FD Technologies has a 'hidden gem'

At FD Technologies (FDP) it is a case of the good outweighing the bad. The company is made up of three business: the new data analytics cloud platform, KX Insights; a financial services consultancy business, First Derivatives (FD); and its marketing platform MRP. KX and FD had strong starts to 2022, but this was partly offset by a sudden fall in growth in the marketing business.

Starting with the bad, MRP’s revenue dropped 8 per cent in the first half and is expected to be down 8 per cent for the full year. Given management was forecasting 10 per cent growth, this is a big miss. The blame is, probably fairly, placed on the worsening macroeconomic conditions. To mitigate the impact, £3.5mn of annual costs are being stripped out of MRP.

The good news is that MRP is the smallest part of the group, making up just 16 per cent of total group revenue. First Derivatives provides 58 per cent and the remaining 26 per cent comes from KX Insights. First Derivatives’ revenue rose 22 per cent, ahead of the 15 per cent expectation. However, due to rising wage inflation, the gross margin slipped one percentage point to 27 per cent.

KX Insights has a much larger gross margin of 72 per cent, rising from 69 per cent last year. This is because it benefits from economies of scale as R&D and marketing expenses get spread over a larger customer base. To justify the FactSet consensus forward price/earnings ratio of 30 most of the sales growth will need to come from KX.

In the first half revenue rose 19 per cent. This was slightly slower than at First Derivatives. However, if service sales, which dropped 11 per cent, are stripped out, growth was 35 per cent. Service revenues come from billing the customer for installation; FD said the drop here was due to KX becoming “easier to adopt”, ie with no installation help.

In the next half-year, KX Insights should feel the tailwind of a partnership signed with Microsoft Azure, which means Microsoft sales teams will now be pushing KX to their huge customer base. Some sales have already been made through the partnership and business here is expected to pick up in the second half of the year.

KX Insights’ annual recurring revenue growth was 41 per cent, ahead of a forecast 35-40 per cent. Broker Peel Hunt thinks KX is “increasingly looking like a hidden gem”, and with that growth rate we tend to agree. Buy.

Last IC View: Buy, 2,840p, 10 May 2022