SimplyBiz (SBIZ:173p) listed its shares on London’s junior market in April last year and the company, a leading provider of compliance, business and technology services to 3,726 financial intermediaries, has delivered on the expectations I outlined in my July Alpha Report.
Profit margins in the 2018 financial year are ahead of the directors’ previous guidance, and when coupled with a near 16 per cent growth in revenues to £51m, supports expectations of joint house broker Zeus Capital which forecasts a 17 per cent hike in operating profits to £10.9m. Excluding £6m of one-off costs, largely relating to the IPO, expect adjusted pre-tax profits for 2018 to increase by two-thirds to £10m, reflecting a much reduced interest charge following the IPO.
Moreover, net cash has surged from £1.2m to £6.4m since the end of June 2018, so last year’s forecast £900,000 interest charge will be reduced to nil in 2019, meaning more cash flow ending up in shareholders' coffers. The board reiterated its guidance which points to a dividend per share of 2.6p for the 2018 financial year (from EPS of 10.5p). Analysts are pencilling in a payout of 4.3p a share in 2019 on the basis of EPS rising by 23 per cent to 12.9p, and a payout of 5p a share covered three times over by forecast EPS of 15p in 2020. The saving on interest costs alone accounts for 40 per cent of forecast growth in pre-tax profits (up from £10m to £12.3m) embedded in analysts’ 2019 estimates.
The balance of the growth is organic – membership numbers increased by 8.5 per cent in 2018 – reflecting a shift in the IFA industry towards direct authorisation, and the requirement for financial intermediaries to comply with a raft of new legislation. An increasing number of firms are seeking the services of companies such as SimplyBiz who provide the services they need to carry out their business. Also, SimplyBiz makes money from product providers, too, so profits from both the ‘demand’ and ‘supply’ side.
Another bull point in my investment thesis is SimplyBiz’s multiple revenue streams including a mortgage club that is the third largest in the UK, a surveying business, and its Verbatim investment solutions business. True, the housing market is notoriously cyclical, but remortgaging business accounts for a quarter of the mortgage club’s lending and the January 2018 acquisition of Landmark Surveyors is helping valuation services exploit the ongoing structural shift in the market to the intermediary sector.
SimplyBiz also has multiple defensive non-cyclical recurring revenue streams to support the predicted strong growth in earnings. That’s because IFAs signing up for compliance, governance, risk and other services provide SimplyBiz with revenues that are spread across a wide breadth of financial services sectors.
Another key strength of the business is that as the market share of financial product sales grows through the intermediary sector, existing and new entrant product providers will see greater benefits from the efficient access to the independent sector provided by SimplyBiz. Furthermore, the breadth of the packaged service the company offers is difficult to replicate and the long-term close relationships with its members makes it difficult for new entrants to prise them away, thus creating a barrier to entry.
The beauty of SimplyBiz’s business model is that it not only delivers strong margins, but over 90 per cent operating cash conversion, too. In fact, net cash generated from operating activities marginally exceeded cumulative operating profit in the three financial years leading up to the IPO. The fact that the year-end net cash position exceeded analysts’ estimates indicates that 2018 was another year of bumper cash flow.
The unwarranted 10 per cent share price pull-back since I covered the half-year results ('Undervalued and under the radar', 12 Sep 2018) places the shares on a very attractive forward PE ratio of 13.4, falling to 11.5 in 2020. They are worth buying ahead of next month’s annual results. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
