TXT e-solutions reported exceptional growth in 2019, with organic growth of 24% and normalised EBIT growth of 90%. Recent acquisitions have put the Fintech division in a stronger position and the company continues to search for new acquisition targets. Measures to contain coronavirus are likely to have an impact on the business, particularly as it is exposed to the airline industry (6% of revenues), but a net cash position of €41m provides more than adequate liquidity for the company to manage its way through the crisis.
TXT reported 48% revenue growth, of which 24% was organic. Both businesses grew on an organic basis: A&A +25% and Fintech +21%. After a spate of acquisitions in 2018 and 2019, the Fintech division now contributes 35% of revenues (FY18: 22%) and offers a wider range of products and services. Normalised EBIT grew 90% y-o-y (margin 8.8%) and normalised diluted EPS grew 333% y-o-y. Net cash at year-end stood at €41.4m. In recognition of the uncertainty surrounding coronavirus, the company decided not to propose a dividend.
The company closed FY19 in a very strong position, having signed licence deals with several North American aviation customers. However, with the drop off in travel in recent weeks, airlines and aircraft OEMs are unlikely to want to sign new contracts and demand for services may also decline. We have revised down our FY20 forecasts to reflect these factors. We reduce our FY20 revenue forecast by 4%, resulting in a €2.1m/7% reduction in gross profit. On unchanged operating expenses (as we assume this is a temporary issue), this results in a cut to our normalised EPS forecast of 53%. We introduce FY21 forecasts, which assume a rebound in growth.
On an EV/sales and EV/EBIT basis, TXT trades at a large discount to its peer group, with EBIT margins forecast to be below the peer group. With €41m net cash, TXT is trading on inflated P/E multiples. Until the remainder of the cash is put to use on value-accretive acquisitions, we would expect the stock to trade at a premium to peers on a P/E basis. The stock has fallen 39% from its peak in January and now has an enterprise value of only €31m. In our view, this decline is overdone.