Acquisition Of Webgenesys Will Reinforce Future Position In Public Sector

Key Takeaways

• Strategic acquisitions and integration of high-margin firms are expected to enhance market presence and improve EBITDA margins.
  
• Increased R&D investments and rapid Smart Solutions growth indicate potential for sustained future revenue and earnings increases.
  
• Overreliance on noncore revenue and acquisitions, along with rising debt and costs, poses risks to TXT's future profitability and revenue growth stability.

Catalysts

Provides software and service solutions in Italy and internationally.

• The Smart Solutions division is experiencing rapid growth, with a 50% increase compared to the same period last year, indicating potential for revenue enhancement as this division expands its market presence with new subscriptions and recurrent revenues.
  
• The acquisition of Webgenesys is aimed at reinforcing TXT e-solutions' position in the public sector, with a robust order backlog expected to generate €200 million in revenue over the next three years, likely impacting revenue and profit growth.
  
• Strategic M&A activities, including the acquisition of technology firms and boutique consultancies, are expected to enhance capabilities, extend geographic and market coverage, and drive future revenue and EBITDA margin improvements.
  
• Investments in R&D, particularly in the Smart Solutions portfolio, have increased by 55.6%, which should contribute to future revenue and earnings growth as advanced solutions are brought to market.
  
• The shift towards more efficient operational strategies and the integration of high-margin acquisitions are expected to normalize EBITDA margins back to the 14%-15% range, potentially leading to higher net margins in the future.

TXT e-solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TXT e-solutions's revenue will grow by 16.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 8.3% in 3 years time.
• Analysts expect earnings to reach €37.1 million (and earnings per share of €2.86) by about February 2028, up from €17.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, down from 26.8x today. This future PE is lower than the current PE for the GB Software industry at 26.7x.
• Analysts expect the number of shares outstanding to grow by 3.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.61%, as per the Simply Wall St company report.

TXT e-solutions Future Earnings Per Share Growth

Risks

• A significant portion of TXT's recent revenue growth is attributed to noncore activities, which may not be sustainable or recur in the future, potentially leading to decreased revenue growth rates.
  
• The EBITDA margin has faced pressure despite revenue growth, with a decrease from previous periods attributed to service-based operations and investment costs above revenue growth; this could imply future challenges to net margins.
  
• TXT has a growing net financial debt due to acquisitions and investments, which could put pressure on net earnings if not offset by increased revenue or cost efficiencies.
  
• The company's reliance on acquisitions to drive growth increases integration risk and the potential for unforeseen costs, which could impact revenue and earnings adversely.
  
• There are inefficiencies and an increase in indirect costs related to a rapidly expanding team and investments in research and development, which might not yield expected returns and could affect future profitability.

Valuation

• The analysts have a consensus price target of €40.85 for TXT e-solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €47.0, and the most bearish reporting a price target of just €34.7.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €444.1 million, earnings will come to €37.1 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of €39.25, the analyst price target of €40.85 is 3.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.