A fintech ready for digital growth

  • Underlying first half profit before tax rose 12% to £ 6million on revenue 10 percent higher to £ 31.7million.
  • Free cash flow of £ 6.8million equates to 81% of cash profit of £ 8.3million.
  • Net debt fell from £ 25.8million to £ 15.5million year-on-year, falling to less than £ 3million since June 30, 2021.

Fintel FNTL: 235p), a provider of compliance, business and technology services to financial intermediaries, posted strong first-half results, sold two non-core businesses and announced two major distribution deals.

Aside from the impressive growth in earnings and cash flow, the key to me is the continued progress made in digitizing revenue as the group adopts a new operating model. Fintel’s distribution business, which provides market intelligence and analysis, product design and targeted distribution to financial institutions, has launched a new “Distribution as a Service” subscription service. Schroders, Just Group, Guardian, BMO and 91 Asset Management have all committed to multi-year agreements that will allow them to develop tailor-made proposals for their own clients using Fintel’s segmental and behavioral knowledge, while improving the efficiency of their distribution through the use of targeted datasets. It also increases Fintel’s recurring revenue stream, improving the quality of its revenue and the price investors are willing to pay for a share of the stock.

Defaqto, the group’s financial technology business that operates a fintech platform for 5,800 advisers and evaluates more than 43,000 UK financial products and funds, is also leveraging its business model by signing a Software-as corporate agreement -a-Service (SaaS) of five years. with Tatton Asset Management (TAM: 510p). The partnership expands Fintel’s fintech customer base by 30%, increases recurring SaaS revenue, while providing 2,500 Tatton and Paradigm customers with Fintel’s market-leading end-to-end financial planning tool, Defaqto Engage. This is also worth a minimum of £ 7million in revenue for Fintel. As part of the strategic partnership, Tatton buys Verbatim, Fintel’s small fund management firm, for £ 5.8million, of which £ 2.8million is due on completion and the balance is payable on a period of four years depending on performance.

In addition, Fintel transferred its non-core business from Zest Technology to FPE Capital for £ 10million, or 22 times the 12-month cash profit. Zest provides software for the employee benefits market. Taking into account both the Verbatim and Zest divestitures, Fintel’s proforma net debt is around £ 2.5million, less than 0.2 times the estimate of Zeus Capital’s cash profit for the entire year of £ 18.1 million. Analysts estimate the group is expected to have net cash of £ 1million by the end of the year, rising to £ 7.7million a year later given the cash conversion rate high of a high margin asset (30% cash profit margin for remaining businesses) lightweight model that generates a mid-teens after-tax return on equity.

This is a question investors have grown accustomed to, as Fintel’s share price has risen 50% since I covered interim results a year ago (“At the cutting edge of technology”, September 16, 2020), significantly outperforming the 30% gain in the FTSE Aim All-Share index. Trading on a forward price-to-earnings (PE) ratio of 18.5 for 2022 based on earnings per share (EPS) dropping from 10.4 pence to 12.6 pence next year, stocks are modestly rated for a fintech company that creates a valuable SaaS revenue stream.

I’m sticking to my target of 275p, but I can see an uptick if the pace of revenue digitization picks up or if Fintel’s well-regarded management team uses the group’s ill-suited balance sheet to make another additional cash-generating acquisition. profits. They have clearly proven their expertise in the management of Defaqto since this acquisition in 2019. To buy.

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