In a previous article, I highlighted the earnings-accretive £73.3m acquisition of Defaqto, a financial technology business operating a fintech platform for 8,500 advisers and providing independent ratings of financial products and funds, by SimplyBiz (SBIZ:222p), a provider of compliance, business and technology services to 3,726 financial intermediaries (‘Defaqto acquisition to drive SimplyBiz share price to new highs’, 20 Mar 2019).
Strategically, combining the two companies has created a single fintech and support services group that will benefit from a greater number and range of distribution channels. Defaqto will help SimplyBiz to advance its services into general insurance and banking markets, grow its customer base and use technology to expand its footprint within retail financial services. Similarly, SimplyBiz will offer Defaqto access to its knowledge and experience of the advisory and asset management markets.
There are also revenue and synergy benefits from the increased analysis and insight derived from the Defaqto business. This will enable SimplyBiz to integrate its existing compliance and regulatory services into Defaqto's powerful technology platform to support the development of enhanced regtech and fintech capabilities in order to meet the needs of its customers. Moreover, the increased scale should accelerate revenue growth across the enlarged group, and enhance profitability, too.
Impact on earnings
Analyst forecasts were not available when the deal was announced, so I crunched the numbers and arrived at a cash profit estimate of £17.6m for the 2019 financial year, representing growth of 55 per cent on 2018. This is bang in line with the estimate Zeus Capital subsequently published in a note to its clients, and suggests that the enlarged group can lift pre-tax profits by half to almost £15m this year after factoring in £1.2m of net finance costs, amortisation charges of £1.2m and a £0.3m depreciation charge. On that basis, Zeus expects adjusted earnings per share (EPS) of 12.9p to cover a prospective dividend per share of 4.3p three times over.
Furthermore, my financial models indicated that with the benefit of robust free-cash-flow generation, then closing 2019 net debt to cash profit ratio will be well below two times. In fact, analysts at Zeus are looking for a closing net debt of £27.3m, or 1.55 times 2019 cash profit estimates. The broking house also concurs with my view that post-tax profit will ratchet up sharply in 2020 as the full benefits of the acquisition kick in, pencilling in 2020 EPS of 15.7p based on net profit of £15.2m (my financial model points to a net profit of £15.5m and EPS of 16p), the implication being that with the shares trading on a 2019 forward price/earnings (PE) ratio of 17 and EPS growth of 22 per cent forecast for 2020, then the price/earnings to growth (PEG) ratio is only 0.78. That’s attractive and explains why investors have warmed to SimplyBiz’s shares.
Indeed, having suggested buying them, at 190p, in my July 2018 Alpha Report, and maintained a positive stance when the company issued its annual results (‘SimplyBiz does the business’, 20 Mar 2019), the share price has gone onto make new highs to produce a total return of around 20 per cent in the past 10 months. More importantly, I expect the positive trend to continue. Joint chief executive Neil Stevens clearly feels the same way as he invested over £100,000 buying shares in his company at the start of this month to increase his stake to 1.67 per cent of the issued share capital. The update from founder and chairman Ken Davy at the recent annual meeting was also positive, not to mention insightful, and well worth a read.
Needless to say, I continue to rate SimplyBiz's shares a very decent buy and maintain my original 272p target price. Buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his previous 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.
