Engineering Group – Working on Liquidity - Initiation
All,
Please find our new analysis here.
Engineering’s strong position in Italy should be a positive; Italian IT spending lags behind its European peers, and the government is emphasising IT spending as part of its share of the EU COVID recovery funds. Our DCF shows a €700m equity cushion under the SSNs. Also, as no cash is needed before the 2028 SSN refinance, Bain has time to wait for growth to bail them out. Working capital swings are large, and continued access to Factoring Lines is crucial for the company.
Investment Considerations
- We are not taking a position in Engineering. Upside is limited to 2 points due to callability, and whilst we see 6 points of potential downside, we do not see a near-term catalyst, but continued weak spending in IT by the Italian government could push the 2030 notes out to 8% => 102c/€
- Despite high leverage, Engineering successfully placed €650m of 2030 bonds in January 2025 (UOP – refinance of existing SSN and Term Loan debt). In May, the company was able to place €100m additional 11.125% 2028 SSNs with Institutional investors in October 2025. The capital structure is long dated with no significant maturities until Q2 2028.
- Our DCF calculation places an EV of €2.0bn or 8.3x our 2025 EBITDA forecast. Debtwire has reported a potential transaction at >10x being pitched in the Italian IT market. Absent a working capital crisis, Bain has until 2028 to hunker down and hope for growth in the Italian IT market.
- If the large quarterly working capital moves become a permanent feature, then there could be liquidity issues, and the DCF valuation may need adjusting downwards. We also noted that there are significant differences between balance sheet working capital moves and those recorded in the cash flow statement.
- There is upside from potential developments in the underinvested Italian IT market. Engineering has a very strong position in its domestic market and will benefit from future investment in the sector by industrial and Government partners. Also, Italy is targeting the IT sector for funds allocated by the EU (post-recovery funds). This cash provides upside from our calculations.
Key Conclusions
- CF & Debt: The company's strong cash flows have enabled it to take on EUR1.2bn, and our DCF model shows an EV of €2bn (see DCF section). Valuation is volatile and dependent on the company ending repeated one-off charges.
- Model: Leverage will start to drop in 2026 as margins improve and non-recurring costs drop.
- Growth is steady across verticals with PNRR-backed projects supporting visibility, but leverage remains elevated at ~6x EBITDA (see Recent Trading section).
- Revenue resilience continued, but delays in PNRR projects and cost pressures weighed on margins, keeping deleveraging a key challenge (see Recent Trading section).
- Market leadership in Italy’s ICT sector with high entry barriers: Engineering holds dominant shares in core IT service segments, supported by deeply embedded proprietary software, high client retention (~98%), and long-standing relationships with public and enterprise clients. The company benefits from secular tailwinds such as Italy’s PNRR-driven digitisation and rising demand for AI, cybersecurity, and cloud solutions (see Industry section).
- Diversified, verticalized business model with expansion runway – A broad service mix across six regulated and complex verticals, combined with international expansion (Germany, Spain, Poland, Latin America), positions Engineering for growth beyond its Italy-heavy base, though execution risk, talent scarcity, and cost inflation remain material constraints (see Industry section).
- Structural tailwinds from government funding and tech adoption: Italy’s €78.7bn digital market, particularly the €25.3bn ICT services and software segment, is set to grow at 7.1% CAGR through 2027, driven by €50bn+ in PNRR-backed digitization, EU Industry 4.0 initiatives, and accelerating adoption of enabling technologies like AI (+31% CAGR), cloud (+15.6%), and cybersecurity (+11.5%) (see Company section).
- High barriers to entry favour domestic incumbents: Regulatory complexity, language and cultural factors, and entrenched relationships in regulated sectors create structural protection for local providers like Engineering, which combines deep public-sector penetration, proprietary software, and vendor partnerships to capture underpenetrated IT spend (1.2% of GDP vs. 1.6% EU average) (see Company section).
Recent Trading:
Q125:
- Revenues grew modestly YoY across all six verticals, led by Public Administration and Finance, while Energy & Utilities lagged. EBITDA rose in line with revenues, with margins stable despite wage inflation.
- PNRR-related wins in Justice and Healthcare added backlog visibility; management sees mid-single-digit growth sustained through 2025.
- No M&A closed, though bolt-on opportunities in cybersecurity/AI remain a focus. Net debt stayed high (~6x EBITDA) due to weak working capital and restructuring costs.
- Bonds trading at 6.5% indicate that the market is sanguine about the company.
Q424:
- Revenue growth held up but slowed as some PNRR projects slipped into 2025. Digitech delivered double-digit growth in AI/cloud, offsetting slower Industry & Services.
- EBITDA margin dipped slightly on cost inflation and subcontracting, though run-rate EBITDA was guided at ~€300m.
- Leverage remained elevated post-LBO, with liquidity supported by €280m RCF. Management prioritises EBITDA-led deleveraging over disposals.
- International expansion (Spain, Germany) progressed, but Italy still ~84% of revenues; diversification remains a medium-term goal with execution risk.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055