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A fintech primed for digital growth

A provider of compliance, business and technology services to financial intermediaries is digitising its revenue and creating a valuable recurring income stream for shareholders.
A fintech primed for digital growth
  • First half underlying pre-tax profit increases 12 per cent to £6m on 10 per cent higher revenue of £31.7m.
  • Free cash flow of £6.8m equates to 81 per cent of cash profit of £8.3m.
  • Net debt slashed from £25.8m to £15.5m year-on-year, falling to below £3m since 30 June 2021.

Fintel FNTL:235p), a provider of compliance, business and technology services to financial intermediaries, has delivered robust first half results, sold two non-core business, and announced two important distribution agreements.

The impressive profit and cash flow growth aside, the key take for me is the ongoing progress being made to digitise revenues as the group adopts a new operating model. Fintel’s distribution business, which delivers market insight and analysis, product design and targeted distribution to financial institutions, has launched a new ‘Distribution as a Service’ subscription service. Schroders, Just Group, Guardian, BMO and 91 Asset Management have all committed to multi-year agreements that will enable them to develop tailored propositions for their own clients by using Fintel’s segmental and behavioural insights, while at the same time improving the effectiveness of their distribution through use of targeted data sets. It also increases Fintel’s recurring revenue stream, thus improving the quality of its earnings and the price investors are willing to pay for a slice of the action.

Defaqto, the group's financial technology business that operates a fintech platform for 5,800 advisers and assesses over 43,000 UK financial products and funds, is leveraging its business model, too, signing a five-year Software-as-a-Service (SaaS) enterprise agreement with Tatton Asset Management (TAM:510p). The partnership expands Fintel’s fintech customer base by 30 per cent, grows its recurring SaaS revenues, while providing 2,500 Tatton and Paradigm customers with Fintel’s market-leading end-to-end financial planning tool, Defaqto Engage. It’s also worth a minimum of £7m revenue for Fintel. As part of the strategic partnership Tatton is purchasing Fintel’s small fund management business, Verbatim, for £5.8m in cash, of which £2.8m is due on completion and the balance is payable over a four-year period based on performance.

In addition, Fintel has offloaded its non-core Zest Technology business to FPE Capital for £10m, or 22 times trailing 12-month cash profit. Zest provides software for the employee benefits market. Taking account both the Verbatim and Zest disposals, Fintel’s proforma net debt is around £2.5m, or less than 0.2 times Zeus Capital’s full-year cash profit estimate of £18.1m. Analysts believe the group should be in a net cash position of £1m by the year-end, rising to £7.7m a year later given the high cash conversion rate of a high margin (30 per cent cash profit margin for the remaining businesses) asset light model which generates a mid-teens post-tax return on equity.

It’s one that investors have been warming to as Fintel’s shareprice has risen by 50 per cent since I covered the interim results a year ago (On the technology beat’, 16 September 2020), materially outperforming the 30 per cent gain on the FTSE Aim All-Share index. Trading on a forward price/earnings (PE) ratio of 18.5 for 2022 based on earnings per share (EPS) rising from 10.4p to 12.6p next year, the shares are modestly rated for a fintech company that is creating a valuable SaaS revenue stream.

I maintain my 275p target, but can see upside if the pace of digitising revenue accelerates or Fintel’s well regarded management team utilise the group’s lowly geared balance sheet to make another earnings accretive complementary acquisition. They have clearly proved their expertise managing Defaqto since that acquisition in 2019. Buy.

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