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SimplyBiz doing great business

Business is booming for the leading provider of compliance, business and technology services to IFAs, and so too are dividends for shareholders
March 5, 2019

SimplyBiz (SBIZ:190p) listed its shares on London’s junior market in April 2018 and the leading provider of compliance, business and technology services to 3,726 financial intermediaries has surpassed the expectations I outlined when I suggested buying the shares, at 190p, in my July 2018 Alpha Report.

Revenues increased by 15 per cent to £50.7m in 2018 and at an organic rate of 6.6 per cent if you exclude the £3.7m contribution from the acquisition of Landmark Surveyors. The underlying growth reflects an 8.5 per cent jump in membership numbers, which is being underpinned by a shift in the Independent Financial Adviser (IFA) industry towards direct authorisation, and the need for financial intermediaries to comply with a raft of new legislation. As a result, more firms are seeking out the services of companies such as SimplyBiz, which provide the services they need to carry out their business.

Membership fees increased by 10.5 per cent to £9.4m and members are taking additional services too as revenues here increased by 7.1 per cent to £4.5m. This growth is also driving higher revenue (up a quarter to £4.1m) from re-selling back-office software to its membership. And because the intermediary business has relatively flat overheads, a higher proportion of revenues are dropping down to the bottom line. Indeed, underlying cash profit rose by almost a third to £5.2m on divisional revenue of £23.3m, highlighting the operational leverage of the business.

Furthermore, SimplyBiz makes money from 135 product providers, too, so profits from both the ‘demand’ and ‘supply’ side. Activities here include providing marketing services (revenues up 11.6 per cent to £6.9m) to these large financial institutions to connect them with their target market of potential customers who are the clientele of the intermediary firms. SimplyBiz also runs the third-largest mortgage club in the UK, providing lenders with access to 1,600 of its members. It arranged £13.7bn of mortgages and earned £6.5m of fees, representing 14 per cent year-on-year growth. Equity release products and remortgages are proving popular albeit house purchases still account for three quarters of the club's lending.

The natural operational leverage of the capital-light business means that cash conversion rates (post-tax operating cash flow as a proportion of cash profits) are eye-wateringly good at 95 per cent. So with the near-20 per cent rise in total adjusted cash profits of £11.4m beating analyst estimates by around 4 per cent, net cash of £6.4m was better than I had anticipated and could almost double by the year-end to provide firepower for acquisitions. So, too, was the 3.03p-a-share declared dividend. It was 15 per cent ahead of analyst forecasts. Adjusted earnings per share (EPS) rose by more than a quarter to 11.9p.

Expect more of the same this year, with analysts at brokerage Zeus Capital predicting adjusted EPS of 12.9p and a dividend per share of 4.3p, rising to 15p and 5p, respectively, in 2020. On this basis, SimplyBiz’s shares are rated on a cash-adjusted PE ratio of 12 for 2020, hardly exacting for a business that has real prospects of lifting EPS by a quarter over the next two financial years. Add to that the potential to make earnings accretive bolt-on acquisitions and the shares continue to rate a buy.

 

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