This cash-generative fintech keeps growing its profit

Fintel (FNTL:205p), a provider of fintech and support services, has delivered higher margins and cash profit in the first half. The improvements were buoyed by 6 per cent higher revenue from software-as-a-service (SaaS) and subscriptions, which account for two-thirds of core revenue. The improved margin performance propelled group cash profit 3 per cent higher to £9mn despite slightly lower total revenue of £31.7mn, the latter reflecting the impact of a subdued housing market on the group’s mortgage and panel surveying businesses.

However, Fintel’s main focus is as a provider of compliance, business and technology services to financial intermediaries, market-leading software, financial information and product research (Defaqto), and a distribution partner to financial institutions and product providers. The intermediary business, which provides compliance services to independent financial advisers (IFAs), mortgage advisers and wealth managers, delivered 15 per cent higher gross profit of £5.2mn, a third of the group total, driven by the expansion of the regulatory technology offering, and digitalisation and expansion of its core compliance offering. The growth offset a dip in profits from distribution services, which was due to weakness in the housing market.

The star performer continues to be Fintel's fintech and Defaqto division. It increased software revenue by 13 per cent, delivered mid-single-digit growth in product ratings revenue and boosted gross profit by more than 10 per cent to £6.3mn (42 per cent of group total). The group's well-regarded management team is not only capitalising on the organic growth, but also made three smart investments after the period end to recycle ongoing strong operating cash flow generation, which is building up cash on the balance sheet.

Astute bolt-on acquisitions complement organic growth

In July 2023, Defaqto acquired MICAP, an independent research and advice tools provider for tax-advantaged investment products. The strategic acquisition extends Defaqto's reach into this specialist market, expands its data footprint and research capabilities, and enhances scale and intellectual property (IP). The deal was funded from the group’s cash reserves, with the upfront cash consideration of £3mn representing a 10 times cash profit multiple. A further £1.5mn cash consideration is payable, a third of which is a contingent earnout based on trading milestones in the first year of ownership.

In the same month, Fintel IQ, a newly formed technology and knowledge platform, acquired Competent Adviser, a dynamic learning platform that enables advisers to meet increasing regulatory competency requirements. The upfront cash consideration of £2.5mn represents a multiple of nine times cash profit, and the transaction includes a £0.5mn contingent earnout too.

In addition, Fintel Labs' technology incubator made its inaugural investment, acquiring a 25 per cent equity stake in Plannr Technologies, a provider of financial technology and specialist customer relationship management (CRM) capability for financial advisers, planners and wealth managers. Defaqto will integrate Plannr's CRM system, extending the capabilities of its Engage proprietary financial advice and planning technology, offering and realising efficiency benefits for the 8,000 financial advisers who use its platform. Fintel has also recently entered a new five-year agreement with technology supplier Intelliflo on improved terms, which enhances profitability.

Moreover, with house broker Zeus Capital forecasting a £10.6mn increase in net cash in the second half, the asset-light highly cash-generative business could have net funds of £23.9mn by the year-end. Shareholders can expect news on further bolt-on acquisitions in due course.

Modest rating for fintech group

Factoring in a higher contribution from the high-margin technology side of the business, Zeus predicts that Fintel should deliver 7 per cent higher full-year cash profit of £20.7mn, on slightly higher revenue of £57mn. On this basis, expect a modest rise in earnings per share (EPS) to 12.4p after accounting for the rise in the corporation tax charge and a slightly higher dividend per share of 3.4p.

This means the shares are rated on an enterprise valuation to cash profit multiple below nine times and a price/earnings (PE) ratio of 16.5, earnings multiples that fall to eight and 15 times, respectively, in 2024. Next year’s estimates are based on cash profit rising 10 per cent after factoring in the contribution from acquisitions, savings from the new technology platform agreement and organic growth.

Fintel’s shares have flatlined since I covered the annual results (‘This fintech winner has hiked its dividend by 8%’, 21 March 2023), but the high level of recurring revenue and cash generation warrants a higher rating. Buy.

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