Fintel’s resilient results highlight its strong credentials

Fintel (FNTL:275p), a provider of fintech and support services, reported a resilient financial performance last year in the face of more challenging macroeconomic conditions. Fintel’s core focus is as a provider of compliance, business and technology services to financial intermediaries, including market-leading software, financial information and product research (Defaqto). it also acts as 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, reported 3 per cent growth in both membership fee income and average revenue per customer, a reflection of increasing regulatory changes, including the consumer duty regulation. The segment’s gross profit rose 15 per cent to £10.9mn, a third of the group total, helped in part by the contribution from two small acquisitions and margin growth driven by digitalisation and expansion of its core compliance offering.

The growth from the intermediaries business mitigated a lower contribution from the group’s distribution services division, which was impacted by last year’s soft housing market. Revenue from non-core surveying and valuation services dipped 17 per cent to £8.4mn, which was the key reason behind the 17 per cent fall in divisional gross profit to £7.6mn. However, with the UK interest rate cycle turning, and the housing market showing signs of life, Fintel is well placed to benefit from a recovery in both transaction volumes and mortgage activity (the group runs one of the UK’s largest mortgage clubs).

Fintech businesses remain the key driver of growth

As has been the case for some time, Fintel's fintech and research division (which includes its Defaqto business) was the stand-out performer, delivering double-digit growth in software revenue, product ratings revenue and gross profit (up 14 per cent to £14.2mn). It’s a high-margin activity (gross margin of 63 per cent) that is being further scaled up through shrewd bolt-on acquisitions to expand the data footprint, research capabilities and intellectual property (IP).

Fintel made a total of four acquisitions at an initial cash cost of £13.3mn in 2023, and two more shortly after the financial year-end to enter adjacent markets, expand its service platform and capitalise on more favourable market pricing for buyers. Expect more deals to follow as the highly cash generative group retains a small net cash position and has access to n £80mn credit facility.

For the year ahead, house broker Zeus Capital forecasts 14 per cent higher revenue of £74.3mn, driven in part by a 12-month contribution from the six acquisitions, 11 per cent growth in cash profit to £22.9mn and 9 per cent higher earnings per share (EPS) of 13.2p. On this basis, the shares trade on a forward price/earnings (PE) ratio of 21, having rallied 34 per cent since I highlighted the undervaluation last autumn (‘This cash-generative fintech keeps growing its profit’, 19 September 2023).

The rating is fully warranted given the quality of the group’s high-margin software-as-a-service (SaaS) and subscription revenue streams, the potential for Fintel to deliver 15 per cent higher EPS of 15.2p in 2025, and scope for upgrades from additional earnings-enhancing bolt-on acquisitions. Hold.

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