Exploit this high-growth fintech opportunity

Cornerstone FS (CSFS:38.5p), a challenger brand in international payment solutions, has delivered profits significantly ahead of previously upgraded guidance.

The group services more than 900 small and medium-sized enterprise (SME) business customers and high-net-worth individuals (HNWI), supporting their payment needs in more than 150 countries and 58 currencies. This is done through a proprietary and highly scaleable cloud-based technology platform developed over the past five years to facilitate high volumes of transactions in multiple currencies at a limited incremental cost. The platform offers bank-grade security and fully verified transactions.

The international payments market is a highly complex space that is measured in many trillions of pounds, comprising payment mechanisms from cash, cards, and account-to-account transfers across physical, internet and mobile interfaces. It’s a fast-growing market that could generate global revenue of $3.2bn (£2.6bn) in 2027, up from $2.2bn in 2022, according to the McKinsey Global Payments Report.

To capitalise on the opportunity, Cornerstone differentiates itself by facilitating large transactions (such as property or corporate investments) for customers that fall outside the traditional transaction remit of banks. Given their cumbersome legacy IT systems, banks lack the cutting-edge technology to service these demand niches and are unwilling to invest in scaling compliance capabilities for client onboarding and ongoing transaction monitoring. Cornerstone’s tailored service requires a high level of compliance support, with each customer given a dedicated account manager. The focus is on quality of service, another differentiator from legacy banks.

A high-growth business with high operational leverage

The board’s focus has been on driving direct sales and fully commercialising the platform, while maintaining tight control over costs. Key elements have been growing the sales team and enhancing and expanding the offering, particularly through increasing the number of counterparties to broaden the number of currencies and countries where Cornerstone can transact.

By targeting HNWI and SME business segments, the group is now delivering eye-catching growth in transaction volumes (33 per cent year-on-year growth), and with the benefit of a relatively fixed cost base an increasing proportion of incremental revenue is being converted into profit. In the 2023 financial year, revenue doubled to £9.6mn on an improved gross margin of 63.4 per cent, up 2.5 percentage points. This reflects the strategic decision to manage down its white-label business and increase revenue from direct clients, which now generate 95 per cent of revenue. Active customer numbers increased by more than 12 per cent last year, of which private clients (primarily HNWIs) accounted for two-thirds of the client base.

So, with underlying operating costs rising £0.6mn to £4.4mn, and gross profit more than doubling from £2.9mn to £6.1mn, the business made a decisive move into profitability, reporting a cash profit of £1.7mn. The result was 20 per cent better than Shore Capital had predicted and reversed a cash loss of £0.9mn in 2022. The group’s balance sheet strength has improved markedly, too, buoyed by £2mn of cash generated from operations.

Expanding the product offering

A core element of the board’s strategy is to establish a global payments network that will enable Cornerstone’s customers to pay in from, and pay out to, any jurisdiction and via any payment method. While it is still early days, new counterparty partnerships have been established, which have broadened the number of currencies and countries where Cornerstone can transact, as well as expanding the business sectors that it can serve.

Chief executive James Hickman is actively pursuing a licence to operate in Dubai, and hopes to expand into Hong Kong early next year. Earlier this year, Cornerstone received authorisation to operate a payments company in Canada and provide payments services to Canadian businesses and individuals. Cornerstone is also making significant progress expanding its payment method offering, having signed an agreement to launch corporate cards co-branded and supported by Mastercard for its corporate customers. In addition, a new offering, Cornerstone Solutions, provides payments solutions to clients that are harder to service, due to, for example, the sector in which they operate. This will allow the group to leverage some of its competitive strengths – such as the high level of experienced, personalised service – and open access to a further cohort of potential clients.  

Upgraded forecasts and low rating

Having upgraded its forecasts multiple times in the past six months, house broker Shore Capital is pencilling in at least 18 per cent annual revenue growth for each year in its 2024-26 forecast period. It looks a conservative assumption given that Cornerstone is delivering double-digit growth in customer numbers and increasing their revenue contribution, too. Moreover, even without any further upgrades, the combination of rising revenue on a relatively fixed cost base is set to drive gross profit, cash profit and pre-tax profit materially higher.

Although analysts expect current-year cash profit to rise from £1.7mn to £1.9mn (a 5 per cent upgrade) on 20 per cent higher revenue of £11.5mn, it’s a conservative estimate that is below the board’s internal budget. Furthermore, with this year’s expected increase in overheads (staff account for three-quarters of operating costs) easing in 2025, an even greater proportion of incremental gross profit will be converted into cash profit next year. This explains why cash profit could increase by 69 per cent to £3.2mn in 2025 to deliver pre-tax profit of £2.5mn on 22 per cent higher revenue of £14.1mn. On this basis, expect adjusted earnings per share (EPS) of 3.1p (2025), implying the shares are rated on a prospective price/earnings (PE) ratio of 12.4 for 2025.

The shares also offer a prospective 2025 free cash flow yield of 11.4 per cent that supports a trebling of net cash from £1.4mn (2024 forecast) to £4.2mn (upgrade from £3.1mn) by the end of 2025. Cornerstone only has a market capitalisation of £22mn, so it is being valued on a modest 6.9 times 2025 cash profit to enterprise valuation. That’s a harsh rating for a high-growth business, hence why Shore Capital raised its target price from 50p to 70p following the results, above the 50p fair valuation I outlined when I suggested buying the shares at 36p (Alpha Research: ‘Tap into undervalued fintech growth’, 8 April 2024). I feel a fair valuation of 60p is now more appropriate given that the strong momentum in customer acquisitions and transaction volumes shows no sign of abating.

Please note that Cornerstone plans to change its name to Finseta (FIN) to better align the brand identity with the comprehensive range of services the group now provides. Buy.

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