Financial Grime 11 Sept 18

Sep 11, 2018 / Financial Grime

Market news

  • RQIH – announces another novation agreement
  • Just Group fell 12% on no news yesterday. The market cap is now £700m against tangible NAV of £1.6bn. The market believes there is a rescue rights coming on the back of the consultation paper issued by the PRA.
  • Dignity fell 6% yesterday after the co=op cut the price of its funerals.

K3 Capital – H1 Results   

Share Price 327p

Mkt Cap £138m

  • Results. Revenue up 53% to £16.5m, marginally ahead of our £16.2m estimate (2017A: £10.8m). EBITDA up 64% to £7.4m (2017A: £4.5m) beating our estimate by 5.7%. Very attractive EBITDA margin improvement up from 41% to 45% helped by administration expenses growth of just 32% and variable staff costs as a percentage of revenue down to 11.8% from 13.6%. Net cash up 121% to £7.5m (2017A: £3.4m). All KPIs are improving with strong revenue growth across all three business segments: Knightsbridge +24%, KBS Corporate +43%, KBS Corporate Finance +78%. Deal fee income up 65% to £9.5m (2017A: £5.8m).
  • Estimates. We upgrade our 2019E revenue number to £16.6m from £15.1m while our 2020E number moves up to £17m from £16.7m, driven by K3’s innovative ways of driving revenue through technology. Our EBITDA estimates move up to £7.1m from £6.5m (2019E) and £7.5m from £7.1m (2020E). 2021 numbers are also now included.
  • Valuation. We upgrade our price target to 375p. K3’s PER FY1 is now in line with similar businesses producing comparable EBITDA margins and ROE, driving the rationale for our price target (see comps table on page 7).
  • Conclusion. A year of significant growth that proves K3 Capital’s innovative approach to generating M&A deals is proven to work, disrupting the traditional relationship model and increasing efficiency through accurate and detailed data, manipulated by bespoke technology to deliver increasing volumes of sellers, buyers and transactions. The company’s innovative use of technology significantly lowers costs driving scaled growth of revenues. This has been the first full year as a public company and the results speak for themselves. K3 Capital have already emerged as the market leader and are likely to deliver substantial long term shareholder returns.

 

STM – H1 Results  

Share Price 71p

Mkt Cap £42.2m

  • Results   Revenue increased 6% underlying to £10.8m (2017A £10.2m) and EBITDA increased 5% to £2.5m (2017A £2.4m). PBT increased 11% to £2.1m (2017A £1.9m). Following an increase in the H1 tax rate EPS was up 4% to 3.1p (2017A 3.1p).  The balance sheet has net cash of £16.3m and the H1 dividend has been increased 17% to 0.7p. 79% of the company’s revenue is recurring and the outlook refers to confidence that 2018 will deliver a solid performance. A new 3-year strategy is being worked on to deliver organic and acquisitive growth alongside business efficiencies.
  • Estimates  The Company has delivered 50% of our full year estimate in H1 but we leave our estimates unchanged at this stage. We anticipate 12% growth in 2019 and introduce a 2020 estimate of £5.3mm PBT (2019 E £4.8m) and EPS of 7.2p (2019E 6.5p
  • Valuation  We use a peer group of financial administrators which have an average PER of 15.9 for the calendarised December 2019 period end.  Putting STM on a 15.4X multiple derives our price target of 100p, increased from 80p previously giving 43% upside for the shares
  • View  With a strong balance sheet, 79% recurring revenues, growing cash generation and opportunities for organic and acquisitive growth alongside efficiencies we are confident the shares will reach our 100p price target

 

Simply Biz – H1 Results  

Share Price 177p

Mkt Cap £135m

  • Results  H1 revenue up 13.7% to £24.2m. EBITDA up 22% to £5.4m. Note their definition of EBITDA excludes share based payments which differs from many.  Adjusted PBT up 60.8% to £4.5m (reported loss £1.16m) and EPS up 61.7% to 4.68p. Net cash now of £1.2m and a maiden dividend of 0.98p.
  • Estimates The house broker forecasts 10% revenue growth in 2019 and 23% PBT growth. Having come to market in March I expect these forecasts to be in tact.
  • Valuation Dec 18 PER is 16.9 falling to 13.7 in 2019 with a yield of 1.5% rising to 2.4%
  • View  The shares look reasonable value for a strong company. But I do wish they wouldn’t strip share based payments out of their adjusted numbers.

Nucleus Financial – H1 Results  

Share Price 210p

Mkt Cap £160m

  • Results AUA was up 15.6% over 12 months to £14.4bn driven by net inflows of 5.9% over the 6 month period. Revenue grew by 11% to £21.6m as the revenue yield declined from 33.3bps to 31.5bps. Adjusted EBITDA was up from £1.98m to £4.9m achieving a 22.4% adjusted operating margin but like SimplyBiz they have stripped out share based payments. Excess capital is £6.7m while NTA is £15.7m. The outlook expects higher margin despite pricing pressure
  • Estimates. There are no market forecasts out yet. However I note that Integrafin is expected to make a 48% operating margin this year while Nucleus has delivered 22%.  
  • Valuation With Integrafin trading at 33X 2018 estimates and this company expected to grow faster the business is valuable.  If it delivered £9m PBT (calculated as 2X the H1 profit) and we put it on a 25X multiple the market cap would be £180m or 13% upside
  • View I suspect this agile company with strong IT could deliver impressive growth going forward and looks reasonably priced.  But I also wish they didn’t strip out share based payments in their adjustments.