TXT reported strong FY15 revenue growth of 13%, with double-digit growth from both divisions, and normalised EPS ahead of our forecast. The planned acquisition of PACE adds higher-margin aerospace software capability and accelerates TXT Next’s quest to expand its addressable market outside of Italy. We have incorporated PACE into our estimates, forecasting normalised EPS growth of 16% in FY16 and 9% in FY17.
TXT reported revenues 1.5% ahead of our forecast for FY15, with EBITDA 2.6% ahead (EBITDA margin 10.8%) and normalised EPS 7.9% ahead. Revenue growth was 12.4% for TXT Perform and 14.2% for TXT Next. Late payments post year-end by several large customers took year-end net cash below our forecast.
TXT is on track to acquire PACE on 1 April for consideration of up to €7.5m in cash. The addition of PACE brings specialist aerospace software to TXT Next’s existing (predominantly Italian) aerospace business, as well as a larger international customer base. We have incorporated the company into our forecasts from the beginning of Q216, forecasting a revenue contribution of €5.4m in FY16 and €7.6m in FY17 at a similar EBITDA margin to the existing TXT group margin.
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.