UK Government Digital Transformation Commitments Will Drive Strong Long Term Upside Potential

Catalysts

About TPXimpact Holdings

TPXimpact Holdings is a U.K. based digital transformation partner focused on designing, building and running modern digital services for public sector and mission driven clients.

What are the underlying business or industry changes driving this perspective?

• Strengthening multi year U.K. government commitments to digital transformation, including funded programs in place and infrastructure and cross departmental modernisation, position TPXimpact to convert its robust pipeline into higher value, longer duration contracts, supporting sustained revenue growth and improved earnings visibility.
• Deep, long standing relationships with central government departments, exemplified by large frameworks such as the GBP 49 million Land Registry program and the GBP 9 million HMPPS engagement, create high switching costs and embedded account positions that can drive incremental statements of work, underpinning recurring revenue and margin expansion.
• Completion of the 3 year turnaround, consolidation from 9 units to 3 focused brands and disciplined bid margin thresholds mean incremental revenue should increasingly drop through to profit, supporting rising EBITDA margins and stronger net earnings despite modest top line fluctuations.
• Targeted investment in growth capabilities, such as a new health sector partner, enhanced bid and marketing teams and upgraded resource management systems, should increase win rates in attractive public service domains and improve utilization, lifting both revenue and net margins over time.
• Ongoing deleveraging from historically high leverage to a target of around 1 times, supported by consistent cash generation, reduces interest expense and financial risk, freeing more operating cash flow to support growth initiatives and ultimately enhancing earnings per share.

Assumptions

This narrative explores a more optimistic perspective on TPXimpact Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming TPXimpact Holdings's revenue will grow by 4.5% annually over the next 3 years.
• The bullish analysts are not forecasting that TPXimpact Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate TPXimpact Holdings's profit margin will increase from -9.6% to the average GB IT industry of 5.1% in 3 years.
• If TPXimpact Holdings's profit margin were to converge on the industry average, you could expect earnings to reach £4.4 million (and earnings per share of £0.05) by about December 2028, up from £-7.3 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from -2.9x today. This future PE is lower than the current PE for the GB IT industry at 23.1x.
• The bullish analysts expect the number of shares outstanding to decline by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.63%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent or renewed disruption in U.K. public sector budgeting, elections and spending reviews could delay or cancel large government programs, lengthen procurement cycles and reduce the flow of new work. This would weigh on revenue growth and limit earnings expansion over the long term.
• High revenue concentration in a small number of central government departments such as His Majesty's Land Registry and the Ministry of Housing, Communities and Local Government increases exposure to policy shifts, internal restructurings and competitive retendering. Any of these could cause contract downsizing or loss and pressure both revenue and net margins.
• Reliance on continuous utilization gains, tight cost control and mix management to drive margin improvement in a structurally low growth environment, combined with ongoing restructuring and systems investments, creates execution risk. This could stall EBITDA margin progression and constrain future earnings.
• Rapid evolution of AI and digital technologies, alongside intensifying competition from larger IT consultancies with greater resources, may erode TPXimpact's differentiation in public sector digital transformation. This could put pressure on pricing power, win rates and ultimately net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for TPXimpact Holdings is £0.71, which represents up to two standard deviations above the consensus price target of £0.62. This valuation is based on what can be assumed as the expectations of TPXimpact Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £0.71, and the most bearish reporting a price target of just £0.45.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be £86.4 million, earnings will come to £4.4 million, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of £0.22, the analyst price target of £0.71 is 68.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.