Shares in PensionBee (PBEE) began trading at 165p per share on 26 April, becoming the twenty seventh firm to list on the London Stock Exchange this year.
This was an inauspicious time for a fintech-styled business to complete its initial public offering: a few weeks earlier, shares in Deliveroo (ROO) bombed even after pricing toward the bottom of their expected range, prompting speculation that valuations had become disconnected from business fundamentals and quality.
Despite an early rally to 187p, PensionBee shares have since edged down to 153p, giving the company a market capitalisation of about £335m.
Early volatility is common in any market debut, but sharp swings in PensionBee shouldn’t be a huge surprise. That's because – with limited sales and trading history, and statutory losses expected for several years to come – it is a classic example of a fast-growing company with huge promise and plenty of uncertainty.
This presents prospective investors with a real challenge. As ever, any judgement around a company’s net present value involves plenty of faith and guess work about the future. This becomes even more acute when valuations are premised on years of double digit growth. Nonetheless, we can still have a stab at determining just how much of this future growth and eventual cash generation is already in today's price.
What investors can point to is a canny business. Founded in 2014 by Romina Savova, a former Wall Street analyst who struggled to navigate the price concerns, advice gap and complexity of private pension options, PensionBee today helps individuals consolidate their past – and often scattered – retirement plans into one user-friendly platform.
“The entry point in almost all our customers’ cases is consolidation," Savova recently told us. "People switch jobs so frequently in the current climate – 11 times over their careers, on average – and the vast majority don’t even open the statement envelope to see how much they have."
Though the consolidation service is free, PensionBee makes its money when customers use the platform to combine their past contributions into one of several "very standard" investment plans managed by asset management giants like Legal & General, BlackRock and State Street. All-in fees for these funds range from 0.5 to 0.95 per cent, meaning they are generally cheaper than robo-advisers, wealth managers or investment consultants, and on a par with or slightly more expensive than the major DIY investment platforms.
This strategy has produced rapid growth in the last three years. At last count – immediately prior to going public – the group administered more than £1.6bn of assets for some 137,000 active clients, of whom more than half are invested, according to metrics outlined in the IPO admission document.
|Asset retention rate (% of AUA)||>95%||>95%||>95%||-|
|Registered customers ('000)||126||232||403||476|
|Active customers ('000)||29||64||119||137|
|Invested customers ('000)||17||38||69||81|
|Invested customer retention rate||>95%||>95%||>95%||>95%|
|Cost per invested customer (£)||209||206||232||-|
|RC: IC conversion rate||14%||16%||17%||-|
|Contractual revenue margin (% of AUA)||0.67%||0.68%||0.69%||-|
|Source: IPO admission document|
On a headline basis, this rate of growth has echoes of the big DIY investment platforms like Hargreaves Lansdown (HL.) or AJ Bell (AJB), which have benefited from strong customer retention, good inflows from both existing and new clients, and a broadly benign market backdrop. All of these factors have helped PensionBee grow its asset base 15-fold in a little over three years.
This momentum, together with encouraging signs that the company is getting better at converting its registered customers into active investors, explains why a largely institutional investor base was prepared to buy shares at just under 60 times trailing sales. That only starts to stack up against even the most successful listed investment platform businesses if you are prepared to look ahead more than two years.
In essence, then, PensionBee provides two services: an introducer of client funds to large asset managers unable or unwilling to market to smaller customers, and a technology provider to individuals who need to consolidate and take charge of their past pensions on one platform.
Doing the first part is relatively straightforward, as it requires establishing and maintaining relationships with investment managers happy to earn fees for generic fund work. The second bit requires lots of cash – and a smart marketing strategy – as PensionBee looks to register customers for its consolidation service and then convert them into investors in one of the off-the-shelf funds.
These twin needs for cash and marketing explain the rationale for April’s IPO, which raised £55m to be used to acquire new customers. In addition to free publicity in the business pages at a moment when people are thinking more than ever about their financial futures, the share sale took place amid a fanfare of marketing.
This will continue, though £10m of the cash raised has been earmarked for technology investments, £34m will be put toward a marketing and advertising budget of between £50m and £60m in the three years to December 2023. Currently, PensionBee expects to spend between £200 and £250 to acquire each invested customer, meaning management would hope to add a minimum of 130,000 new clients from the IPO proceeds alone. To Savova, raising money to acquire new customers at this price “makes so much sense”, when customer churn is well below 5 per cent, and fees are both consistent and recurring.
Indeed, Broker Keefe, Bruyette & Woods (KBW) pegs what it terms the gross lifetime value of each customer at £1,554, meaning the initial up-front cost is repaid seven times over. In time, these costs are expected to fall as PensionBee’s brand recognition and economies of scale improve. What’s more, this terminal value assumes no regular contributions to the pension pot, and that just £20k of preserved pensions are transferred into each PensionBee customer account.
But while management expects annual top line growth to stay above 50 per cent for the next few years, non-marketing costs already exceed revenues, as company disclosures show.
|Share based payments||-26||-923||-2,174|
|Source: IPO admission document|
This tells investors two things. The first is that growth must remain blistering for the company to meet a management target to break even at the ‘adjusted Ebitda’ level by the end of 2023. For this to happen, PensionBee’s marketing efforts really need to connect with customers, and competition needs to be sufficiently benign to hold down cost inflation.
Second, the cash flow statement will be the main way to measure PensionBee’s financial health for the next three years. As marketing costs aren’t capitalised, the balance sheet will communicate very little about how much value is being created in the business. Similarly, the income statement will show heavy net losses until operational gearing really kicks in and the scale effects of a technology platform help fees to outstrip overheads.
KBW, which acted as underwriter on the IPO, estimates that the £55m raised from investors should provide enough capital to reach profitability. As costs mount, it forecasts PensionBee’s net cash balance will decline to £14.7m by the end of 2023, before the company swings to positive operating cash flow in 2024. The following year, the broker expects sales to power to £89.9m – more than double the rate of cost growth – and for post-tax profits to reach £17.5m after accounting for share based payments and tax.
Though not unreasonable, given the company’s recent history, KBW’s projections rest on some pretty sizeable ‘ifs’. Alongside higher-than-expected costs, these include the strength of equity markets, how existing workplace pension schemes and pension managers respond to the mass re-housing of assets onto the platform, and other as-yet unforeseen competitive threats.
Fortunately for PensionBee, it is the only pension pot consolidator in the market. The fact that it has taken seven years to get to £6.3m of annual revenue also suggests barriers to entry are likely quite high. Neither is there much incentive for the multi-trillion-dollar asset managers the company partners with to introduce their own direct-to-consumer offerings, given the start-up costs this would involve and the prospect of alienating their institutional and advisor client bases.
In theory, one indirect threat could come from the UK government, which is hoping to launch a pensions dashboard by the end of 2023. This, the Department for Work and Pensions says, will give individuals access to their historical pensions information “online, securely and all in one place”.
What the dashboard won’t do is provide guidance beyond that point, which helps to explain why management is sanguine about the development. “Until pension providers clear their data, consolidation will inevitably remain hard,” says Savova, who also sits on the dashboard’s steering committee. “When the project is complete, we expect it to be like rocket fuel, because once people can see their pension they are more likely to use our consolidation services.”
These services, it should be noted, are clearly well valued by existing app users. A survey carried out by consumer research group Boring Money at the start of this year found PensionBee had the highest net promotor score of any direct-to-consumer investment platform provider.
None of this means the platform is free of competitive pressures. Its customers may be less driven by price than good customer service and the opportunity to take charge of their pensions, but there is nothing preventing a fee-conscious customer from moving their pots to even cheaper investment solutions such as Vanguard Investor.
As such, KBW may be asking a lot of the company’s revenue gross revenue margin to remain at 67.5 basis points by 2025. The broker’s long-term discounted cash flow forecasts – which help determine its long-term value of 180p per share – only anticipate a decline to 50.1 basis points by 2050.
That looks generous, but then again there is little point trying to work out what sector pricing will look like in thirty years’ time. What should matter most to PensionBee investors now is whether the company can grow its customer base fast enough without needing to return to the market for a fresh cash injection.
For that to happen, the company can neither slow down nor put a foot wrong. On 19 times’ KBW’s forecast profits for 2025, the market has set some dizzyingly high expectations.
|Year end AuA||1,358||2,383||4,135||6,870||10,939||15,719|
|Source: company, KBW estimates|