Fintel agreement with Tatton will add 2,500 IFA firms and will bring scale benefits says Zeus Capital (LON:FNTL)


Fintel plc (LON:FNTL) is the topic of conversation when Zeus Capital’s Research Analyst Robin Savage caught up with DirectorsTalk for an exclusive interview.

Fintel is a leading provider of FinTech and support services to the UK retail financial services sector. This week, the company announced a major strategic partnership with Tatton Asset Management and the sales of its fund management business for a cash consideration of up to £5.8 million. Now, joining me today to discuss the news is Robin Savage, Research Analyst at Zeus Capital.

Q1: As mentioned, the company has signed a five-year distribution agreement with Tatton Asset Management, and to sell its fund management unit, Verbatim, to Tatton for £5.8 million. What are the key elements of the transaction from FNTL’s perspective?

A1: First of all, the company is going to have a major distribution agreement, it’s the largest of its distribution agreements to date, with Tatton Asset Management and this will increase its distribution as a service, they call it DaaS, or you could see it as subscription revenue stream with the largest of these deals done to date. Most recently, they signed deals with the likes of Schroders and with Just Group and The Guardian Group.

Secondly, it’s going to be integrating the pool of IFA’s that Tatton have with their very large pool of IFA’s and this will help to grow the average revenue per member that are part of their service group.

Third point is that it’s going to be neutral to earnings short-term while reducing the group debt to below £1 million pounds and it has potential to be able to grow revenue and profits, medium term.

I think this improves the quality of the company’s sales, revenue, and profits, essentially Verbatim was contributing around about £1.4 million of profitability a year, and that was effectively linked to the Assets under Management, which hadn’t been growing under the company’s management. I think that the business is in the best hands in Tatton, which is a specialist to fund management group.

So, I think overall this, this seven-year distribution deal will be extremely helpful to the company, adding 2,500 IFA firms and it will bring scale benefits.

Q2: What’s the impact then on your forecasts?

A2: Well, the immediate impact on the revenues and earnings will be neutral so no impact, and that’s guidance from the management team so in essence, the £1.4 million of annual possibility will be offset by revenues from license fees coming from Tatton and its clients. The access to Tatton’s 2,500 IFA clients should have a benefit, which we don’t yet include in our forecast.

The company reports its interim results to the 30th of June next Tuesday, 21st of September, this is the appropriate moment for me and others to consider the medium term impact of the company to recent corporate actions which include the sale of Zest, which is one of its lower margin businesses.

Also, to consider these transactions and the impact that this should have on the shape of the business, in particular, the proportion of the business which is either SaaS or subscription revenue and profitability.

Q3: What impact does this deal have on your view of Fintel’s valuation?

A3: At £2.31, the company is trading at around about 18.6 times earnings and 4 times EV to sales and I would say that if this business were a pure SaaS and subscription business, generating EBITDA margins of 35% to 40%, which is the intention of the business set out in the Capital Markets Day last December, the appropriate EV to sales ought to be more like 6-7 times sales. So, moving from 4 to 6 is clearly a 50% increase in valuation.

I think there’s going to be a need to see the shape of the business changing before that is fully reflected in the business, I’m of the opinion that approximately two thirds of the business is SaaS and subscription at the moment.

Further disposals and changing the shape of the business will lead to the management’s expectation that over 70% of their business will be SaaS and subscription in short term and the EBITDA margins for the group should move from 30% up to the 35%-40% range also in the medium term and I will review all this after the interims next Tuesday.

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