Solid H1, with FY17 guidance maintained

Fintech Group 14 September 2017 Update
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FinTech Group

Solid H1, with FY17 guidance maintained

Financial services

Scale research report – Update

14 September 2017

Price

€19.00

Market cap

€319m

Share price graph

Share details

Code

FTK

Listing

Deutsche Börse Scale

Shares in issue

16.811m

Last reported net (debt)/cash

N/A

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.

Does not offer CFDs and spread bets, which might impair its ability to grow internationally.

Complex group structure, which is being amended.

Analyst

Richard Jeans

+44 (0)20 3077 5700

FinTech Group (FTG) announced a solid set of H1 results and FY17 guidance was re-affirmed. While EBITDA slipped by 6% to €13.0m, this reflected a €1.8m provision reversal in H116, and hence the underlying growth was 9%. Brokerage customers grew by 11% over H116, and transactions rose by 10%, while three new B2B projects have been delivered that will contribute in H2. Additionally, the collateralised credit book jumped by 42% over the six months to €187m. Consequently, management anticipates a strong H2. Despite being the fastest growing major broking business in Europe, the shares continue to trade at a discount to the sector.

Investment case: Combining a bank with technology

A key differentiator is that FTG owns both a bank and a software technology business, which uniquely gives it exposure to the bulk of the value chain. Management’s goal is to grow the business both organically and through acquisitions so that it generates €150m of annual revenues in the mid-term along with EBITDA of €50m and net profit of €30m. 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.

H117 results: Net profit nearly trebles to €7.0m

Group revenue grew by 2.5% to €49.6m while EBITDA fell by 5.6% to €13.0m. However, there was a €1.8m provision reversal in the prior period, which related to a legal case that FTG won, and hence underlying EBITDA rose by 8.5% to €13.0m. 23k B2C clients were added during the period, taking the total to 235k. Three new B2B projects were delivered, including a project for a large multinational bank that is shifting its euro deposit collection business from London to Frankfurt, due to Brexit, and is adopting FTG’s technology platform. FTG is confident it will win further business as a result of Brexit. Net profit nearly trebled to €7.0m, which helped to boost the group’s equity ratio to 7.0% from 5.9% a year earlier.

Valuation: Attractive relative to peer group

The shares trade on 13.7x FY18 consensus earnings. This looks very attractive relative to peers, given FTG’s attractive growth profile and improving margins.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

75.0

19.7

(0.13)

0.0

N/A

N/A

12/16

95.0

30.6

0.73

0.0

26.0

N/A

12/17e

105.0

35.3

1.13

0.0

16.8

N/A

12/18e

115.0

41.7

1.39

0.0

13.7

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.

H117 results: Net profit nearly trebles to €7.0m

Frankfurt-based FinTech Group (FTG) is a leading online brokerage business (Flatex) active in Germany (20%+ market share) and Austria (40%+ market share) and further European expansion is planned. Management continues to look for potential acquisitions to break into broking markets across Europe (initial target markets are France, Benelux and Italy). FTG also has other assets in the value chain including a technology business that builds bespoke software platforms for customers, and a bank. In March, FTG announced plans to leverage synergies by merging its five operating companies into just two companies: a tech entity (FinTech Group AG) and a financial services entity (FinTech Group Bank AG). The purpose was to simplify the group structure, improve transparency and to save costs, mainly by simplifying the management and organisational structure and FTG is now in the final stages of this process.

Exhibit 1: H1 results breakdown

€000s

H116

H117

ST&FS

TP&WLBS

Other

Total

ST&FS

TP&WLBS

Other

Total

Revenues

11,623

36,505

220

48,348

12,866

36,999

(303)

49,562

Raw materials and consumables used

(269)

(12,821)

(443)

(13,533)

(1,355)

(12,976)

281

(14,050)

Personnel expenses

(1,458)

(6,096)

(3,237)

(10,791)

(1,253)

(5,849)

(4,314)

(11,416)

Other administrative expenses

(2,495)

(5,240)

(2,509)

(10,244)

(3,498)

(6,290)

(1,306)

(11,094)

EBITDA

7,401

12,347

(5,969)

13,780

6,760

11,883

(5,641)

13,003

Margins

63.7%

33.8%

28.5%

52.5%

32.1%

26.2%

Depreciation and amortisation

(2,424)

(2,590)

EBIT

11,356

10,412

Financial result

(650)

(674)

EBT

10,706

9,738

Income tax expense

(1,848)

(2,699)

Earnings from continuing activities

8,858

7,039

Earnings from discontinued operations

(6,310)

(88)

Consolidated net profit

2,548

6,951

Source: FinTech Group. Note: ST&FS stand for Securities Trading & Financial Services, TP&WLBS stand for Transaction Processing & White Label Banking Services

H117 group revenue grew by 2.5% to €49.6m while EBITDA fell by 5.6% to €13.0m. However, there was a €1.8m provision reversal in the prior period, which related to a legal case that FTG has previously provided for but consequently won, and hence underlying EBITDA rose by 8.5% to €13.0m. Consequently, the underlying group EBITDA margin rose by 150bp to 26.2%. Net profit nearly trebled to €7.0m, which helped to boost the group’s equity ratio to 7.0% from 5.9% a year earlier. Earnings per share were €0.42. The company does not pay a dividend as the focus is on investing for growth.

23k brokerage (B2C) clients were added during the H1 period, taking the total to 235k while transactions rose to 5.5m. This translates to c 47 trades per customer on an annualised basis. Three new B2B projects were delivered, including a project for a large multinational bank that is shifting its euro deposit collection business from London to Frankfurt, due to Brexit, and is adopting FTG’s technology platform. FTG is confident it will win more business of a similar nature as a result of Brexit. The other two B2B projects related to the setting up of retail banking infrastructure for two Austrian banks.

Funds under management slipped to €0.9bn from €1.3bn over H1, reflecting the decision to pass on the ECB’s 40bp negative interest rate to customers. Consequently, some customers shifted their liquid deposits to securities and securities under management jumped by 23% to €10.3bn. Clearly, the growth in securities under management has important commercial benefits for FTG as this represents the primary source of stock from which customers execute trades. The group’s credit book rose from €131.1m as at 31 December to €186.8m as at 30 June, with an average interest rate of c 4%.

FTG provides statutory segmental reporting according to the so-called management approach, as shown in Exhibit 1. We note that c 70-80% of broking revenues are back-office trade processing, which is reflected in the second, larger division (TP&WLBS). Management has maintained its guidance given with the Q1 results (net profit of €16.8m and EPS of €1.0). It expects continued growth in ST&FS, secured by expansion, in depth and in scope, of its collaborations with business partners including Morgan Stanley. Meanwhile TP&WLBS will benefit from the three projects delivered in H1, while the additional functionality of the technology platform is available for new customers. TP&WLBS it will also benefit from the increased loan portfolio while the €800m treasury portfolio has been optimised, which will result in a 50bp improvement in interest rate received. Finally, the initial synergies from the corporate reorganisation will be realised in H2.

Exhibit 2: Key performance indicators

FY12

FY13

FY14

FY15

FY16

H116

H117

Transactions executed

6,625,418

5,486,715

6,023,210

10,143,219

10,462,477

4,976,371

5,505,237

Number of retail customers

118,170

126,111

134,403

176,600

212,040

193,773

234,874

Transactions per customer per year

56.07

43.51

44.81

57.44

49.34

51.36

46.88

Customer assets under management (€m)

2,810

3,527

4,043

5,770

10,855

9,416

11,238

of which: securities account volume

2,272

2,795

3,236

4,784

9,512

8,367

10,310

of which: deposits account volume

538

732

807

986

1,343

1,049

929

Source: FinTech Group

The group hopes to list on the Prime Standard in the first half of 2018. The process has been delayed by the restructuring of the business, which will result in the reduction of five business units to just two, and FTG is undergoing the last process of merging Flatex into FinTech Group Bank.

Valuation: Attractive given the sector consolidation and anticipated continuing fintech M&A

The shares trade on 13.7x FY18 consensus earnings. This looks very attractive relative to peers – of its main quoted peers, only Binckbank trades on a lower rating, but has been struggling, with weaker margins and a slower growth profile.

FTG is clearly an attractive takeover target as its business combines a traditional online brokerage with fintech elements. According to a survey earlier this year by Simmons & Simmons, an international law firm, 31% of banks and asset managers expect to acquire a fintech firm within the next 12 to 18 months as a way to improve their digital innovation. An additional 31% said they are delaying acquisitions while they seek greater certainty about which firms to target.

Exhibit 3: Peer analysis

Share price

Market cap

Currency

Revenue

Revenue

Operating profit

Operating margin

P/E (x)

local curr

local curr

Year 0

Year 1

Year 2

CAGR

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

FinTech Group

19

319

95.0

105.0

115.0

10.0%

29.8

35.5

28.3%

30.9%

16.8

13.7

Avanza

336

10,077

SEK

919.0

984.8

1073.2

8.1%

445.0

484.5

45.2%

45.1%

25.7

23.0

Swissquote

36.85

565

CHF

159.7

177.3

190.3

9.2%

110.7

118.7

62.4%

62.4%

18.4

16.5

Binckbank

4.25

287

147.7

153.0

156.0

2.8%

8.7

31.3

5.7%

20.1%

9.7

12.6

Interactive Brokers

41.94

17,317

US$

1,396

1,483.8

1,603.0

7.2%

*987.5

*1,142.5

66.6%

71.3%

28.3

26.7

Medians excluding FinTech Group

7.6%

53.8%

53.8%

22.1

19.8

Source: Bloomberg. Note: Prices as at 13 September 2017. Note: *EBITDA and EBITDA margins.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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