CFO SIM EQUITY RESEARCH – PITECO: another jewel in the crown

Piteco SpA

Italy - Software	Another jewel in the crown

4th November 2020

ACQUISITION OF RAD

RIC: PITE.MI

BBG: PITE IM

Piteco buys RAD Informatica, a highly profitable, well-managed, fast

growing, cash-flow-generative firm. The company, purchased fairly

cheaply, operates in the NPL management software niche. The move adds interesting modules to the Piteco current selling proposition. Once again, the acquisition adds value for shareholders.

Rating:

Buy

Price Target:

• 11.30 (€ 9.40)

Upside/(Downside): 43.0%

Last Price: € 7.90

Market Cap.: € 151.5m

1Y High/Low: € 8.76/€ 4.54

Free Float: 27.1%
Major shareholders:
Podini Family	65.2%
Management	5.1%

8.4
7.9
7.4
6.9
6.4
5.9
5.4
4.9
4.4
nov-19gen-20	mar-20mag-20lug-20	ago-20	ott-20
Piteco	Thompson Reuters Software EU

Stock price performance

		1M		3M	12M
	Absolute	-1.5%		21.9%	25.4%
	Rel.to FTSE Italia	-0.1%		14.7%	17.5%
	Rel.to EU Sector	-2.9%		-3.7%	-18.4%

Analysts:

Luca Arena

[phone] [e-mail]

Gianluca Mozzali

[phone] [e-mail]

Another value accretive move - Buy reiterated

The acquisition is EBITDA-, EPS- and value-accretive: the target is more profitable than

the Piteco group and the price paid is by far cheaper than Piteco's current market valuation. We revised our model factoring in the consolidation of RAD as of 1-Dec-20. The result of the consolidation is massive and, on the back of the price paid and the profitability of the target, leads to an upgrade in PT to € 11.30/s (€ 9.40/s), 43.0% upside to current prices. We reiterate the Buy recommendation: in this market turmoil, Piteco represents a defensive player, able to catalyse the consolidation of other preys, adding interesting value accretive modules to the group's selling proposition.

RAD has a 70% market share in the NPL and UTPL management software

The company, established twenty years ago thanks to the expertise and experience that the founding members had gained in the fields of credit management and software development, today boasts a key know-how in the process of debt collection at legal and extrajudicial levels. The company holds 70% of the market and employs a team of over 50 analysts and developers. RAD has developed a management tool that connects all those interested in the operational management of NPL and litigation, allowing information sharing of, file work progress and all procedural aspects and cooperation in real time.

A well-managed, highly profitable, fast-growing company, paid 8.5x EBITDA19

The company is well managed, offers hefty returns, generates huge visible cash flows and is fast growing. In 2019, RAD generated revenues to the tune of € 10.3m and EBITDA of € 5.9m, 57.3% margin and NFP was zero. Piteco is paying € 35m for a 70% stake which corresponds to 8.5x EBITDA19 The deal envisages a put/call option mechanism by RAD

Holding's shareholders for the remaining 30% stake to be exercised in various time windows following the approval of RAD's financial statements for the years 2023, 2024 and 2025. Furthermore, an additional window is envisaged between 23-31 March 2021 for the sole investment held by a few financial investors of RAD.

A value-added element in the group's selling proposition

We like the announced move very much. The acquisition represents an important opportunity for the group to increase and develop its business, from a strategic, industrial and management perspective. The acquisition is aimed at consolidating the role of Piteco as a domestic and international leader in the financial software sector, with a distinctive competitive positioning in the sector and with significant prospects for growth and value creation. Piteco's external growth strategy is still in place, envisaging the aggregation with leading software producers. Now Piteco's catalogue comprises 1) Treasury Management Software, 2) Payment Service Software dedicated to banks,3) Risk Management software solutions and NPL software services.

Piteco, key financials and ratios

	€ m		2018		2019	2020e		2021e	2022e
	Sales		20.2		24.0	26.6		39.0	42.2
	EBITDA		8.3		10.2	11.5		18.6	20.7
	EBITDA adjusted		8.3		10.2	11.5		18.6	20.7
	EBIT		6.4		7.3	8.4		12.8	14.8
	Net profit		5.3		3.0	6.2		9.5	11.5
	Net profit adjusted		5.1		5.7	6.2		9.5	11.5
	EPS adjusted		0.28		0.31	0.34		0.52	0.64
	EPS adj. growth		44.5%		12.4%	8.5%		53.6%	21.6%
	DPS ord. €/s		0.15		0.15	0.15		0.15	0.20
	Dividend yield		1.9%		1.9%	1.9%		1.9%	2.5%
	NFP (cash)/debt		26.8		27.5	64.2		49.6	36.3
	Free Cash Flow Yield		8.0%		4.7%	7.6%		11.4%	10.7%
	PER x		16.4		16.5	24.5		16.0	13.1
	PCF x		11.5		13.0	12.9		8.5	9.1
	EV/Sales x		5.4		5.0	8.1		5.2	4.5
	EV/EBITDA x		13.3		11.9	18.8		10.8	9.1
	EV/EBIT x		17.2		16.7	25.7		15.7	12.6

Piteco SpA

Income statement (€ m)	2018	2019	2020e	2021e	2022e
Total Revenues	20.2	24.0	26.6	39.0	42.2
Raw Material	(0.3)	(0.1)	(0.2)	(0.2)	(0.2)
Services	(3.4)	(4.1)	(4.5)	(6.3)	(6.6)
Personnel expenses	(8.1)	(9.4)	(10.3)	(13.1)	(13.9)
Other Costs	(0.1)	(0.1)	(0.2)	(0.7)	(0.8)
EBITDA	8.3	10.2	11.5	18.6	20.7
EBITDA adj.	8.3	10.2	11.5	18.6	20.7
D&A	(1.9)	(3.0)	(3.1)	(5.8)	(5.8)
EBIT	6.4	7.3	8.4	12.8	14.8
Financial (charges)/income	0.1	(3.1)	(1.3)	(1.9)	(1.6)
Other costs & extraordinaries & other	(0.7)	(0.4)	0.0	0.0	0.0
Pre-Tax profit	5.7	3.7	7.1	10.9	13.3
Income taxes	(0.5)	(0.7)	(0.9)	(1.4)	(1.7)
Net Profit	5.3	3.0	6.2	9.5	11.5
Net Profit Adjusted	5.1	5.7	6.2	9.5	11.5
Balance sheet (€ m)	2018	2019	2020e	2021e	2022e
Net Working Capital	4.1	5.5	7.4	8.3	9.0
Net Fixed Assets	60.4	60.9	112.1	107.6	103.2
Equity Investments	0.0	0.0	0.0	0.0	0.0
Other M/L Term A/L	(6.6)	(7.6)	(12.6)	(17.2)	(18.3)
Net Invested Capital	57.9	58.9	106.9	98.7	93.9
Net Financial Debt	26.8	27.5	64.2	49.6	36.3
Minorities	0.0	0.0	0.0	0.0	0.0
Group's Shareholders Equity	31.1	31.4	42.7	49.2	57.7
Financial Liabilities & Equity	57.9	58.9	106.9	98.7	93.9
Cash Flow statement (€ m)	2018	2019	2020e	2021e	2022e
Total net income	5.3	3.0	6.2	9.5	11.5
Depreciation	1.9	3.0	3.1	5.8	5.8
Other non-cash charges	0.5	2.7	4.9	4.2	1.0
Cash Flow from Oper. (CFO)	7.7	8.7	14.2	19.5	18.3
Change in NWC	(0.8)	(1.4)	(1.9)	(0.9)	(0.7)
FCF from Operations (FCFO)	6.9	7.3	12.4	18.7	17.6
Net Investments (CFI)	(23.3)	(0.1)	(54.3)	(1.4)	(1.4)
Free CF to the Firm (FCFF)	(16.4)	7.1	(41.9)	17.3	16.2
CF from financials (CFF)	16.8	(9.7)	41.0	(9.7)	(9.1)
Free Cash Flow to Equity (FCFE)	0.4	(2.5)	(0.9)	7.5	7.2
Financial ratios	2018	2019	2020e	2021e	2022e
EBITDA margin	40.9%	42.6%	43.1%	47.9%	49.0%
EBIT margin	31.7%	30.2%	31.5%	32.9%	35.2%
Net profit margin	26.0%	12.6%	23.2%	24.3%	27.3%
Tax rate	8.1%	18.0%	13.0%	13.0%	13.0%
Interest coverage x	(0.0)	0.4	0.2	0.1	0.1
Net Debt/Ebitda x	3.2	2.7	5.6	2.7	1.8
Debt-to-Equity x	0.9	0.9	1.5	1.0	0.6
ROIC	11.2%	5.2%	7.5%	9.2%	12.0%
ROCE	9.5%	10.7%	7.1%	10.7%	12.0%
ROACE	11.6%	10.7%	9.0%	10.8%	12.2%
ROE	17.2%	9.6%	16.7%	20.6%	21.6%
Payout ratio	51.7%	95.6%	49.0%	31.9%	35.0%
Per share figures	2018	2019	2020e	2021e	2022e
Final N. of shares # m	18.1	19.2	20.2	20.2	20.2
Final N. of shares (fully diluted) # m	18.1	19.2	20.2	20.2	20.2
Average N. of shares (fd)# m	18.1	18.7	19.7	20.2	20.2
EPS stated €	0.29	0.16	0.31	0.47	0.57
EPS adjusted €	0.29	0.16	0.31	0.47	0.57
EBITDA €	0.46	0.55	0.58	0.92	1.02
EBIT €	0.35	0.39	0.43	0.64	0.74
FCFO €	0.38	0.39	0.63	0.92	0.87
FCFF €	(0.90)	0.38	(2.13)	0.86	0.80
FCFE €	0.02	(0.14)	(0.05)	0.37	0.36
Dividend €	0.15	0.15	0.15	0.15	0.20

2

Piteco SpA

The company at a glance

Piteco, more than 4x the size of its closest competitors, is the undisputed domestic leader in corporate treasury management and financial planning software. The company designs, develops and implements proprietary software and solutions for corporate cash and risk management. It focuses on large/mid enterprises operating in all industries except public administration. The Piteco software is 100% proprietary as well as modular (19 different modules), embeddable (it can work within Oracle, Sap or Microsoft environments), customisable (its open architecture allows several combinations of product modules) and available on foreign markets. The group is developing a challenging internationalisation and diversification process, boosted by the recent acquisitions: 1) Juniper Payments enables Piteco to penetrate the huge US market with a well-managed cash flow generative firm, paid for fairly cheaply; 2) Myrios widened the group's offer with a risk management, capital markets and compliance software dedicated to banks (60% of the business line turnover) as well as to large manufacturing and service companies (40%).

FY-19 turnover grew 18.9% to € 24.0m, driven by the increase in recurring revenues, the acquisition of 40 new clients and the Myrios contribution for the entire year. EBITDA declined 5.2% to € 10.2m, 42.6% margin, slightly lower than our estimates, mainly as a result of Juniper's flat performance. PIteco's client base currently comprises some 730 firms operating in over 40 countries: a significant number of them are listed on the Italian stock exchange whereas 98% record a turnover of more than€ 100m.

2019 revenues and…		… and client profile (sales) breakdown
14%				2%
				43%
26%				55%
60%
Maintenance fees Services		Software				< € 100m sales		€ 100m - € 500m		> € 500m sales

Shareholder structure (post rights issue)

	%	# m
Podini Family	65.2%	13.2
Dedagroup S.p.A.	49.8%	10.1
Marco Podini	7.4%	1.5
Maria Luisa Podini	7.4%	1.5
Francesca Zanella	0.2%	0.1
Lillo S.p.A.	0.2%	0.0
Management	5.1%	1.0
Andrea Guido Guillermaz	1.7%	0.3
Riccardo Veneziani	1.7%	0.3
Paolo Virenti	1.7%	0.3
Free Float	27.1%	5.5
Ennismore Fund Management	7.0%	1.4
Treasury shares	2.6%	0.5
Total	100.0%	20.2

Source: Company data

Peer group absolute performance

	1D	1W	1M	3M	6M	YTD
Intuit Inc	2.6	(1.7)	(0.2)	4.5	18.3	24.0
Microsoft Corp	2.0	(3.2)	0.3	(3.2)	14.2	30.9
Oracle Corp	0.6	(0.5)	(4.6)	1.4	9.1	7.2
Salesforce.com Inc	2.0	(5.3)	(5.2)	17.7	45.3	45.8
SAP SE	4.2	(3.1)	(28.5)	(30.6)	(13.4)	(21.9)
Median large players	2.0	(3.1)	(4.6)	1.4	14.2	24.0
Datalogic SpA	0.5	3.9	(13.2)	(17.4)	(9.4)	(37.8)
Digital Bros SpA	(0.4)	(5.7)	(20.7)	(27.3)	13.3	32.5
Expert System SpA	2.7	0.2	(8.6)	(25.5)	(30.2)	(30.2)
Exprivia SpA	0.0	4.2	0.0	(8.3)	(11.6)	(23.0)
Reply SpA	2.3	2.1	(0.5)	11.2	51.4	37.7
TXT e solutions SpA	0.8	(4.3)	(3.4)	(4.9)	(7.9)	(24.0)
Median small players	0.7	1.2	(6.0)	(12.9)	(8.7)	(23.5)
Piteco SpA	(0.8)	(1.3)	(1.5)	21.9	27.4	24.4

Source: Thomson Reuters Eikon

Peer group multiples table

Price & EV multiples x	PER FY1	PER FY2	PCF FY1	PCF FY2	Sales FY1	Sales FY2	EBITDA FY1	EBITDA FY2	EBIT FY1	EBIT FY2
Intuit Inc	38.4	33.8	35.0	31.4	9.7	8.6	25.8	22.7	27.7	24.0
Microsoft Corp	30.2	27.4	24.2	21.9	9.3	8.3	20.0	17.7	24.1	21.4
Oracle Corp	13.4	13.0	11.9	11.5	5.0	4.8	10.1	9.7	10.9	10.5
Salesforce.Com Inc	62.1	60.1	35.5	33.6	10.0	8.3	33.4	27.5	57.5	44.5
SAP SE	18.5	19.4	16.5	15.7	4.5	4.3	14.0	13.0	15.2	15.3
Median large player	30.2	27.4	24.2	21.9	9.3	8.3	20.0	17.7	24.1	21.4
Datalogic SpA	57.8	17.2	17.0	10.5	1.3	1.1	14.0	8.6	33.5	12.6
Digital Bros SpA	14.8	13.8	7.7	7.2	1.4	1.3	5.9	5.0	9.7	8.2
Expert System SpA	n.m.	n.m.	n.m.	n.m.	4.1	3.3	81.9	n.m.	n.m.	n.m.
Exprivia SpA	(3.0)	6.6	1.7	3.0	0.4	0.4	4.0	4.2	(6.9)	6.3
Reply SpA	32.6	28.7	24.2	21.6	2.7	2.4	17.5	15.1	21.8	18.6
TXT e solutions SpA	28.7	21.3	15.2	12.8	1.0	1.1	8.9	9.2	14.2	13.2
Median small player	28.7	17.2	15.2	10.5	1.4	1.2	11.5	8.6	14.2	12.6
Piteco SpA	24.5	15.9	16.3	9.9	8.1	5.1	18.8	10.8	25.7	15.6

Source: CFO Sim, Thomson Reuters Eikon

3

Piteco SpA

Piteco adds NPL software to its selling proposition

Piteco purchases RAD Informatica, a highly profitable, well-managed, fast growing, cash flow generative firm. The company, bought fairly cheaply, operates in the NPL management software niche. The move adds interesting modules to the Piteco current selling proposition. Once again, the acquisition adds value for shareholders.

The target: RAD Informatica

RAD, established twenty years ago thanks to the expertise and experience that the founding members had gained in the fields of credit management and software development, today boasts important know-how in the process of debt collection at legal and extrajudicial levels. The company holds 70% of the market and employs a team of over 50 analysts and developers with consolidated knowledge in the fields of credit recovery and both banking and insurance litigation. In greater details, RAD has developed a knowledge management tool that connects all those interested in the operational management of NPL and litigation, allowing information sharing of, file work progress and all procedural aspects and cooperation in real time.. The company is well managed, offers hefty returns, generates huge visible cash flows and is fast growing.

Piteco buys the asset transferred by RAD Holding to RAD, a newly established vehicle. In 2019, RAD generated revenues to the tune of € 10.3m, EBITDA of € 5.9m, 57.3% margin and NFP was zero.

The market is growing. According to Banca IFIS's projections, in the hypothesis of a timid macroeconomic recovery in 2021, the default rate, i.e. the performing loans that switch to non-performing, should be 2.8% compared to 1.3% of 2019. The total stock, adding together bad loans (NPL) and unlikely to pay loans (UTP) still present in the bank balance sheet and those already sold, is estimated to reach € 338bn in 2020 (+ 5% YoY), while in 2021 impaired exposures could rise to € 385bn and undergo a further increase in 2022.

The deal structure

Piteco is paying € 35m for a 70% stake which corresponds to 8.5x EBITDA19 and 4.9x Sales19: this compares to the current 15.5x and 6.6x multiples of Piteco. The price is paid in two instalments: € 4m for an 8% stake at the time of the deal announcement (15- Oct) and € 31m for the remainder by the end of November. The deal envisages a put/call option mechanism by RAD Holding's shareholders for the remaining 30% stake to be exercised in various time windows following the approval of RAD's financial statements for the years 2023, 2024 and 2025. Furthermore, an additional window is envisaged between 23-31March 2021 for the sole stake held by a few financial investors of RAD.

Piteco finances this move via 1) new 6Y 2.5% bank facilities for a total consideration of

• 27m, and 2) a capital increase of € 8m. The price for the rights issue has been fixed at
• 8.45 per share, a level that implies a 21.1% premium over the volume weighted average price of Piteco's shares over the last 6M prior to the date of approval of the rights issue, a 11.5% premium over the last 3M and a 6.5% premium over the last month. The capital increase is reserved for directors and shareholders Marco Podini and Maria Luisa Podini. According to the company, the reserved capital Increase is particularly convenient for Piteco in terms of timing and certainty as to its positive outcome. Having said that, we would have rather preferred a more market friendly move, i.e. open to the totality of the existing shareholder base.

4