With the acquisition of Assioma, TXT continues to deploy its substantial cash pile. The deal doubles the size of its financial institution-focused software testing business and is earnings accretive. The company announced strong Q119 revenue and net income growth, with a particularly good performance from the Aerospace, Aviation & Automotive business. We have revised our forecasts to reflect the acquisition and Q1 results, with EPS upgrades of 31% and 22% in FY19 and FY20 respectively.
On 1 May, TXT acquired Assioma, an Italian software testing business focused on the Italian banking sector. On a pro forma basis, this doubles the size of the Banking & Finance division and increases its profitability. The deal will cost up to €9.3m, with €4.3m already paid out in cash, and €0.3m in cash and €2.3m worth of shares in escrow until the end of May. Up to €2.4m is payable for earnouts over the medium term, treated as long-term debt in our forecasts.
TXT reported Q119 revenue growth of 26.5% y-o-y, and 17.3% organic growth. The Aerospace, Aviation & Automotive (AAA) division was the biggest contributor to organic growth, up 20% y-o-y, with Banking & Finance up 6.6% on an organic basis. The cost base increased at a slightly faster rate than revenues (mainly due to a 63% increase in R&D spend), resulting in normalised EBIT growth of 13.4% y-o-y. Marking to market the €100m invested in multi-segment insurance funds resulted in financial income of €1.3m in Q119, which was the main factor in the 163% increase in net income y-o-y. We have revised our forecasts to reflect Q1 results and the Assioma acquisition, resulting in upgrades to normalised EPS of 31% in FY19 and 22% in FY20. Management confirmed that it continues to seek appropriately priced acquisitions in both divisions.
TXT is trading on EV multiples that are at a c 30% discount to peers – by FY20 EBITDA margins are forecast to be broadly in line with peers, although EBIT margins are lower. As the company still has a large proportion of the cash from the sale of TXT Retail (we estimate €50m in net cash by the end of FY19), its P/E multiples are inflated versus peers. We expect this premium to reduce as the company makes earnings-enhancing acquisitions.