Banking JV is abandoned with positive effect

Fintech Group 7 December 2018 Update
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FinTech Group

Banking JV is abandoned with positive effect

Financial services

Scale research report - Update

7 December 2018

Price

€18.16

Market cap

€340m

Share price graph

Share details

Code

FTK

Listing

Scale

Shares in issue

18.7m

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.

The cancellation of the joint venture raises concern over the B2B strategy.

Analyst

Richard Jeans

+44 (0)20 3077 5700

FinTech Group’s (FTG’s) proposed banking joint venture (JV) with Austrian Post has been abandoned in accordance with the feedback of the relevant regulatory bodies that the approval of a new banking licence might take between one and a half to two years. This supports FTG’s near-term earnings and leaves the business focused on its online brokerage activities. Meanwhile, 10-month KPIs indicate the brokerage business continues to perform well, with trades up 16% over the corresponding 10-month period. High-margin OTC products jumped 34% and represent c 25% of the total. In the wake of the recent de-rating, the shares look increasingly attractive on c 11x consensus FY19 earnings.

10-month KPIs: Trades rise 16% to 10.6m

Total brokerage customers rose 16% y-o-y (and 4% over four months) to stand at 285k. FTG estimates the addressable market size in Germany as 1.2–1.5m, growing at 1–2% per year. The 10.6m trades over 10 months indicate there were 4.0m trades over the July to October period, which includes the quiet summer months. The 4.0m translates to annualised c 42 trades per customer compared with over c 48 in H1. Importantly, OTC products (or exchange-traded products, ETPs) jumped 25%. An attractive new ETP product pricing regime took effect from 1 November and FTG will benefit from a full period of the new pricing in FY19.

Banking JV with Austrian Post is abandoned

In September, FTG announced a banking JV with Austrian Post whereby FTG would supply the technology and Post offered its established infrastructure. However, the agreement was dependent on JV receiving a banking licence before January 2020. FTG has now been informed by Austrian regulatory bodies that it would take 1.5–2.0 years to receive a banking licence. The parties could not agree on an alternative plan to passport FTG Banks’ German banking licence to the JV in order to start as originally scheduled with effect of 1 July 2019. As the parties have signed only a non-binding term-sheet, FTG was able to walk away without any penalties. The cancellation will support near-term earnings, as management had been forecasting losses from the JV until 2023. In addition, several other B2B projects that had been delayed following the Post deal are now back on track.

Valuation: Attractive relative to peer group

Following the recent de-rating, the shares trade on 10.6x FY19e consensus earnings. We believe this looks attractive relative to its peer group (see Exhibit 1) given FTG’s favourable growth profile along with 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

25.9

N/A

12/17

107.0

32.1

1.00

0.0

18.2

N/A

12/18e

124.3

44.6

1.42

0.0

12.9

N/A

12/19e

142.1

54.7

1.74

0.0

10.6

N/A

Source: Company data, Thomson Reuters

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.

Valuation: Attractive relative to peer group

The shares trade on 10.6x Thomson Reuters FY19e consensus earnings. This looks attractive relative to peers. FTG shares trade roughly in line with both Binckbank, the Dutch broker that has been struggling, and Swissquote, which has smaller growth and margins. The data for Comdirect, FTG’s key competitor in Germany, are distorted by the disposal of ebase.

Exhibit 1: Peer group comparison

Share price

Market cap

Revenue

Revenue

Operating profit

Operating margin

P/E (x)

P/E (x)

local curr

local curr

Currency

Year 0

Year 1

Year 2

CAGR

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

FinTech Group

FTKG.DE

18.16

339

EUR

107.0

124.2

143.3

15.7%

37.8

45.3

30.4%

31.6%

12.9

10.6

Global B2C peers

Avanza

AVANZ.ST

441

13,365

SEK

1243.0

1076.1

1244.3

0.1%

471.5

581.1

43.8%

46.7%

33.0

26.4

Binckbank

BINCK.AS

4.505

303

EUR

148.5

145.6

146.6

(0.6)%

35.6

35.0

24.4%

23.9%

10.2

11.4

Comdirect

CDBG.DE

10.6

1,493

EUR

363.6

328.6

352.1

(1.6)%

53.0

102.0

16.1%

29.0%

13.9

22.6

Etrade

ETFC.O

47.4

12,051

USD

2452.0

2884.2

3080.4

12.1%

1401.7

1467.1

48.6%

47.6%

12.4

11.2

FinecoBank

FBK.MI

9.062

5,499

EUR

582.7

626.3

686.7

8.6%

374.5

429.7

59.8%

62.6%

23.4

19.9

Interactive Brokers

IBKR.K

56.04

23,532

USD

1834.0

1927.7

2180.9

9.0%

1238.3

1484.3

64.2%

68.1%

26.5

21.2

Swissquote

SQN.S

44.35

680

CHF

218.4

226.4

257.4

8.6%

58.1

74.1

25.7%

28.8%

13.1

10.3

Averages excl FinTech Group

5.2%

40.4%

43.8%

16.0

15.4

European B2B peers

CREALOGIX

CLXN.S

120

167

CHF

87.1

110.2

121.0

17.8%

8.7

12.3

7.9%

10.2%

29.3

19.7

First Derivatives

FRST.L

2100

543

GBP

186.0

215.9

242.6

14.2%

29.3

31.7

13.6%

13.1%

25.9

23.5

GFT

GFTG.DE

7.56

199

EUR

418.8

411.3

430.4

1.4%

24.9

30.5

6.0%

7.1%

10.0

8.9

Gresham Technologies

GHT.L

89.5

61

GBP

21.7

23.3

26.1

9.8%

4.5

5.5

19.3%

21.1%

29.8

19.9

Sopra Steria

SOPR.PA

85.75

1,756

EUR

3845.4

4071.0

4279.3

5.5%

281.8

337.7

6.9%

7.9%

9.7

7.9

Temenos

TEMN.S

119.4

8,442

CHF

735.4

848.2

950.5

13.7%

249.5

296.9

29.4%

31.2%

40.9

34.9

Averages excl FinTech Group

10.4%

13.9%

15.1%

18.0

14.6

Source: Thomson Reuters. Note: Priced at 6 December 2018.

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