Positioned for strong sustainable growth

Fintel (FNTL:225p), a provider of compliance, business and technology services to financial intermediaries, is accelerating the digitisation of its core business, increasing Software-as-a-Service (SaaS) revenue and converting more distribution partners to multi-year subscription agreements.

SaaS and subscription revenue is well on course to hit management’s 70 to 80 per cent target within the next couple of years, having increased by five percentage points to 65.7 per cent of the group’s core revenue of £52.2mn in 2021. The growth has partly been driven by higher software licence income from Fintel’s intermediary services division, which provides compliance and other business services to financial advisers, wealth managers and mortgage advisers.

Another reason is the expansion of 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. For instance, Defaqto ESG research platform now includes 76 retail investment funds, its digital ESG client profiler has been deployed to over 8,000 wealth managers and financial advisers, and a partnership agreement with Tatton Asset Management has scope to boost the group’s fintech customer base by 30 per cent.

Fintel’s distribution division is making robust progress, too, by converting its blue-chip client base to long-term ‘Distribution as a Service’ subscription service agreements. This business delivers market insight and analysis, product design and targeted distribution to financial institutions, thus enabling them to develop tailored propositions for their own clients and enhance their distribution through targeted data sets. Having converted 40 per cent of revenue here to multi-year distribution agreements, the latest being Aviva, Invesco, Royal London and Hawksmoor, joint chief executive Matt Timmins says that 60 per cent should be converted by the year-end.

House broker Zeus Capital values the group’s digital business at £262mn, or 254p a share, to reflect its high level of profitability (33 per cent cash profit margin) and ongoing mid-single digit revenue growth. Fintel’s lower margin and more cyclical non-core surveying and panel management business accounts for 6 per cent of group cash profit, but is still comfortably worth £10mn based on a valuation of 8.6 times cash profit.

On a modest 11.5 times forecast cash profit estimates to enterprise valuation, and priced well below analysts’ 265p a share sum-of-the-parts valuation, this is an attractive entry point especially as the group is well funded to make further earnings accretive acquisitions. Although the share price has declined 4 per cent since I covered the interim results (‘A fintech primed for digital growth, 21 September 2021), the FTSE Aim All-Share index has shed 18 per cent of its value in the same period. I fully expect the outperformance to continue as equity markets recover. Buy.

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