Banking joint venture with Austrian Post

Fintech Group 25 September 2018 Update
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FinTech Group

Banking joint venture with Austrian Post

Financial services

Scale research report - Update

25 September 2018

Price

€28.50

Market cap

€499m

Share price graph

Share details

Code

FTK

Listing

Scale

Shares in issue

17.5m

Business description

FinTech Group 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 and Austrian markets with limited geographical exposure.

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

New joint venture will stretch management time in the near term.

Analyst

Richard Jeans

+44 (0)20 3077 5700

FinTech Group (FTG) has announced a landmark 50/50 banking joint venture with Austrian Post (VIE: POST, market cap c €2.4bn) where FTG is supplying the technology while Post offers its established infrastructure. The deal creates a new growth arm for FTG that is expected to break even in 2022 and could act as a blueprint for similar deals in other countries. Meanwhile, H1 results were in line with expectations as margins benefited from strong growth in broking volumes. If FTG can meet its objective of generating €35m net income from the joint venture with Post by 2025, it would provide significant upside in the shares for the cost of the 7% dilution in the capital increase that has funded the deal.

H1 results: In line, transactions jump 20%

H1 results were broadly in line with management’s expectations. Revenue rose by 18% to €58.5m while EBITDA jumped 42% to €18.4m. The growth was driven by the core Financial Services (FIN) segment, which saw its revenues rise 26% to €52.3m as its EBITDA margin soared by 620bp to 28.9%, reflecting operational gearing as transactions increase. The Technologies (TECH) segment dipped as the division continues to undergo heavy investment in new functionality.

A free ride to Austria

Both FTG and Post are investing €112.5m in the new joint venture. FTG is funding its investment with a €35m share placement with Post and transferring its interest in its Austrian flatex.at business at a €25m valuation. The remaining €52.5m is payable over 2020 to 2023 and is effectively fully funded as the joint venture will pay FTG at least €10m per year for the IT infrastructure. The joint venture has the use of Post’s 433 post office branches as well as 1,351 postal partners; this infrastructure would have been impossible for FTG to establish on its own. Following the collapse of the arrangement with its previous financial services partner, BAWAG, Post conducted a ‘beauty contest’ for a new partner and stressed it wanted to hold an equity interest. After an extensive search, it selected FTG partly because it was the only company that could provide banking and technology.

Valuation: Attractive relative to peer group

The shares trade on 16.2x 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 along with improving margins, and with further significant upside potential from the banking joint venture with Post.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

95.0

30.6

0.73

0.0

39.0

N/A

12/17

107.0

32.1

1.00

0.0

28.5

N/A

12/18e

124.8

45.3

1.47

0.0

19.4

N/A

12/19e

141.3

54.7

1.76

0.0

16.2

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.

H1 results: In line with management’s expectations

Revenue rose 18% to €58.5m while EBITDA jumped by 42% to €18.4m, as the EBITDA margin jumped by 520bp to 31.5%. The growth was driven by the FIN segment, which saw its revenues rise 26% to €52.3m. This reflected the strong growth in transaction volumes, and the operational gearing fed through to the bottom line with the FIN division’s EBITDA margin surging 620bp to 28.9%. The new partnership with Goldman Sachs is going well; FTG has nine product partners; the top five are Morgan Stanley, BNP Paribas, Goldman Sachs, UBS and Vontobel. The TECH segment dipped as the division continues to undergo heavy investment in the core banking system FTG:CBS and this will continue in H2.

Exhibit 1: H118 y-o-y analysis

H117

H118

(€000s)

FIN

TECH

Other*

Total

FIN

TECH

Other*

Total

Revenues

41,414

17,844

(9,696)

49,562

52,256

16,378

(10,136)

58,498

Raw materials and consumables used

(12,660)

(3,315)

1,925

(14,050)

(14,060)

(1,834)

909

(14,985)

Personnel expenses

(7,464)

(6,465)

2,512

(11,417)

(8,578)

(6,205)

2,554

(12,229)

Other administrative expenses

(11,874)

(4,479)

5,259

(11,094)

(14,495)

(5,061)

6,673

(12,883)

EBITDA

9,416

3,584

13,001

15,123

3,277

18,402

Margins

22.7%

20.1%

26.2%

28.9%

20.0%

31.5%

Depreciation and amortization

(2,590)

(3,527)

EBIT

10,411

14,874

Financial results

(674)

(957)

EBT

9,737

13,917

Income tax expense

(2,699)

(4,442)

Earnings from continuing activities

7,038

9,475

Earnings from discontinued ops

(88)

(94)

Consolidated net profit

6,950

9,381

Source: FinTech Group. Note: *Other represents inter-divisional; TECH provides IT to the FIN segment.

The KPI data indicate that Q2 was a quieter period that Q1, with c 2.9m transactions versus c 3.7m in Q1.This was reflected in the transactions per customer, which fell from c 56 in Q1 to 48 for the whole of H1. Customer assets continued to grow nicely, but the primary focus for FTG is on driving transaction volumes as that is the biggest driver of profits.

Exhibit 2: Key performance indicators

FY12

FY13

FY14

FY15

FY16

FY17

H117

H118

Change H/H %

Transactions executed

6,625,418

5,486,715

6,023,210

10,143,219

10,462,477

11,272,496

5,505,237

6,628,374

20.4

Number of retail customers

118,170

126,111

134,403

176,600

212,040

253,825

234,874

274,830

17.0

Transactions per customer per year

56.07

43.51

44.81

57.44

49.34

44.41

46.88

48.24

2.9

Customer assets under management (€m)

2,810

3,527

4,043

5,770

10,855

11,794

11,238

12,120

7.8

of which: securities account volume

2,272

2,795

3,236

4,784

9,512

10,910

10,310

11,166

8.3

of which: deposits account volume

538

732

807

986

1343

884

929

954

2.7

Source: FinTech Group

Gross commission income jumped 23% to €45.3m, helped by the introduction of new brokerage products, which are mainly exchange traded products. After deducting commission expenses, net commission income rose 20% to €33.0m. Gross interest income jumped 28% as the group’s credit book continued to grow at pace, mainly relating to margin trading (60–70%) and factoring (25–30%). The credit book stood at c €195m at end June and yields c 4.5%. Meanwhile, provision of IT services dipped as the focus there remains on heavy investment.

Exhibit 3: Revenue by type (gross basis)

(€000s)

H117

H118

Change (%)

Commission income

36,711

45,303

23.4

Provision of IT services

7,164

6,337

(11.5)

Interest income

4,258

5,453

28.1

Other operating income

1,429

1,416

(0.9)

Total

49,562

58,509

18.1

Source: FinTech Group

Landmark deal with Austrian Post (Österreichische Post)

BAWAG floated on the Vienna stock exchange in October 2017, raising €1.9bn in Austria’s biggest ever listing. Prior to its IPO, BAWAG announced it planned to give notice to Post on their partnership, instead choosing to operate its own network of branches. BAWAG had been paying Post an annual fee (we understand around €60m) for the use of Austrian Post’s infrastructure. The arrangement has been highly profitable for BAWAG (VIE: BG, market cap €4.1bn), generating revenues of €224.6m in FY17, for 40% profit margins (34% in FY16), and representing 43% of its total pre-tax profits in FY17.

Following the termination, Post conducted a ‘beauty contest’ for a new financial services partner. Post operates a highly profitable traditional post office business. However, this is a mature business, threatened by email, and management wants to diversify the group’s income sources. Consequently, it wanted to hold an equity interest in a new financial services venture. Post selected FTG because FTG was the only one that could provide both banking and technology. The BAWAG relationship ends in December 2019, while the new joint venture is expected to begin trading in July 2019, pending the granting of the relevant banking licence. Given that FTG has operated a banking business in Austria for almost a decade and has had to file data with Austrian regulators, it believes this process will be a formality and a licence would be expected early next year. There will then be a pilot phase in c 50 branches, with basic banking functions.

Exhibit 4: Deal structure

Source: FinTech Group

Both FTG and Post are investing €112.5m in the new joint venture so that €225m equity will be provided by 2025. FTG is funding its investment with a €35m share placement with Post (1,225,761 new shares at c €28.55) and transferring its interest in flatex.at for a €25m valuation. The remaining €52.5m is payable over 2020 to 2023 and is effectively fully funded as the joint venture will pay FTG at least €10m per year for the IT infrastructure including the core banking system and operating IT system along with services. The amount could rise, depending on the level of services that are contracted. The joint venture has the use of Post’s 433 post office branches as well as 1,351 postal partners. Post enjoys c 60m customer contacts per year, and after BAWAG stops offering its products in Post’s c 1,750 branches and postal partners, many of its customers will have a strong interest in becoming a customer of the new joint venture, especially in rural areas, since BAWAG has fewer than 100 of its own branches. FTG believes it can achieve revenues of €300 per customer and projects adding 250k customers in 2021 and 400k in 2025. It forecasts the joint venture will break even by 2022 and generate net profit of €35m in 2025.

Valuation: Attractive relative to peer group

The shares trade on 16.2x 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. The new joint venture with Post adds extra upside potential, BAWAG’s €4.1bn valuation suggests there could be significant upside because 43% of its profits came from the Post arrangement. However, we note the joint venture will also have to compete with BAWAG.

Exhibit 5: Peer group comparison

Share price

Market cap

Revenue

Operating profit

Operating margin

PE (x)

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

28.50

499

EUR

107.0

124.8

141.3

14.9%

39.6

47.8

31.7%

33.8%

19.4

16.2

Global B2C peers

Avanza

413.4

12,515

SEK

965.0

1049.6

1187.6

10.9%

437.0

540.0

41.6%

45.5%

32.1

27.0

Binckbank

5.45

368

EUR

149.0

147.0

150.0

0.3%

37.0

38.3

25.1%

25.5%

12.1

13.5

Etrade

55.86

14,505

USD

2359.1

2859.1

3074.7

14.2%

1346.8

1453.5

47.1%

47.3%

15.6

13.9

FinecoBank

11.41

6,942

EUR

580.2

640.6

705.1

10.2%

390.0

441.0

60.9%

62.5%

28.0

24.0

Interactive Brokers *

58.84

24,437

USD

1609.6

1892.0

2208.0

17.1%

1723.0

1987.0

91.1%

90.0%

27.0

23.3

Swissquote

70.3

1,078

CHF

187.5

217.8

240.2

13.2%

58.8

71.4

27.0%

29.7%

21.3

17.9

Medians excl FinTech Group

12.1%

44.4%

46.4%

24.2

20.6

European B2B peers

CREALOGIX

142

197

CHF

87.1

110.0

121.0

17.9%

8.7

12.3

7.9%

10.2%

34.7

23.3

First Derivatives

4020

1,044

GBp

179.6

212.7

238.8

15.3%

30.7

33.9

14.4%

14.2%

50.6

45.5

GFT

12.58

331

EUR

414.7

418.0

439.3

2.9%

26.1

32.4

6.2%

7.4%

16.1

13.2

Gresham Tech

162

110

GBp

21.7

24.6

27.6

12.8%

4.5

5.5

18.3%

19.9%

25.3

21.6

Sopra Steria

139

2,856

EUR

3823.8

4093.3

4296.5

6.0%

284.5

337.0

7.0%

7.8%

13.3

11.4

Temenos

159.5

11,301

CHF

728.8

843.4

949.8

14.2%

238.5

286.0

28.3%

30.1%

55.8

48.8

Medians excl FinTech Group

13.5%

11.2%

12.2%

30.0

22.4

Source: Bloomberg. Note: *EBITDA and EBITDA margins are shown in place of operating profits/margins. Priced at 20 September 2018.

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