SimplyBiz Group Analyst Q&A: Quality of group earnings has improved (LON:SBIZ)


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

Q1: SimplyBiz Group has released a trading update for the 6 months to 30th June, what were the key points in that update?

A1: This update confirms that the recurring revenues from Defaqto and from the company’s Intermediary Services division have limited the impact of the COVID lockdown on group revenues and EBITDA. Importantly, the update provides full year guidance of adjusted EPS of, and I quote, “no less than 11p” for the current year.

Other key points include the first half revenues of £28.9 million which is 0.7% lower than the first half last year but, as I mentioned, the Defaqto acquisition in March 2019 has definitely helped by the increase in revenue and this has offset a significant reduction in surveying and valuation related revenue caused by the lockdown restrictions.

The adjusted EBIDTA margin is 25.5% and that implies an EBITDA of £16.9 million and that compares with £17.8 million for the same period last year.

The cash flow conversion is expected to exceed 65% compared to 40% last year, just bare in mind the normal cash conversion is over 80% so it is a lower cash conversion and that’s because the company has given some leeway to its intermediary firms but the cash will come through over the next 12-18 months from the IFA firms. So, you should expect improving cash flow over the year and a bit.

The net debt at the end of June 2020 was £25.8 million compared to £27 million at the end of last year and the group is well within its banking covenants. We expect the net debt to continue# to fall and should be under £20 million by the end of 2021.

Operationally, the company is operating ‘business as usual’, the Intermediary Services division continues to deliver all its services to customers without disruption and it’s been recruiting new member firms. So Intermediary Services division pretty much as usual with the exception of the leeway given in terms of cash payment to member firms.

The Distribution Channels division, which includes the valuation and surveying business, has been significantly impacted by the lockdown restrictions in the second quarter and the volume of valuations and surveys has moderately increasing in June. The management has indicated it intends to take capacity out of this division reducing the operational gearing to housing market activity.

Interims are scheduled for publication on 15th September when we will, obviously, have much more information to consider.

So, the outlook, Matt Timmins, Joint Chief Executive made lots of comments but I think the key thing is he said, “the lockdown period has allowed us to accelerate its clear digital strategy which will further enhance quality of earnings, margin and cash generation going forward.”

Q2: How does this statement change Zeus view of the company?

A2: First, I would say the statement confirms three things:

First of all, the company has a resilient business model with a large element of recurring revenues with an innovative management team.

Secondly, its acquisition of Defaqto in March last year  has many benefits, especially Defaqto’s almost all recurring revenues, high margins, and ability to operate flexibly and remotely.

Thirdly, the COVID lockdown would have a limited negative impact on the company’s Surveying and Valuations business for the year, obviously during that second quarter it was unable to operate. Clearly, the statement tells us that that business is not back up and running.

In the event the 0.7% fall in revenue and 6% fall in EBITDA to £7.4 million from £7.9 million last year is a good result. We are pleased to set out new forecasts which are consistent with management guidance as set out in the statement.

In short, we expect three things:

  • One is Defaqto to continue growing strongly with high margins of over 40%.
  • Secondly the Intermediary Services division to also grow albeit at a lower rate of 4-5% per annum and lower margins similar to recent history but around about 23% operating margin.
  • The Distribution Channels revenue to grow at between 5-6% and at margins of 25% as SBIZ recovers its Marketing Services revenues and doesn’t really make too much of an effort to try and grow its Valuation Services division as it will be taking capacity out of that.
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We expect the Intermediary Services and Defaqto will together contribute just under three quarters of both 2020 and 2021 EBITDA. I think it is fair to say that the quality of group earnings has improved.

Q3: This year SimplyBiz Group shares have traded from 245p to a low of 136p, that was on the 18th March, and then to a recent high/low of 190p and 137p respectively and now I think they’re trading at around 150p. With all this in mind, what’s your view on the company’s valuation?

A3: Well it has been a year of a lot volatility for the company’s shares. We should remember that the equity share price should reflect the present value of shareholder of value creation over many future years.

The view of that has been changing so let me just take you through the time period.

So, at the beginning of the year at 245p the share price reflected the contribution that the Defaqto acquisition that was made in March 2019 would bring to the group not only in the year of acquisition but also in the coming years. Defaqto’s prospects remain excellent and it has made a valuable contribution in the first half of this year and should, for the whole of this year and coming years.

A lot of that should still be there in the price, the fall in share price to a low of 136p in late March reflected clearly was linked to the expected impact of COVID-19 on the Surveying and Valuations business unit which, in 2019, contributed over 20% of group revenues. The withdrawal of management guidance for 2020 year was a clear indication of uncertainty in the short term earnings prospects.

The share price recovery to 190p by the end of April coincided with the end of lockdown and the ability of the Surveying and Valuation businesses to actually start operating again and it reflected the market’s appreciation of the management announcements of action taken to support the company’s clients and the decision to furlough its Surveyors during the period and obviously to invent new socially distance ways of carrying out surveying work.

The recent fall to 137p I think reflects concerns about the impact of the second quarter lockdown on the company’s interims and full year results so it was uncertainty there again which raised its head.

The recovery to 150p now, in my opinion, reflects a balance between concerns and the facts which have been set out in today’s trading update.

In my opinion, the SBIZ share price should reflect the improving quality of its earnings, as I mentioned a few moments back, at 150p SBIZ is trading on 13.6 times our new forecast which is set at 11.0p. Remember management are saying they expect it to exceed 11p so 13.6 times the management guidance which includes the share based payments.

So, we expect the company to provide investors with higher than market earnings growth and have defensive qualities. With the prospects of double digit earnings growth over the next few years, driven by Defaqto and Intermediary Services division and recovery in the distribution channels, a valuation of 16 times forecasts earnings for 2021 which I’ve set at 12.2p, which is an otherwise valuation of just under £2 a share is , in my mind, very credible.

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