Fintel plc (LON:FNTL) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.
Q1: Robin, what were the key points that we should be aware of in Fintel’s latest trading update?
A1: Well, this trading update is ahead of its full year results to December 2021, which will be released on Tuesday 22nd of March and it confirms that the results will meet or exceed expectations, that the group is making significant strategic progress, and that is financially strong.
So, in terms of the numbers, the core revenue has grown 5% to just over £52 million, we’d expected £51 million and the group expects to grow revenue at between 5% and 7/8% per annum. The total revenue is marginally ahead of expectations at nearly £64 million, we had expected £61 million and that the adjusted EBITDA growth will be in line with expectations. The net cash at the end of the year was £2.5 million and we’d expected £1 million and at the end of 2020, the group had net debt of just over £19 million. So, financially, and in terms of operationally, the business is doing well.
Strategically, they have made progress in that they’ve been growing their SaaS and subscription revenue stream across all divisions and they’ve been able to maintain their margins while investing in a digital service platform. They have a major new strategic partnership, including one with Tatton, which was announced a few months ago, and they’ve got 13 major institutions including of Aviva and Schroders and many others, which have moved from previous annual contracts to what the company describes as ‘Distribution as a Service’. Similar to Software as a Service but a distribution agreement which is a multi-year subscription agreement which gives a lot more clarity to the FNTL shareholders about the pace of growth in the revenues.
So in terms of the outlook, the joint Chief Executive Matt Timmons says that the rapid digitisation of the group SaaS and subscription-based business has continued, improving earnings quality, and delivering key services to customers and that the Board is confident of continued strong trading and key strategic progress in 2022.
Q2: So, these changes, have they affected your forecast in any way?
A2: We’re going to maintain our forecast. We have obviously nudged up our revenue expectations to the numbers which have been put in the statement. We have left our EBITDA profit and earnings and dividend per share expectations unchanged.
We are pleased to see that there is more cash, so therefore have made a note of that but I think in terms of the forecast for 2022 and beyond, at the moment, we’re going to leave the numbers unchanged but we do expect that the results on the 22nd March will provide information which will enable shareholders and analysts to feel more confident about the future.
Q3: Finally, how do you value the Fintel stock?
A3: It has been transitioning from being a multi-service for business support business to being something which essentially a SaaS subscription business, especially with the acquisition of Defaqto a few years back, which has got a lot of its revenue provided on a subscription, recurring basis. As you appreciate, institutional investors in particular are attracted by recurring revenues, particularly if they happen to be formally structured as recurring, in the shape of a Distribution as a Service, rather than just simply as an annually renewable contract.
So, as the business transitions towards being more completely a subscription business, and I estimate around about 80%, maybe slightly more of the core revenues are from this type of service, and I now think about over 90% of the group EBITDA also effectively coming from this type of service – that when we get the full year results, that the valuation that investors put on the business will reflect the quality and growth of this core digital business.
If you said to me, in a snapshot, how do you value these types of businesses? What I would suggest is that there is a focus on the value of sales and the value of sales multiple that I think is appropriate, it’s s more like 5-6 times rather than 3 times which it’s trading on at the moment.
So, I think once we get more information, which I believe we’ll start getting more information from 22nd March, I think that the multiple on which the stock trades should change. I don’t expect to change the actual earnings and dividends a lot but I think it’s about the appreciation of the quality of that earnings and dividend stream which will change when the company next reports.
