Attractively positioned for growth

FinTech Group 23 July 2018 Update
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FinTech Group

Attractively positioned for growth

Financial services

Scale research report - Update

23 July 2018

Price

€29.75

Market cap

€521m

Share price graph

Share details

Code

FTK

Listing

Scale

Shares in issue

17.5m

Business description

FinTech Group (FTG) is an integrated online brokerage business. It is divided into two business areas – a technology business and a financial services business that includes a bank and a brokerage business.

Bull

Attractively valued against brokerage peer group.

Favourable regulatory environment within Europe.

Positioned to benefit from eventual upswing in interest rate cycle.

Bear

Focused on the German market with limited geographical exposure.

The company does not pay a dividend as the focus is on investing for growth.

Complex group structure, which is being amended.

Analyst

Richard Jeans

+44 (0)20 3077 5700

FinTech Group’s (FTG) brokerage business benefited from the jump in volatility in Q1. Volatility has since abated, but the business stands to benefit from a new ETP partnership with Goldman Sachs announced in March. Meanwhile, FTG remains well positioned to benefit from a strengthening German economy and the eventual rise in interest rates. Despite being the fastest-growing major broking business in Europe, the shares continue to trade at a discount to the brokerage sector.

Investment case: Combining a bank with technology

A key differentiator is that FTG also owns a bank and a software business, which uniquely gives it exposure to the bulk of the value chain. Flatex’s >200k customers are among the most active in the market, generating c 47 trades per customer per year. We see upside possibilities from the sale of FTG products to non-FTG clients, and we see the potential for fee increases given the rate per trade has remained unchanged for 11 years. Additionally, FTG is a play on a strengthening economy and subsequent rising interest rate environment as the group stands to benefit from interest income on its extensive customer deposits. With the ECB deposit rate at minus 0.4%, we believe there is more scope for rises than further declines.

FY18 trading and guidance

FY17 revenues grew by 13% to €107m while net profit surged by 36% to €16.8m. The collateralised credit book grew by 54% to €202m, as interest income jumped by 31% to €10.4m. The group saw a strong start to FY18, with 10k B2C clients added in Q1 (up 5% since December) and processed 3.7m settled transactions (up 31% over Q117). This implies that trades per customer were 56 on an annualised basis in Q1. The trading volumes were boosted by the spike in volatility in February. Management reiterated its revenue guidance of €120m, EBITDA of €40m and a net profit of €24m. FinTech is planning to shift its listing to the Prime Standard later this year.

Valuation: Attractive relative to peer group

The shares trade on 15.9x FY19e consensus earnings. We continue to believe this rating looks very attractive relative to its peer group (see page 4), given FTG’s favourable growth profile and improving margins.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

95.0

30.6

0.73

0.0

40.8

N/A

12/17

107.0

32.1

1.00

0.0

29.8

N/A

12/18e

125.0

45.7

1.49

0.0

19.9

N/A

12/19e

143.8

56.3

1.87

0.0

15.9

N/A

Source: Bloomberg

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Strong momentum continued in Q118

FY17 revenues grew by c 13% to €107m while net profit surged by c 36% to €16.8m. The collateralised credit book grew by 54% to €202m and interest income jumped by 31% to €10.4m. The group saw a strong start to FY18, with 10k B2C clients added in Q1 (up 5% since December) and it settled 3.7m transactions (up 31% over Q117). This implies that the annualised number of trades per client jumped to c 56 in Q1, having fallen in FY17 due to historically low volatility last year. The jump in Q1 activity was driven by the spike in global stock market volatility in February.

In December 2017, Morgan Stanley, which has a strategic partnership with FinTech Group, acquired a 4% stake in FinTech Group, through the issue of 700k new shares for €18.2m in cash (€25.94 per share). This helped to boost the group’s equity ratio, which jumped to 10.2% at end-December from 5.9% a year earlier. The decline in customers‘ cash and deposits also boosted this ratio, with the decline due to FTG passing on the 0.4% negative interest rate to customers.

In March the supervisory board extended the CEO Frank Niehage’s contract to 2022. The company is holding its AGM on 7 August and it is scheduled to report its interim results on 30 September.

Exhibit 1: Key performance indicators

FY12

FY13

FY14

FY15

FY16

FY17

Q118

Transactions executed (000's)

6,625

5,487

6,023

10,143

10,462

11,272

3,700

Number of retail customers (000's)

118.2

126.1

134.4

176.6

212.0

253.8

264

Transactions per customer per year

56.07

43.51

44.81

57.44

49.34

44.41

56

Customer assets under management (€m)

2,810

3,527

4,043

5,770

10,855

11,794

of which: securities account volume

2,272

2,795

3,236

4,784

9,512

10,910

of which: deposits account volume

538

732

807

986

1,343

884

Source: FinTech Group

The FY17 growth was driven by the core broking activities, with commission income rising 21%, as well as the credit book with interest income jumping by nearly a third.

Exhibit 2: Revenue by type

€’000

2016

2017

Change (%)

Commission income

64,031

77,488

21.0

Provision of IT services

15,583

16,006

2.7

Interest income

7,799

10,352

32.7

Other operating income

7,608

3,168

(58.4)

Total

95,021

107,014

12.6

Source: FinTech Group

B2C activities

In 2017, FTG significantly expanded its market share in Germany with flatex, and assumed the position of market leader in Austria with around 25,000 flatex.at customers. Flatex plans to build on its strategic partnership with Morgan Stanley aims to expand brokerage market share further in Germany. Plans are also in place to expand the brokerage business across Western Europe.

The credit book jumped by 49% over the year to c €202m. This primarily reflects the growth in the margin trading activity. FinTech Bank offers loans at a 4.9% interest rate on collateral, up to a maximum 25% LTV of the value of shares held by the customer.

ETP partnership with Goldman Sachs. In March, FTG announced a partnership with Goldman Sachs, with Goldman becoming a preferred ETP (Exchange Traded Products) partner at flatex. From 15 March, Goldman’s extensive product range has been available for flatex customers at a flat fee of €1.90, for order values of at least €1,000. This deal helps to expand flatex’s market leadership in trading certificates and warrants.

B2B activities

The group offers technology it uses within its brokerage and banking businesses to other businesses on a white labelled basis. There is a targeted contract lifetime of five to seven years with a contract lifetime value of €5-10m. Around 10% of the contract value is in set-up fees with the balance of 90% in recurring revenues. The group acquired two major new B2B projects in FY17, and FTG now has more than 30 B2B clients.

A key driver remains cost pressure, with return on equity c 4% for German banks compared with 8-10% globally. This puts pressure on banks to reduce costs and hence to outsource inefficient back office structures and processes. We note that IT is the second biggest cost for banks. A focus is to target FTG:CBS (core banking system) as the standard platform for private and specialised banks

The former ‘Securities Trading & Financial Services’ segment has been expanded to include FinTech Group Bank and renamed ‘Financials Services’ (FIN). The FIN segment thus includes the products in B2C online brokerage, B2B white-label banking, as well as electronic securities settlements, securities custody and other banking services.

The ‘Technologies’ (TECH) segment includes all IT services: among other things it develops and operates the group’s core banking system FTG:CBS. In addition, this segment includes research and development activities.

Exhibit 3: FY17 y-o-y analysis

2016

2017

€’000

FIN

TECH

Other

Total

FIN

TECH

Other

Total

Revenues

73,394

33,733

(12,106)

95,021

89,113

30,642

(12,742)

107,013

Raw materials and consumables used

(22,202)

(6,766)

3,487

(25,481)

(28,688)

(3,937)

1,640

(30,985)

Personnel expenses

(10,390)

(5,803)

(3,297)

(19,490)

(15,353)

(2,702)

(5,088)

(23,143)

Other administrative expenses

(22,781)

(3,974)

7,329

(19,426)

(25,206)

(3,050)

7,445

(20,811)

EBITDA

18,021

17,189

(4,587)

30,624

19,866

20,952

(8,744)

32,075

Margins

24.6%

51.0%

32.2%

22.3%

68.4%

30.0%

Depreciation and amortization

(5,159)

(5,590)

EBIT

25,465

26,484

Financial results

(1,226)

(1,288)

EBT

24,239

25,196

Income tax expense

(3,956)

(8,179)

Earnings from continuing activities

20,283

17,017

Earnings from discontinued operations

(7,967)

(220)

Consolidated net profit

12,316

16,797

Source: FinTech Group

Research & development (R&D)

FTG spent €10.0m on R&D in FY17, up from €6.6m in FY16, of which €7.9m was capitalised and €2.1m was expensed. The increase related to several B2B projects the group is working on.

Exhibit 4: Research & development

€’000

2016

2017

Change (%)

Development

4679

7889

68.6

Research

1949

2086

7.0

R&D total

6628

9975

50.5

% sales

7.0%

9.3%

R&D capitalised

5304

7889

48.7

R&D expensed

1324

2086

57.6

R&D amortised

2122

2192

3.3

Net capitalised

3182

5697

79.0

Source: FinTech Group accounts

Valuation: Attractive relative to peer group

The shares trade on 15.9x FY19e Bloomberg consensus earnings. This looks very attractive relative to peers; of its main European quoted peers, only Binckbank trades on a lower rating, but has been struggling, with weaker margins and a slower growth profile. Meanwhile, Avanza trades at a significant premium despite missing Q2 numbers.

Exhibit 5: Peer group comparison

Share price

Market cap

Revenue (local currency m’s)

Operating profit (local curr m’s)

Operating margin (%)

PE (x)

local curr

local curr

Curr

Year 0

Year 1

Year 2

CAGR

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

FinTech Group

29.75

521

EUR

107.0

125.0

143.8

15.9%

39.3

48.6

31.4%

33.8%

19.9

15.9

Global B2C peers

Avanza

390.4

11,711

SEK

965.0

1049.6

1187.6

10.9%

437.0

540.0

41.6%

45.5%

30.3

25.5

Binckbank

4.82

325

EUR

149.0

144.5

148.0

(0.3)%

33.0

35.2

22.8%

23.8%

12.1

12.3

Etrade

63.13

16,661

USD

2359.1

2881.7

3113.9

14.9%

1340.7

1478.7

46.5%

47.5%

17.6

15.5

FinecoBank

10.28

6,254

EUR

580.2

636.6

701.6

10.0%

388.3

440.5

61.0%

62.8%

25.5

21.7

Interactive Brokers *

65.34

26,901

USD

1609.6

1915.0

2231.2

17.7%

*1723.0

*1987.0

*90.0%

*89.1%

30.4

25.7

Swissquote

56.5

866

CHF

187.5

202.0

227.5

10.2%

108.8

118.4

53.9%

52.1%

17.9

16.2

Medians excl FinTech Group

10.5%

50.2%

49.8%

21.7

18.9

European B2B peers

CREALOGIX

150

208

CHF

71.6

88.1

102.0

19.4%

10.5

15.0

11.9%

14.7%

26.2

19.7

First Derivatives

4020

1,040

GBP

179.6

212.7

239.0

15.4%

25.0

27.9

11.7%

11.7%

50.0

45.0

GFT

13.45

354

EUR

414.7

416.4

448.4

4.0%

27.8

32.1

6.7%

7.2%

17.8

13.9

Gresham Technologies

156.5

106

GBP

21.7

23.4

25.0

7.4%

4.2

5.1

17.8%

20.4%

24.8

21.7

Sopra Steria

174.7

3,590

EUR

3823.8

4056.6

4248.4

5.4%

299.0

339.5

7.4%

8.0%

16.1

14.0

Temenos

150

10,627

CHF

728.8

843.8

948.8

14.1%

242.3

288.6

28.7%

30.4%

50.5

42.8

Medians excl FinTech Group

10.7%

11.8%

13.2%

25.5

20.7

Source: Bloomberg. Note: *EBITDA and EBITDA margins are shown in place of operating profits/margins. Priced at 19 July 2018.

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