GFT Group has disposed of emagine, its staffing business. The disposal transforms GFT into an IT services pure-play focused on the banking sector. GFT has also made a small acquisition in Spain, which boosts its presence in Spain and Mexico, strengthens its offerings in the digital banking space and adds new service offerings in digital communication and marketing. The impact of the deals is a modest upgrade for our EPS forecasts. We continue to believe there is a good likelihood of earnings upgrades, in light of the current conservative guidance, and this helps to underpin the current valuation of c 20x our FY16 EPS.
Disposal of emagine
Following a review of the options for the group’s contractor recruitment business, emagine, the unit has been sold to its management for an undisclosed sum. emagine represented c 20% of group revenues, but only a fraction of the group's value, due to its thin margins. Further, there were no significant synergies between emagine and the core solutions business. Hence we view its disposal as a sensible strategic move as it will enable the group to focus on growing its core IT solutions business
GFT has acquired Adesis from its management for an undisclosed sum. Adesis provides IT services to financial institutions and adds expertise in digital banking. Based in Madrid, Adesis complements GFT’s Barcelona-based operations in Spain, and adds 273 employees to the group’s existing 3,400 headcount.
We have made initial adjustments for the disposal and acquisition, while not changing the continuing operations. We have edged net interest expense higher by €200k in each year, due to the higher expected net debt levels. In all, EPS rises modestly in each of the next three years
The stock trades on 1.7x FY16 EV/revenues and 12.5x EBITDA. These numbers look favourable when compared to c 2.0-2.9x sales and c 12.2-13.3x EBITDA for larger global IT services businesses. Our DCF model (which assumes a WACC of 10% and 13.6% long-term margins [up from 11.5% in our last note to reflect the latest M&A deals]) values the shares at €16.42 (previously €16.25). However, 20% compound growth over FY15-18 would lift our valuation to c €24.50.