TXT E-Solutions: Targeting North American Growth
Edison | May 10, 2013 06:01AM ET
TXT e-Solutions (TXT) reported Q113 results broadly in line with our expectations. Revenues grew on an organic basis for both businesses and were further boosted by the addition of Maple Lake. While the market environment remains tough in Europe, North American growth prospects are more promising, and the company has strengthened its sales team in the region. The outlook points to continued growth in Q2 and we leave our forecasts unchanged. The stock continues to trade at a discount to peers.
Q113 results: Organic and acquisition growth
TXT grew Q1 revenues 13.8% y-o-y, with organic growth of 2.2%. Both businesses grew organically (Perform +1.4%, Next +3.1%), with Maple Lake driving total TXT Perform growth to 22.7% y-o-y. The higher mix of software boosted gross margins (52.5% vs 51.3% in Q112 and 49.5% in Q412). As expected, TXT increased investment in R&D and sales and marketing, with a particular focus on driving growth in North America, resulting in an operating margin of 8.5% (vs 10.7% in Q112). Net cash increased to €10.3m by the end of Q113.
Investing in product development and sales capacity
During Q113, the company launched several new products, including TXT on Cloud, which enables customers to deploy TXT software on Microsoft and Amazon cloud platforms. To accelerate growth in North America, the company hired a sales director and business development manager. The sales pipeline has improved over the quarter, although Europe remains a tough market. While the timing of new license deals continues to be uncertain, the order backlog for maintenance and services supports growth in Q2. We leave our forecasts unchanged.
Valuation: Discount to peers
TXT trades on a P/E of 12.2x FY13e and 8.8x FY14e normalised EPS, which is at a discount to peers. In our view, this is not justified based on the company’s growth, profitability and dividend yield prospects, and we see scope for upside to at least 10x FY14e EPS (€10.1). Triggers for share price appreciation include continued strong contract wins in TXT Perform and TXT Next, evidence of improving operating profitability, smooth integration of Maple Lake and that the Maple Lake acquisition is leading to enhanced sales opportunities in both Europe and North America.
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