51% in H119 vs 38/34% for Piteco Spa/Juniper). Organic growth was 8% y-o-y.
Net income declined 8% y-o-y due to the increase in non-cash charges (D&A up €0.6m, largely driven by the accounting impact of the Myrios acquisition – IFRS 3 Business Combinations) and, to a lesser extent, an increase in financial costs (+€0.4), which are mostly driven by the one-off impact of the revaluation of the outstanding put options that Piteco granted to the shareholders of Myrios and Juniper. Piteco provides an adjusted net income figure (removing only the increased D&A expense – IFRS 3) of €2.3m, up 3% y-o-y.
Net debt reduced to €14.8m (from €15.3m at the end of FY18) thanks to free cash-flow generation of €4.0m in H119, partly offset by the dividend payment (€2.8m). Including the value of the put options, net debt was €26.4m.
Piteco growth to continue, Myrios to accelerate
Our forecasts reflect stable organic growth in the corporate treasury core business (Piteco Spa) with an acceleration of growth in the recently acquired Myrios and Juniper.
We expect growth to continue at sustained pace for Piteco Spa (corporate treasury, which includes the group’s broad treasury management software activities), in line with the historical trend (we forecast 6% 2019e–21e revenue CAGR vs +5% in 2012–18). This business develops and delivers treasury and financial planning solutions, primarily to the Italian market, but it is also expanding internationally. Due to the flexibility of the solutions offered, the cost-effectiveness, the good company reputation and historical track record, the opportunity to grow the customer base in Italy (with c 1,100 prospects according to the company) and the difficulty for international players to penetrate the Italian market, we expect organic growth to continue at a robust pace. Piteco Spa signed 30 new clients in the first three quarters of 2019 (compared to a portfolio of c 600 clients). If we annualise new client wins (40), the company is on track to beat the number of client additions in FY18 (37) and FY17 (30). It should be noted that a SaaS option is offered to new clients, which is growing very quickly (albeit from a low base). As a result, revenue growth may be more subdued in the short term (as revenues are spread over a number of years) in exchange for more stability in the longer term and a higher overall contract value.
We expect an acceleration of growth for Myrios, which offers software solutions for finance and risk management areas, targeted at banks (60% of revenue) and large corporates (40% of revenue). Myrios’s key areas of functionality cover deal management across a broad range of asset classes (FX, debt, commodities and securities), hedge accounting and risk analysis. Significant commercial progress was achieved in 2019 and we expect growth for Myrios to accelerate in H219 and FY20 thanks to new large client additions, both corporate (eg Telecom Italia (MI:TLIT)) and banks (eg Medio Credito Centrale).
A new subsidiary, Myrios Switzerland (based in Geneva) was set up in February 2019 to help internalise Piteco group’s existing products. The unit offers all Piteco’s software solutions for treasury management, digital payments and financial risk management. It is too early to assess the success of this commercial effort, but we point out that a pick-up in orders from outside Italy would represent upside to our forecasts for the group – we believe this will be one of the key points to focus on in FY20.
H1 growth was slower (2% revenue growth year-on-year, despite the recent US dollar appreciation), for Juniper Payments (digital payment and clearing house), a US payments software business focused on the correspondent banking space. We expect a revenue step-up in FY20 following a year of significant investments, which led to a significant increase in costs (H1 Juniper operating costs up 14% y-o-y vs revenues +2% y-o-y). We expect to have more visibility on the outlook for this business with the FY19 results.
Profit forecasts overview: Robust organic growth
We expect robust revenue growth (8% CAGR 2019e–21e) to translate into solid earnings progression (normalised EPS CAGR of 10%). Our forecasts only reflect organic growth for the group although we believe further acquisitions could strengthen the outlook. We provide more detail on the key financials below:
We forecast 8% revenue CAGR 2019e–21e for the group with the strongest growth rate at Myrios (17% vs 6/8% CAGR for Piteco Spa/Juniper).
Following an expected expansion of the EBITDA margins for the group in FY19 (mostly reflecting the full-year contribution of Myrios), we factor in a small further expansion in FY20/FY21 thanks to a more favourable business mix (Myrios has higher margins and has a higher growth rate) and economies of scale. We see our forecasts for EBITDA margins as conservative as we see potential for margins to expand. Overall we estimate an EBITDA CAGR of 9%.
Sustained EBITDA growth, combined with constant D&A in FY20e–FY21e and a decline in financial expenses results in a 10% normalised net income CAGR.
Balance sheet headroom for further acquisitions
Piteco Group expanded significantly via acquisitions over the last few years with three deals in four years (Centro Data in 2015, Juniper in 2017 and Myrios in 2018). With good cash flow generation (10% FCF yield), leverage ratios well below the covenant thresholds and the prospect of further organic growth in the next few years, we expect the company to consider further acquisitions starting in FY20.
Existing bank loans have the covenants of net debt/EBITDA < 3x and net debt/equity < 1x. Hence, based on FY20 forecasts, both covenants suggest net debt ceiling of c €35–40m (assuming no new EBITDA contribution from acquisitions) vs our year-end FY20 forecast of c €10m (assuming full conversion of outstanding convertible bonds by FY20 and excluding the value of the put options related to Myrios and Juniper, which are not considered in the covenant calculations), leaving at least €25–30m of balance sheet headroom.
Forecasts: Revenue and EBITDA little changed
We have made only small changes to revenue and EBITDA forecasts post the H1 results. However, 2019e–21e EBIT/net income both reduce by an average 8%, mostly reflecting an increase in non-cash expenses (D&A), partly offset by a small increase in EBITDA margins in FY20–FY21. We now forecast total D&A of €2.8m for FY19 vs €1.9m previously. We have also assumed an increasing number of shares to reflect the full conversion of convertible bonds by FY20 and increased the portion of D&A included in the adjusted operating profit and adjusted net income (which results in lower estimates) to better align it with the company definition.
Valuation: Discount to international and Italian players
We believe the key attractiveness of Piteco is its ability to generate high profit margins while providing customers with a flexible and cost-effective solution The historical growth track record, the earnings growth outlook (10% EPS CAGR 2019e–21e) and sustained cash-flow generation (10% FCF yield) supports further investment opportunities that could strengthen the growth outlook. The stock is trading on 9x EV/EBITDA and 13x P/E for FY20, at a discount to large international software providers and small Italian software companies.
Our DCF-based valuation is broadly unchanged, at €6.7/share. This is based on a 5.1% CAGR for net revenues over 10 years, a long-term EBITDA margin of 43%, a WACC of 9% and terminal growth rate of 2%.
The key upside or downside risks to our forecasts are higher or lower customer acquisition at Piteco Spa, stronger or slower than expected revenue acceleration at Myrios or Juniper, higher/lower contribution from international clients (Myrios Switzerland) and higher or lower margins. Furthermore, we believe M&A activity would represent a significant growth opportunity and generate execution risks.
