Fintel: Plan proceeding “at pace” says Zeus Capital

Fintel plc (LON:FNTL) interims are in line with its July trading update which (i.e. 10% revenue growth and 12% EBITDA growth) and provided colour on the impact of recent strategic disposals (i.e. Zest Technologies and Verbatim funds). In short:

  • 10% revenue growth, with Core revenues growing by 3% to £24.9m
  • 12% EBITDA and 12% adj PBT growth to £8.3m and £6.0m, respectively
  • 45% rise in operating cashflow to £6.8m (with Capex down from £1m to nil)
  • Net debt down 40% yoy to £15.5m and to below £3m currently
  • Adj EPS including 0.8p deferred tax charge, fell 2% to 4.1p (excluding this deferred tax charge adj EPS would have risen 17% to 4.9p)
  • Interim DPS reinstated at 1.0p a share

Outlook from Joint CEOs: “Current trading remains robust. Our strategic plan is being implemented efficiently and at pace. We remain confident that the Company is in a strong position to deliver in line with current expectations for FY21.”

Zeus view: We define “Core” as: Fintel Group excluding Zest (sold 21/7/21), Verbatim (sold 14/9/21; FY20 revenue of £2.3m) and Valuation Services (trading well). With Verbatim as non-core, FY20 Core revenue is now £47.2m (previously: £49.5m), which is 77% of the total revenue (previously: 81%).

We adjust our P&L forecasts to reflect disposals, new distribution deal with Tatton (neutral to EBITDA this year and enhancing next) and strong cash generation. Overall, our new Core revenue is consistent with our previous expectations.

Adjusting for the impact of disposals, we trim our current year EBITDA by £0.3m to £18.1m and set an expectation for 2022 EBITDA at £19m: Valuation Services are contributing c. £7.5m revenue pa and c. £1.1m EBITDA, while Core revenue grows at 6% pa on an EBITDA margin just below management’s 35% to 40% target.

Adj EPS includes deferred tax charge which has taken 0.8p off the interim adj EPS to reflect the expected increase in corporation tax to 25% from April 2023. Our adj EPS for 2022 is based on a normal 19% tax charge. On a “normal” tax charge our adj EPS for 2021 would be 12.0p (previously 12.2p).

Valuation: At 231p, FNTL is trading on 19x prospective “normal tax charge” adj EPS of 12p. Arguably this rating does not reflect the quality and growth of its core digital businesses which generate over 80% of Group revenues and over 90% of Group EBITDA.

In our opinion, as set out in “Digital Transformation” our 13 January 2021 note, Fintel’s Core business, when it grows revenues organically at 5% to 7% pa, and operates on a 35% to 40% EBITDA margin, should trade on a sales multiple 5x to 6x and ungeared PER multiple of 22x to 27x (i.e. 268p to 320p based on 2021 adj EPS of 12p; core sales of 51.6p with non-core and cash of 10p per share).

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