SimplyBiz Group Analyst Q&A: Core revenue streams will drive the valuation (LON:SBIZ)

SimplyBiz Group

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

Q1: SimplyBiz Group, the leading independent provider of fintech and support services to financial advisors and financial institutions, they’ve released a trading update ahead of full year results on the 16th of March. Robin, what are the key points in that update?

A1: Well, in overview, the company’s trading update shows that it’s marginally ahead of where the management expected it to be in July last year.

We must nudge up our P&L forecast for 2020, the year that’s just gone, the cashflow is stronger than we’d expected and our 30th of January research note entitled ‘digital transformation’ provides a prudent view of the value creation through the separation of the digital core from the non-core businesses, we’ll touch on that later,

In summary, the trading update tells us that the 2020 results will show £61 million of group revenue, which is 3% below group revenues for 2019, it’ll show an adjusted EBITDA margin of 28.3%, which is identical to the level last year. Now that implies an EBITDA of £17.4 million which is 2% below the adjusted EBITDA last year of £17.8 million.

The robust cash flow conversion is expected to exceed 65% when you look at adjusted EBITDA conversion, but if you do it on a conversion of adjusted profits, it’s sort of late 70% conversion. The net debt has been reduced to £19.5 million, they say that the ratio of net debt to adjusted EBITDA was 1.1, which is consistent with the number I said earlier of £17.4 million adjusted EBITDA.

So, there’s been a slight change in the wording of the guidance for adjusted EPS, now previously they’d said no less than 11p a share, and now they’re talking about marginally above 11p per share. They’ve announced an intention to declare a final dividend of not less than 2p, previously they’d said a final dividend of 2p.

In terms of the outlook, Matt Timmons, joint-CEO, observed that the resilient trading performance in a challenging year demonstrates the robust nature of their core revenues and ongoing improvement in the quality of core underlying earnings, offsetting an expected reduction of valuation and surveying income in the period.

Throughout 2020, the business has accelerated its digital strategy, grown the core customer base and delivered new services, which will further improve the quality of earnings, the margins and cash generation.

Q2: How does this update impact your view of the company and its forecasts?

A2: Well, we’re going to have to increase our 2020 forecast because revenue is nearly 3% above our expectation and the EBITDA is nearly 2.5% more than we’d expected and the adjusted EPS, we had set expectations at 11p so we’re now thinking 11.2 or maybe a bit higher than that.

I think it doesn’t actually fundamentally change my view, but I think what it does show is that the cash generation is stronger, much stronger than I’d expected. It’s £2.3 million better cash generation so the net debt of £19.5 is less than the £21.8 that we had expected.

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So, we have reduced our December 2021 net debt forecast by £2.2 million to only £13 million and we estimate that cashflow after CapEx is around about £8.5 million, which is 8.8p per share of free cash, which implies free cashflow conversion of adjusted EPS of 79%.

So, to be absolutely straight with you, the detail of the cashflow hasn’t been released, I’m unaware of it in detail so we should just be a little bit more cautious about the conversion rates. We will review our 2021 forecast and set 2022 expectations when the full-year results are released on the 16th of March.

Q3: So, SimplyBiz Group full year results show underlying growth of its digital core business. How does this impact your view on valuation?

A3: This morning, SBIZ shares are up 4.4% to just under £1.90 and I think that is reflecting just the confidence in the quality of revenues and cash generation for the group as a whole, and the management stability to provide clear guidance, even in a very difficult economic conditions.

I think that, prior to the announcement today, there was about a 3% relative improvement relative to the All-Share and I think that was reflecting investors recognition of the quality of the core revenue streams, these digital revenues. I would say that because I wrote a research note on it but these core revenue streams are 80% of the group revenue and it’s about 90% of the group EBITDA and it is the core that is going to be growing and it’s appreciating that which I think is going to drive the valuation.

So, I think in terms of the explicit guidance as to what the earnings per share are for this year, I think that’s just perhaps a bit of detail, the more important issue is to do with the core digital revenues and EBITDA which we’ll get more information later.

If I remind you that these core revenues generate or are expected to generate organic revenue growth of between 5-7% per annum, which you may think is not particularly high, but the point is it is quality growth. The business ought to be operating on a 35-40% EBITDA margin and I expect these core businesses to be operating on a 33% operating margin for the year we’ve just had and for that operating margin to gently nudge up into that range of 35-40% over the next couple of years.

I think that stocks with these characteristics should trade on an ungeared price to revenue multiple of 4.5-5 and an ungeared price earnings multiple of 18-19 times. The math is simple for me, that if we look at 5 times core revenue for 2021, which is expected to be over £51.7 million, that gives me an indication of a value of the business of £258 million, which is £2.67 per share, which is over 40% above where we are at the moment.

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