TXT’s H1 results confirm that TXT Retail has seen a recovery in licensing after a weak Q1 and TXT Next continues to experience strong organic growth. With the inclusion of the PACE acquisition from April, TXT Next is now more internationally focused and has a comprehensive solution suite to address the aerospace market. Key drivers of growth for the group are expansion into Asia Pacific in TXT Retail and growth of the aerospace business in TXT Next. Our forecasts are substantially unchanged.
TXT reported H116 revenue growth of 6.6%, or 0.2% once the €2m contributed by the PACE acquisition is excluded. While TXT Retail revenues declined 5.5% y-o-y in H116, this masks the recovery in licensing revenues in Q216 (+41% q-o-q) as contracts delayed from Q1 were closed. We highlight the progress made by the division’s Asia Pacific business, which signed two contracts in the region during Q2 (one in India, one in China). TXT Next grew 25% in H116, with strong organic growth of 9% in the period, as previous internationalisation efforts have paid off.
The retail market has been tough in H116, although the company started seeing a pick-up in demand for its solutions in Q2. Management expects to see a positive development for both divisions in Q316. We have left our forecasts substantially unchanged, although there is a small positive impact on diluted EPS now that all options have either been exercised or cancelled. TXT’s net cash position declined to €0.5m at the end of H116 after paying for the FY15 dividend and the PACE acquisition. We forecast that the company will start generating cash again in H216, with net cash forecast to reach €2.3m by the end of FY16 and €4.2m by end FY17.
On our slightly revised earnings forecasts, TXT trades at an EV/Sales and P/E premium to European IT services companies, but at a discount to specialist supply chain planning (SCP) software suppliers. Based on the growth and profitability profiles of both groups, we would expect TXT to trade somewhere in the middle of the two groups. With the addition of PACE, the mix of revenues is shifting in favour of higher-margin licence sales, which should drive up multiples over time. We note a forecast dividend yield of more than 3%. Triggers for share price appreciation include large licence wins in TXT Retail, evidence of growing North American and Asia Pacific market share and further international wins in TXT Next.