Strong organic revenue growth in Q318 combined with the recent Cheleo acquisition resulted in revenue growth of 18.6% y-o-y, a normalised EBITDA margin of 10.0% (+80bp y-o-y) and a normalised EBIT margin of 5.8% (down 240bp due to higher depreciation from the capitalisation of leases). The company has started deploying the proceeds of the TXT Retail disposal, with the first two deals adding software solutions to the services-led Banking and Finance business. We expect the company to make further accretive acquisitions across both businesses.
TXT reported Q318 revenue growth of 18.6% y-o-y/organic 12.8% y-o-y. With a higher proportion of software revenue versus a year ago (Q318 14%; Q317 11%), the gross margin improved by 320bp y-o-y. Excluding Cheleo acquisition-related costs, the normalised EBITDA margin increased to 10.0% from 9.2% in Q317. Postcapitalisation of leases according to IFRS 16, the normalised EBIT margin has declined to 5.8% from 8.2% in Q317. We have revised our forecasts to reflect Q3 results, new debt taken out in Q3, share buy-backs and the spin-off of TXT Sense. This results in an 11.4% reduction in normalised EPS in FY18e and a 3.5% increase in FY19e.
TXT is targeting organic growth in both divisions (aerospace, aviation and automotive, AA&A; banking and finance, B&F) boosted by selective acquisitions to increase the breadth and depth of software and service offerings. Most recently it has broadened the product offering within B&F via the Cheleo and T3M acquisitions, adding software solutions for loan lifecycle management and risk assessment respectively to its existing software quality assurance business. With €65m net cash, we expect further acquisitions across both businesses.
On price-based valuation metrics, TXT continues to trade at a premium to peers as even post the Cheleo acquisition, around two-thirds of its market cap is made up of the net cash balance. Until the bulk of TXT’s cash is put to use on value-accretive acquisitions, we would expect the stock to trade at a significant premium to peers on a P/E basis. On an EV basis, TXT trades at a discount to peers, with forecast EBITDA and EBIT margins moving up to the peer group average by FY19. The company continues to evaluate targets in each of its core markets.