Xavi Solutions: Updated financial targets and goodwill write-offs
Research Update
2023-01-19
07:20
Redeye provides a research update following Xavi Solutions’ updated financial targets. In connection with the announcement, the company also made goodwill write-offs that will affect its Q4 2022 result. Accordingly, we make forecast adjustments to reflect the new financial targets, leading to a revised fair value range.
Jacob Svensson
Fredrik Nilsson
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Xavi Solutions announced a goodwill write-down of SEK28.9m in connection with the preparation of closing its books for 2022 and the associated review of impairment needs. The write-down is attributable to the Solve segment (Frontwalker Group SEK13.9m) and the Serve segment (Tavana IT SEK15m), which does not affect its cash flow. In addition, Xavi Solutions will do a write-off of approximately SEK2.0m within the Ventures segment. According to management, this is because of the market slowdown due to geopolitical uncertainties affecting the segment’s expected cash flow generation.
In accordance with the announcement, Xavi Solutions updated its financial targets to achieve net sales of approximately SEK154m by the end of 2025 with an EBITA of approximately SEK11m. This is lower than the previously communicated targets of net sales of SEK185m by the end of 2024 with earnings after tax of approximately SEK11m, while it is also a postponement by 12 months. Consequently, we make forecast adjustments to reflect its new financial targets, which indicate slower operational momentum than our previous estimates.
We decrease our sales forecast by 4% and 12% for 2023e and 2024e, while we expect sales of SEK150m by 2025e (SEK172m) compared to Xavi Solutions’ target of SEK154m. Furthermore, we expect an EBITA of SEK9m by 2025e (SEK14m), slightly below its target of SEK11m. Altogether, our DCF gives rise to a new Base Case of SEK0.60 (SEK0.75) per share, while our new Bear and Bull Cases are SEK0.20 (SEK0.25) and SEK1.25 (SEK1.30), respectively.
| SEKm | 2020 | 2021 | 2022e | 2023e | 2024e |
| Revenues | 8.7 | 118.5 | 115.6 | 122.1 | 135.5 |
| Revenue Growth | nm. | 1263% | -2.5% | 5.6% | 11.0% |
| EBITDA | -1.8 | 4.5 | 3.4 | 4.0 | 7.0 |
| EBIT | -4.3 | 0.36 | -31.0 | 0.33 | 2.8 |
| EBIT Margin | -49.7% | 0.3% | -26.8% | 0.3% | 2.1% |
| Net Income | -5.7 | -1.7 | -32.1 | -0.07 | 1.9 |
| EV/Revenue | 1.7 | 0.2 | 0.3 | 0.2 | 0.2 |
| EV/EBIT | -3.4 | 69.2 | -1.2 | 72.0 | 7.7 |
Case
A Swedish IT consulting group ready to scale up
As a Swedish IT consulting group providing specialised know-how in the structurally growing IT space, Xavi Solutions and its team of experts add value to clients by making them more competitive with digital solutions. With the recent strategic shift to a complete IT consultancy following divestments and operational streamlining, and with group functions that we believe can handle larger volumes at limited cost increases, we see Xavi Solutions poised for growth with improved profitability. As such, solid quarterly reports and M&A will act as future catalysts.
Evidence
The transformation is starting to materialise
Given its solid customer base and recently sharply increased sales through acquisitions, we note that Xavi Solution has validated its business model with a competitive strategy while the company now has the scale to execute its strategic transition to a complete IT consulting group. Moreover, we believe its current EBIT levels around breakeven and its headroom to scale up at limited incremental cost increases suggest solid profitability as Xavi Solutions grows.
Challenge
In need of coveted employees
Attracting and retaining coveted employees, the most valuable asset for any IT consulting firm, is critical, which is a challenge for Xavi Solutions. However, Xavi Solutions works actively with the company culture, which signifies by its Great Place to Work certification. We argue that this certification, combined with the use of Talent Acquisition Specialists (TAS), ensures a good corporate culture with satisfied employees while it supports the company in attracting and retaining skilled and experienced employees.
Challenge
Will it succeed in transforming into a profitable IT consultancy?
While IT consulting companies are generally cash-flow-generating businesses, one challenge for Xavi Solutions is to succeed in transforming into a profitable one. Moreover, the competition for talented employees has driven up salaries in the industry over the years, which could harm margins. However, with its possibility of handling larger volumes with limited overhead, we believe that Xavi Solutions has set the foundation to become profitable, implying scalability and profitability improvements as the company grows.
Valuation
Low EV/S does not reflect its potential
Our DCF model indicates a Base Case of SEK0.60 per share and Bear and Bull cases of SEK0.20 and SEK1.25, respectively. We argue that Xavi Solutions’ shift towards a complete IT consulting company has not been seen fully fundamentally yet, creating an interesting opportunity based on its current EV/S multiple. As this shift materialises to a greater extent, we argue that Xavi Solutions can shrink the valuation gap to its peers.
In accordance with the recent announcement, Xavi Solutions updated its financing targets as follows:
Disclosures and disclaimers
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