Description

Summary

Piteco is a leading provider of company treasury management and financial planning software with over 30 years of history. It recently acquired Juniper Payments, a provider of accounting clearance of interbank financial flows at a low multiple to enter the US market. Not only does it look like a great business to own, it also enables Piteco to sell its treasury management software to an existing customer base in the US. Piteco’s solutions replace internal inefficient solutions (customers’ payback period is less than 1 year) and has high switching costs once it is installed (low customer churn). The business is highly cash generative, generates great RoIC, has recurring revenue, and good growth prospects. At less than 12x EBIT, this business is too cheap given the barriers to entry and recurring revenues. Management owns 9% of the outstanding stock and is currently repurchasing shares.

Business overview

Piteco has been providing treasury management (TMS) and financial planning software for SMEs in Italy for over 30 years. Its systems are completely proprietary and are fully compatible with ERP systems such as SAP, Oracle and Microsoft. The software covers the entire value chain: R&D, design, implementation, sales and assistance. It dominates the Italian TMS market but has ways to go as this is a relatively unpenetrated market. In Italy alone, the company has identified over 2,500 potential customers, meaning its penetration is around 25% (600 customers now), leaving significant room for further organic growth.

The company’s software solutions replace internal inefficient processes and ad-hoc spreadsheets. The product has more than 20 modules, but a typical customer starts with around 5, meaning once a customer is acquired there is significant opportunity to upsell the customer once it gets used to the product and sees the benefits. Both the nature of this product and the superior product offering from Piteco results in virtually zero customer churn (only customer churn reported is companies going bankrupt or being acquired). A typical customer will have a payback period of less than a year on their Piteco investment.

Acquisition of US business - Lendingtools.com

In early 2017 (consolidated since 7 April 2017) Piteco did an MBO of Lendingtools.com to enter the US market. The total investment was $13m of which $3m was for 55% of Juniper Payment and $10m was an intercompany loan to be repaid in 10 years. Juniper Payments then purchased the assets of LendingTools.com, in addition to net working capital of $2.25m (of which $1.9m cash). Piteco has the right to acquire an additional 5% of Juniper Payments for a maximum payment of $1.5m based on the business’ 2017 and 2018 EBITDA (this will be finalized on 7 April 2019). The remaining shares of Juniper Payment is owned by the management, who also has a put option on the remaining 40% exercisable in 2022.

LendingTools.com is one of the largest interbank networks in the US. It processes more than $3bn of bank transfers and check collections. It generated $5m of revenues in 2016 and pre-tax profits of c$1.8m. This provides Piteco an excellent platform to introduce its TMS business in the US, at the same time as it looks like a great business purchased at a good price.

Myrios

Piteco recently announced that it has signed a deal to acquire Myrios, an Italian based Finance and Risk Management software company focused on helping manufacturing and service companies with complex finance calculations and procedures. The deal structure is very similar to LendingTools, where management is highly incentivized through an earn-out a few years out.

Based on my calculations, Piteco paid c7.9x EBITDA (TTM) for a business that grew revenues and EBITDA by 27% and 58% in 2017, respectively. The business mainly generates its revenues through software usage license fees, which means it should be as sticky as Piteco’s other businesses. For a sticky business with that kind of growth the transaction looks like a great deal for Piteco’s shareholders. The only caveat to highlight here (a bit of a red flag) is that 50% of the earn out will be settled using Piteco shares in 2021.

Competition

It is hard to find data on the exact market shares and competitors for this market, but Piteco probably has north of 70% market share in Italy. There have been some competitors trying to enter the market, but due to the dominant position of Piteco and the stickiness of this type of business it has been without success. As mentioned above, the main competitor is Excel and inertia.

Valuation

As the financials for Myrios is quite dated these are excluded from the following valuation. Including the liabilities to acquire the outstanding minority of LendingTools.com as financial debt, the total enterprise value of Piteco is c83m EUR. This means that the shares are currently trading at less that 12x EBIT (TTM), which is very cheap for a sticky business with RoIC around 20% that is growing.

Three other levers of shareholder value creation not included above: 1) Management is currently using excess cash to buyback shares 2) Myrios was a cheap acquisition of what seem to be a great business 3) Further growth in the US from introducing Piteco’s TMS to clients of LendingTools.com.

Risks

1)     Italy: The recent selloff in the shares can most likely be attributed to a general downward pressure on Italian equities. Piteco has significant exposure to the Italian economy and any uptick in the number of bankruptcies would hurt Piteco’s revenues.

2)     Failure to cross-sell in US: The company acquired Juniper Payments to enter the US market with its TMS system. Although the acquisition price on its own looks reasonable, the company is likely to increase staff in the US to cross-sell TMS and if this fails it will have a strong impact on profits.

3)     Family ownership: Although there is no evidence of self-dealing from the Podini family (owns 64%), there is a small risk of this given the family has control.

Catalyst

• Traction with TMS offering in the US (through LendingTools.com)
• Continued buybacks at current share price