TXT experienced strong growth in H115, with both divisions reporting y-o-y growth of 13%. The international expansion strategy is paying off – both TXT Perform and TXT Next won new customers in target overseas markets during H1. To reflect the stronger first half, we have raised our revenue and earnings estimates in FY15 and FY16. The company continues to seek acquisitions to accelerate growth in both divisions and has a strong balance sheet to support its growth strategy.
TXT reported revenue growth of 13% y-o-y in H115, with similar growth from both TXT Perform and TXT Next. TXT Perform benefited from a large licence deal in Q215, the first for the newly opened Hong Kong office. TXT Next has seen sustained demand over the last three quarters, from both aeronautical and banking & finance customers. Normalised EBIT margins expanded by 220bp y-o-y to 9.6% despite increased investment in international expansion and product development
As a result of incorporating PACE and slightly increasing our growth assumptions for TXT Perform, we raise our FY16 revenue forecast by 11% (14% y-o-y growth) and our normalised EPS forecast by 3%, and introduce a FY17 revenue growth forecast of 6% with EPS growth of 9%. The stock trades on a P/E of 17.1x FY16e and 15.7x FY17e based on normalised EPS. This is a discount to global supply chain software vendors and a premium to European IT services companies, which is reasonable considering the current split of the business. Even after acquiring PACE, we forecast a strong net cash position and a dividend yield above 3% for FY16/17. If TXT is able to successfully integrate and grow the PACE business as well as sell TXT Next’s existing services to PACE’s international customer, we see scope for stronger growth in TXT Next and margin enhancement. For TXT Perform, key growth drivers include the North American business and the recently established Asia Pacific operations.