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Edison Investment Research is terminating coverage on GFT (GFT). Please note you should no longer rely on any previous research or estimates for this company. All forecasts should now be considered redundant.
GFT Technologies SE
GFT has lowered its FY17 guidance due to delayed decision making at its two largest investment banking customers – Deutsche Bank (DB) and Barclays. GFT said that management changes at the banks have resulted in deferred orders. However, investment banking revenue outside these two customers has been guided upwards, as has the group’s retail banking segment. But these factors were outweighed by the revenue declines at the two investment banks, and management has cut its FY17 revenue guidance by 6% to €425m, while EBITDA comes back by 13% to €42m.
GFT remains on target and thematic trends are broadly the same. Underlying Q1 revenue growth was solid at 13.3%, helped by 3% more days in the period, and management guidance was maintained. GFT’s retail banking activities remain buoyant, benefiting from digital banking projects in continental Europe and the group’s first retail banking project in the US, while the investment banking backdrop remains challenging, not helped by Brexit and the political changes in the US. With the sustained healthy outlook in digitalisation across the retail banking sector and the prospect of a recovery for the investment banking market (since these businesses need to invest in IT to sustain growth), we believe the shares are looking increasingly appealing on c 13x our FY19e earnings.
While GFT reported FY16 revenues and EBITDA slightly ahead of our forecasts, the shares fell in response to unexpectedly weak FY17 guidance and higher than expected debt. The guidance reflected the challenging investment banking backdrop, which has been holding back profits in the UK and North America. Nevertheless, GFT’s retail banking activities remain buoyant, benefiting from digital banking projects in continental Europe, and management expects group growth to return to trend levels from FY18 on digitisation strength and recovering investment banking markets. Hence, we believe the shares look attractive on c 14x our FY18 earnings.
Q3 numbers were in line with expectations and management has maintained both its FY16 and long-term guidance. The backdrop remains broadly unchanged, with demand for IT projects (predominantly digitisation) in the European commercial banking sector outweighing weakness in the Anglo Saxon investment banking markets. A recovery in the latter is largely dependent on improvements in the financial performance of investment banks. However, we note the investment banking sector needs to invest in IT to remain competitive. Given that the outlook is sustained, we believe the shares are attractive on c 13x our FY18 earnings.
GFT reported a solid Q1, with constant currency organic growth of 7.6%. This was slightly below the long-term trend, as the group saw some deferrals in Anglo Saxon regions due to poor results in the investment banking sector and uncertainty relating to the imminent UK vote on the EU. Nevertheless, management expects orders to pick up later this month and in Q3, regardless of the outcome of the BREXIT vote. We have edged our forecasts up with the inclusion of Habber Tec Brazil, which GFT acquired in early April. In our view, if management can continue to maintain the momentum, the stock looks attractive, trading on c 17x our FY17e EPS.
FY15 was another year of solid growth at GFT, with organic revenue growth of 18% at constant currencies. This was achieved in spite of the turmoil in the European investment banking sector, as participants needed to invest in compliance projects and outsourcing trends remain favourable. In our view, if management can continue to maintain the momentum, the stock looks attractive, trading on c 18x our FY17e EPS.
GFT's shares have fallen sharply recently, tracking a steep fall in Deutsche Bank’s shares, along with broad declines across the banking sector. We note that Deutsche Bank generates c 40% of GFT’s revenues. At the time of the Q3 results, GFT said it expects stable revenues from Deutsche in FY16, with the growth coming from other parts of the business. GFT is on Deutsche’s strategic partner list, and GFT handles complex IT projects for Deutsche, along with maintenance of its core business. Competition in this space is low. The IT area at risk in the case of cost-cutting is the commodity IT business, which GFT is not involved in, and is mostly handled by large IT service providers (including the India-based majors). GFT's shares traded at c €32 in early December and, in the wake of the share price de-rating, now look significantly more attractive, trading on c 15x our maintained FY17 earnings.
GFT continued to grow apace, with organic revenue growth (excluding Rule Financial) of 19% in Q3. Margins continued to expand with the adjusted operating margin rising by 100bp to 11.0% over Q2. While FY15 growth has mainly come from investment banking, the pipeline for 2016 is focused on several large retail banking projects. Given management’s increased guidance, we have upgraded our EPS by forecasts by 2% in FY15 and 4% in FY16 and FY17. In our view, if management can continue to maintain the momentum, the stock still looks attractive, trading on c 22x our FY16 EPS.
GFT Group produced another strong performance in Q2, to sustain 23% organic growth over H1. Following the disposal of its resourcing division, GFT is now an IT services pure-play focused on the financial services sector. The group’s adjusted operating margin rose to 10.0% in Q2 and we anticipate further margin expansion with revenue growth and profit recovery at Rule Financial. Noting management’s increased guidance and the strong pipeline for FY16, we have upgraded our EPS by forecasts by 11% in FY16 and 7% in FY17. Hence, the stock continues to look attractive, trading on c 17x our FY16 EPS.
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.
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