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SimplyBiz’s earnings growth underpriced

The provider of compliance, business and technology services to almost 6,000 financial intermediaries made an important acquisition in the first quarter, and is generating decent organic growth, too

In the first quarter this year, SimplyBiz (SBIZ:199p), a provider of compliance, business and technology services to almost 6,000 financial intermediaries, made 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 (‘Defaqto acquisition to drive SimplyBiz share price to new highs’, 20 March 2019). The contribution from Defacto helped drive a 30 per cent rise in SimplyBiz’s first-half cash profit to £6.8m, but there was decent organic growth, too.

In the group’s intermediary services division, membership income rose by almost 13 per cent, buoyed by average membership fees increasing by 5.3 per cent to £221 per month. Income from additional services offered to intermediaries also increased, by 9 per cent, a reflection of the regulatory headwind, which is persuading more companies to take on more paid-for services from companies like SimplyBiz. And software licence income surged by 25 per cent.

SimplyBiz’s distribution channel is its main profit generator. The division incorporates not only the Defaqto business, but the third-largest mortgage club in the UK, too. Mortgage completions shot up by almost a fifth to £7.4bn, demonstrating that even in a relatively subdued housing market there is decent demand. It shouldn’t be that surprising given that interest rates are at record lows, and look set to remain so for some time, thus incentivising a healthy amount of remortgage business. The division also provides marketing services to 135 financial institutions to connect them with potential customers through events, seminars, and the distribution of print and electronic material. Income from this activity rose by 17 per cent.

Underpinned by the profit uplift from the Defaqto acquisition, analysts at Zeus Capital are maintaining their full-year adjusted pre-tax profit of £14.9m, up from £10m in 2018, on revenue of £64.6m to deliver underlying earnings per share (EPS) of 12.7p. In the 2020 financial year, analysts are pencilling in pre-tax profit of £15.7m on revenue of £73.2m to produce EPS of 15.7p. Dividend per share estimates are 4.3p and 5.2p, respectively. This implies the shares are rated on a forward price/earnings (PE) ratio of 13 and offer a 2.6 per cent prospective dividend yield for the 2020 financial year.

That’s hardly an expensive rating, given that a full 12-month contribution from Defaqto de-risks a chunk of SimplyBiz’s anticipated profit growth in 2020, and the enlarged group is reaping revenue and synergy benefits from the increased analysis and insight derived from the acquired business. For example, SimplyBiz’s compliance and regulatory services are being integrated into Defaqto's powerful technology platform to support the development of enhanced regtech and fintech capabilities; and Defaqto is helping 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.

True, SimplyBiz’s share price has pulled back from summer highs of 242p towards the 190p entry point in my July 2018 Alpha Report. However, the group’s operational performance, trading outlook and scope for strong earnings growth in 2020 suggest this is not only unwarranted, but a buying opportunity, too. Buy.


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