Strategic review

FinTech Group 11 July 2019 Update
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FinTech Group

Strategic review

Financial services

Scale research report - Update

11 July 2019

Price

€22.35

Market cap

€437m

Share price graph

Share details

Code

FTK

Listing

Scale

Shares in issue

19.6m

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 in FY2020.

Favourable regulatory environment within Europe.

Organic growth opportunities by rolling out the brokerage across new regions in the eurozone.

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.

Low/negative eurozone interest rates make it challenging to generate returns on client money.

Analyst

Richard Jeans

+44 (0)20 3077 5700

FY18 was a strong year for FinTech Group (FTG) with healthy 17% growth in revenues and expansion in margins. In recent weeks flatex has launched successfully in the Netherlands, with the entry cost considerably lower than expected. Consequently, management upgraded EBITDA guidance in May. Management believes it has all the components for growth (notably, the brokerage platform & banking licence) and has hired an investment bank to review various strategic options. Given the growth potential, we believe the shares remain attractive on c 16x consensus FY20 earnings.

FY18 annual report

FY18 revenues grew by 17% to €125.1m, while EBITDA lifted by 32% to €42.4m. This was driven by an 11% increase in transactions, along with onboarding new B2C customers. The new Goldman Sachs partnership has progressed well, and the bank will become flatex’s platinum partner in Germany from November.

International expansion

In June, FTG launched flatex in the Netherlands. The model includes zero fees and flatex generates revenues via a cut from its product and exchange partners. Product partners in the Netherlands are Goldman, BNP and Vontobel. FTG intends to launch its brokerage in other eurozone countries over the next 18 months.

May trading update

flatex added more than14.5k customers in the first five months of FY19 and transactions were expected to reach record levels in Q2, despite subdued volatility. The FY19 EBITDA margin target was raised from 27% to 29% due to significantly lower than anticipated investment and marketing costs in the Netherlands.

Strategic review

In early July, FTG announced that it has appointed Lazard ‘to investigate the group’s strategic options regarding the future orientation of the company in order to be able to optimally make use of the significant growth opportunities. Such evaluation will include potential strategic partnerships, a potential sale (wholly or partially) of the company and obtaining potential new investors’.

Valuation: Attractive relative to peer group

The shares trade on 15.6x FY20e consensus earnings. We believe this looks attractive relative to the peer group (see Exhibit 5) given FTG’s favourable growth profile along with improving margins.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

107.0

32.1

1.00

0.0

22.4

N/A

12/18

125.1

42.4

1.43

0.0

15.6

N/A

12/19e

143.1

42.1

1.06

0.0

21.1

N/A

12/20e

158.5

N/A

1.43

0.0

15.6

N/A

Source: Company data, Refinitiv

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.

FY18 results

FY18 revenues rose by 17% to €125.1m, while EBITDA jumped by 32% to €42.4m. The number of transactions increased by 11% to 12.5m in FY18, reflecting a 14% increase in the number of clients and a slight decline in transactions per customer. The current top seven product partners are: Morgan Stanley (platinum), Deutsche, Goldman Sachs and UBS (gold); and BNP Paribas, HSBC and Vontobel (silver). The Goldman Sachs partnership has been successful and from November it will replace Morgan Stanley as the new platinum partner, with zero fees for traders. Traders pay €1.90 for products from gold partners and €3.90 from silver partners.

FTG launched flatex in the Netherlands in June, and the process was carried out so efficiently that management was able to increase EBITDA guidance by 200bp in May. The Netherlands model includes zero fees for traders and flatex generates revenues via a cut from its product and exchange partners. flatex’s product partners in the Netherlands are Goldman, BNP and Vontobel. FTG intends to launch the brokerage in other eurozone countries over the next 18 months. It plans to drive this growth primarily organically.

The proposed name change to flatex will be put forward at the AGM on 12 August, while the uplisting to Prime Standard has been put on hold due to the strategic review. The company continues to pay no dividend, with the focus on investing for growth

Exhibit 1: Key performance indicators

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Transactions executed (000's)

6,625

5,487

6,023

10,143

10,462

11,272

12,483

Number of retail customers (000's)

118.2

126.1

134.4

176.6

212.0

253.8

290.3

Transactions per customer per year

56.07

43.51

44.81

57.44

49.34

44.41

43.00

Customer assets under management (€m)

2,810

3,527

4,043

5,770

10,855

11,794

10,995

of which: securities account volume

2,272

2,795

3,236

4,784

9,512

10,910

10,000

of which: deposits account volume

538

732

807

986

1,343

884

995

Source: Company accounts

Commission income grew at 10%, which was roughly in line with the number of transactions. Provision of IT services rose by 15%, reflecting the onboarding of new B2B contracts, and interest income increased by 13%, reflecting the growth in the collateralised loan book. The jump in ‘Other operating income’ reflected c €6m of factoring revenue.

Exhibit 2: Revenue by type

2016

2017

2018

FY18/FY17 change (%)

Commission income

64,031

77,488

84,861

9.5

Provision of IT services

15,583

16,006

18,462

15.3

Interest income

7,799

10,352

11,733

13.3

Other operating income

7,608

3,168

10,044

217.0

Total

95,021

107,014

125,100

16.9

Source: Company accounts

Both segments – FIN (financial services) and TECH (technology) produced strong growth in FY18. In FY17, the expenses in the holding structure was allocated to ‘Other’ category but, following the completion of the ‘From 5 to 2’ strategy, these costs are now allocated to the two segments, and hence the EBITDA of the ‘Other’ category is zero in FY18.

Exhibit 3: FY18 y-o-y analysis

2017

2018

FIN

TECH

Other

Total

FIN

TECH

Other

Total

Revenues

89,113

30,642

(12,742)

107,013

107,140

39,730

(21,770)

125,100

Raw materials and consumables used

(28,688)

(3,937)

1,640

(30,985)

(44,517)

(5,462)

13,132

(36,847)

Personnel expenses

(15,353)

(2,702)

(5,088)

(23,143)

(17,274)

(9,470)

4,830

(21,914)

Other administrative expenses

(25,206)

(3,050)

7,445

(20,811)

(17,001)

(10,779)

3,808

(23,972)

EBITDA

19,866

20,952

(8,744)

32,075

28,348

14,018

0

42,368

Margins

22.3%

68.4%

30.0%

26.5%

35.3%

33.9%

Depreciation and amortization

(5,590)

(8,180)

EBIT

26,484

34,188

Financial results

(1,288)

(2,179)

EBT

25,196

32,010

Income tax expense

(8,179)

(10,965)

Earnings from continuing activities

17,017

21,044

Earnings from discontinued operations

(220)

0

Consolidated net profit

16,797

21,044

Source: Company accounts

Cash flow and year-end cash and equivalents are subject to volatility due to the group’s banking activities. Excluding banking operations, cash flow from operations was €17.5m. The FY18 financing inflow includes the c €35m share placement with Austrian Post and the equity position rose by 48% to €167.2m, to represent 13.6% of total assets, up from 10.2% in FY17.

Exhibit 4: Financial summary

Year ended 31 December

FY14

FY15

FY16

FY17

FY18

€000s

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

17,140

75,024

95,021

107,014

125,100

EBITDA

3,624

19,738

30,624

32,073

42,368

EBITDA margin

21.1%

26.3%

32.2%

30.0%

33.9%

EBIT

3,220

17,239

25,465

26,484

34,188

EPS from continuing operations

(0.58)

0.86

1.21

1.01

1.12

EPS from discontinued operations

0.00

(0.99)

(0.47)

(0.01)

(0.01)

DPS

0.00

0.00

0.00

0.00

0.00

BALANCE SHEET

Total non-current assets

9,354

64,999

78,889

97,373

132,493

Total current assets

85,927

1,142,067

1,454,647

1,009,677

1,095,245

Assets from discontinued operations

0

1,174

459

383

0

Total assets

95,281

1,208,240

1,533,995

1,107,433

1,227,738

Total non-current liabilities

(36)

(16,324)

(14,808)

(29,392)

(30,395)

Total current liabilities

(45,163)

(1,106,059)

(1,428,557)

(965,317)

(1,030,118)

Total liabilities

(45,199)

(1,122,383)

(1,443,365)

(994,709)

(1,060,513)

Net Assets

50,082

85,857

90,630

112,724

167,225

CASH FLOW

Cash flow from operations

23,240

(58,705)

(143,956)

112

253,641

Cash flow from investments

(331)

(47,237)

(9,192)

(12,587)

(27,756)

Cash flow from financing

21,838

26,296

1,078

20,273

32,160

Net Cash Flow

44,747

(79,646)

(152,070)

7,799

258,045

Cash & cash equivalent end of year

61,482

541,273

389,202

397,002

655,047

Source: Company accounts

Valuation: Attractive relative to peer group

The shares trade on 15.6x FY20e consensus earnings, which looks attractive relative to peers. In December 2018, Saxo Bank of Denmark announced it was acquiring BinckBank of Belgium for c €424m, reflecting a 35% premium. We estimate that this translates into a FY20 P/E of c 16.5x. We note that BinckBank’s growth rate and margins are both significantly lower than FTG’s, while its business model potentially carries more risk given BinckBank’s large credit exposure to non-brokerage credit business.

Exhibit 5: Peer analysis

Share price

Market cap

Currency

Revenue

Operating profit

Operating margin

PE (x)

local curr

local curr

Year 1

Year 2

Growth

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

FinTech Group

22.35

437

EUR

143.1

158.5

10.8%

33.9

42.2

23.7%

26.6%

21.1

15.6

Global B2C peers

Avanza

78.5

11,897

SEK

1150.9

1299.6

12.9%

473.0

566.0

41.1%

43.6%

28.3

24.2

Comdirect

9.34

1,320

EUR

347.2

370.1

6.6%

63.8

82.7

18.4%

22.4%

9.9

20.3

Etrade

45.3

11,084

USD

3000.9

3009.2

0.3%

1479.2

1470.0

49.3%

48.9%

10.5

10.4

FinecoBank

10.11

6,161

EUR

663.3

712.9

7.5%

405.6

445.3

61.2%

62.5%

23.2

20.6

Interactive Brokers

53.74

22,237

USD

1957.6

2084.1

6.5%

1221.6

1236.6

62.4%

59.3%

23.0

21.7

Swissquote

40.76

625

CHF

235.8

255.3

8.3%

153.2

166.0

65.0%

65.0%

15.4

12.9

Averages excl FinTech Group

7.0%

49.5%

50.3%

15.6

16.7

European B2B peers

CREALOGIX

97.8

137

CHF

107.3

115.4

7.5%

-1.0

3.0

(0.9%)

2.6%

58.6

23.5

First Derivatives

2880

767

GBP

245.7

275.6

12.2%

31.7

36.3

12.9%

13.2%

32.4

28.9

GFT

7.55

199

EUR

421.0

435.8

3.5%

21.8

26.6

5.2%

6.1%

13.0

10.4

Gresham Technologies

115.5

79

GBP

24.8

26.1

5.0%

1.1

1.7

4.4%

6.5%

77.7

49.7

Temenos

174.45

12,656

CHF

989.1

1111.9

12.4%

295.8

351.8

29.9%

31.6%

50.6

43.1

Averages excl FinTech Group

8.1%

10.3%

12.0%

31.7

23.1

Source: Refinitiv. Note: Priced as at 9 July 2019.

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Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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