Topicus.com Inc.
(TOI-V) C$106.00
Q4/F23: Slowing Revenue Growth, but Solid Margin and FCF Gains
Event
Yesterday, after market close, Topicus reported its Q4/F23 results.
Impact: SLIGHTLY POSITIVE
In-line revenue, but decelerating growth continues. Q4/F23 revenue was right in
line with our €310mm estimate, up 17% y/y. Solid 7% y/y organic growth continues to
benefit from the large price increases in maintenance contracts due to high inflation,
as maintenance and other recurring revenue grew 10% y/y organically. However,
total revenue growth continued to decelerate throughout F2023 and fell below 20%
y/y this quarter, due to the slowdown in M&A activity, as Topicus' M&A spend fell
28% y/y in F2023 to ~€132mm, or just ~65% of FCF.
EBITDA and FCFA2S beat expectations. EBITDA of €91.9mm (29.7% margin)
was above our €87.1mm estimate, primarily due to lower-than-expected staff costs.
FCFA2S of €28.9mm came in well above our €15.5mm estimate, but it was aided
by a much lower-than-expected tax rate (9.6% vs. our ~25% estimate), and to a
lesser extent, lower-than-expected staff costs, that combined accounted for an ~
€9mm tailwind.
M&A activity rebounds; solid start to Q1/F24. Inclusive of cash payments,
deferred payments and holdbacks, Topicus spent ~€30mm on acquisitions in Q4/
F23, which is a sharp rebound from the €7.4mm spent in Q3/F23, but was below
our €40mm estimate.
Topicus' M&A activity has picked up this year, as Q1/F24 to-date, it has spent
€49.4mm on acquisitions (€30.7mm in cash, €13.9mm in holdbacks, and €4.9mm in
contingent consideration), surpassing Q4/F23 M&A spend with half a quarter still to
go. We expect Topicus' M&A spend to be closer to its target of spending 100% of its
FCF on M&A this year. However, we believe revenue growth could be at/below ~20%
y/y in the coming quarters due to the M&A slowdown last year (assuming Topicus
does not complete any large acquisitions in the near term).
TD Investment Conclusion
We are increasing our target price to C$120.00 (from C$115.00), based on 23.0x
our C2025 EBITDA estimate. We are encouraged by the recent rebound in M&A
activity, while its margins, FCF, and balance sheet remain strong. However, we
are still concerned about the (near term) growth outlook and macro/geopolitical
headwinds, and believe the shares are fairly valued at current levels.