Company Overview: FINEOS Corporation Holdings PLC (ASX: FCL) is engaged in offering core systems for life, accident, and health insurance carriers worldwide with seven out of the ten biggest group life and health carriers in the United States and six out of ten major life and health carriers in Australia. The company remains on track to scale rapidly, working with pioneering progressive carriers in North America, Europe, and the Asia Pacific. The FINEOS Platform comprises the FINEOS AdminSuite core product suite along with few other add-on products, FINEOS Engage, and FINEOS Insight.
FCL Details
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New Client Wins & Acquisition Synergies to Aid FCL: FINEOS Corporation Holdings PLC (ASX: FCL) is involved in the research, development, marketing, and supply of software products for the Life, Accident and Health (LA&H) insurance industry. The market capitalisation of the company stood at ~A$1.11 billion as on 22 January 2021. For the full year ended 30 June 2020, the company has recorded revenues of €87.8 million, depicting a rise of 39.8% on a year over year basis, along with an increase of 18.6% in its prospectus forecast of €74.0 million. The company’s statutory EBITDA increased by a whopping 64.2% on pcp in FY20 and came in at €13.3 million. FY20 results were mainly driven by a number of factors which included, new client wins, upgradation of existing client to the cloud along with rising demand from clients to accelerate FCL’s operations to meet corporate and regulatory requirements.
At the end of 30 June 2020, the company increased its overall headcount by 31.8% to 875, thus supporting the top-line growth. The company remained on track to invest in Research and Development (R&D), strengthening its vision and mission to be a worldwide market leader in underlying systems for group and individual life, accident, and health insurance on its sole cloud technology platform. Notably, in FY20, total R&D expenditure went up by 24.6% and came in at €28.4 million, out of which the company capitalised ~€16.8 million and expensed €11.6 million. Proforma NPAT in FY20 came in at €2.3 million against a loss of €0.8 million in FY19. Continued focus on its employees and leadership quality in FY20, resulted in these positive operational and financial results.
Looking at the past performance, the company’s revenue recorded a CAGR of 27.75% over the period of FY18-FY20, depicting a continuous upward movement. Subscription revenue and service revenues witnessed a CAGR of 34.16% and 35.61%, respectively, for a period of FY18-FY20. ILF (Initial License Fees) also witnessed an upward trend during the same time span (FY18-FY20).
Revenues Trend (Source: Company Reports)
The company has commenced FY20 with excellent performance, thanks to the buyout of Limelight Health in August 2020 for US$75 million. Limelight Health is a provider of cloud-based quoting, rating and underwriting software to the life, accident, and health insurance carrier market in North America. The company added that the acquisition is highly complementary to its strategy of enhancing its focus in the North American market and accelerating its sales, marketing, and product development capabilities in the region.
Revenues by Region: In FY20, the company continued to invest higher in order to grow its worldwide client portfolio, which comprises numerous life, accident and health insurance carriers in North America and the Asia Pacific region. Revenues from North America, Asia Pacific Region, and EMEA contributed 59%, 35% and 6% of total revenues, respectively, in FY20. By geography, the company witnessed a total revenue growth of 39.8% on FY19, aided by significant expansion in the North American region.
Revenues by Region (Source: Company Reports)
Growing Global and Diverse Client Base: In FY20, the company remained on track to gain from new client wins and existing client enhancements. The Group plans to drive up-sell and cross-sell prospects with its existing clients and entice new clients in both existing and new geographic markets. Additionally, integrating Limelight product suite with FCL’s growth strategy, enabled the company to add more clients and market share in the US, thus opening new business avenues in the future. The picture below depicts FCL’s diversified client base, with many long-standing relationships.
Client Base Highlights (Source: Company Reports)
1QFY21 Key Updates: The company commenced Q1FY21 with a growth of 18% in cash receipts to €30.1 million as compared to €25.5 million in the previous quarter, mainly indicating the timing of SaaS revenue collections and solid services revenue which is billed on a monthly basis. As at 30 September 2020, the company’s cash balance stood at €34.9 million. The company also completed an institutional placement and share purchase plan in 1QFY21 to fund the acquisition of Limelight. Total headcount at the end of 1QFY21 increased 19% from the end of 30 June 2020, and came in at 1,040, representing an addition of Limelight Health employees. In October 2020, a Heads of Agreement was contracted with QInsure in Australia, indicating the objective to upgrade QInsure’s FINEOS Claims system to the FINEOS Claims SaaS version on the FINEOS Platform, run by AWS.
Liquidity Position: At the end of FY20, the company’s cash balance amounted to €39.8 million, reflecting funds raised at the IPO and cash flow generation in the 2H of the year. The cash balance and debt-free position at 30 June 2020 offered a healthy balance sheet to finance future growth prospects. The company has a history of delivering sustained shareholder returns, depicting a strong track record of revenue and earnings growth. Net cash generated from operating activities in FY20 stood at €11.5 million.
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 62.93% of the total shareholding. Jacquel Investments Ltd holds the maximum interest in the company at 53.82%, followed by Capital Research Global Investors with 83% of interest.
Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: During FY20, the company had a gross margin and EBITDA margin of 32.5% and 15.9%, higher than FY19 figure of 18.3% and 15.9%, respectively. The current ratio for the period stood at 2.24x, higher than the industry median of 1.96x. Debt to equity multiple of the company stood at 0.09x FY20, lower than FY19 figure of 0.97x, depicting an unleveraged balance sheet position.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Risk Analysis: The company undertakes certain transactions denominated in foreign currency, exposing the business to foreign currency risk through foreign exchange rate fluctuations. FCL continues to acquire a large number of companies, which adds to integration risks. It can also adversely impact its balance sheet in the form of an elevated level of goodwill and intangible assets. Moreover, stiff competition in the markets where FCL operates and regulatory concerns may dampen the financial performance. Further, uncertainty around Covid-19 transmissions and government restrictions adds to the woes. Also, the loss of any key licence agreements, and loss of key customers remain a potential headwind.
Future Expectations: For FY21, FCL remains optimistic about attaining revenue growth levels despite the global headwind and uncertainty led by the COVID-19 pandemic. The company is expecting a top-line growth of 20%, which includes subscription revenue growth of 30%. The group continues to make investments in the products and regions that have the potential for sustainable growth in the near future. The group’s core areas include SaaS business model and software products for the Life, Accident and Health (LA&H) insurance industry. This growth potential foreseen in the group’s business is enabling it to invest in infrastructure and resources to build a larger and more resilient organization. Going forward, the company remains well focused to pursue strategic acquisitions, invest in core products, implement delayed rollouts, and continue its current growth trajectory and leverage on growth opportunities from the emerging software industry, through its strong execution.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All forecasted figures have been taken from Thomson Reuters
Stock Recommendation: With robust segmental growth and geographical expansion, FCL looks poised to continue its expansion in FY21. The stock of the company corrected ~2.3% in the past one month and ~9.3% in the past six months but went up ~16.3% in the past 9 months period. Currently, the stock is trading slightly below the average 52-week trading range of A$2.16-A$5.75. On the technical analysis front, the stock has a support level of ~A$3.688 and a resistance level of ~A$4.213. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of lower double-digit upside (in percentage terms). For this purpose, we have taken the peer group - Limeade Inc (ASX: LME), Integrated Research Ltd (ASX: IRI), Infomedia Ltd (ASX: IFM), to name a few. Considering the recent developments, acquisition synergies, decent 1QFY21 and FY20 results, decent liquidity position, encouraging outlook and current trading levels, we recommend a “Buy” rating on the stock at the current market price of A$3.85, up 4.054% on 22 January 2021.
FCL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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