Event Core
As published on 20 October 2021, the Morrison Government extended support to Australia’s thriving fintech industry to promote job creation and attract record investment. On the same day, EY FinTech Australian Census 2021 highlighted the expanding industry employment, surging entrepreneurship and robust growth in capital raising activities.
Key Highlights of Australia’s Fintech Industry
Fintech Approaching Maturity Stage: Australia’s fintech industry has continued to manifest resilient growth throughout the COVID-19 pandemic, embarking on record-high capital raising activities and surging numbers of startups moving towards post-profit.
Key Drivers: Profound development in digital infrastructure caused by the pandemic drove fintech innovation, translating to strong revenue generation from job creation and overseas markets. Industry collaboration, government incentives, global talent acquisition, and surged diversity will be critical for keeping the industry’s global growth trajectory at elevated levels.
Key Macro Growth Drivers
Significant Resurgence in Household Spending: In June 2021 quarter, domestic demand contributed 1.6 ppts to GDP incline. Public and private demand surged, primarily attributed to a 1.1% surge in household spending and a 7.4% surge in public investments. In addition, household expenditure on services surged across all states in the quarter. Spending on services surged by 1.3%.
Figure 1: Sharp Recovery in Household Spending with Corresponding Decline in Saving Ratio
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Constructive Lending Indicators: In August 2021, the value of loan commitments for personal investments rose by an astonishing 16.7%. The new borrower accepted loan commitments for housing rose considerably by 47.4% PcP, vastly attributed to first home buyer grants, and a 38.9% PcP incline in fixed-term loans under personal finance.
Figure 1: Significant Boom in Housing Finance Signaling Spike in Lending Activities
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Developments in Fintech Industry 2021
Global Fintech Ranking: Australia gained two places in the global fintech rankings. The country is now ranked sixth in the world and second in the Asia-Pacific region as per Findexable, an international research and analytics firm. The ranking upgrade reflects a vibrant fintech culture with increasing adoption among businesses, governments, and citizens.
Industry Growth Witnessed in 2021: Fintech Australia estimates that the industry has expanded from $250 million in 2015 to $4 billion in 2021. Leading players, such as Zip and AfterPay, have expanded their horizons at the international level. Furthermore, global investment has powered growth in worldwide expansion and fintech exports.
Key Risks and Challenges
Figure 3: Driving and Restraining Factors
Source: Analysis by Kalkine Group
Household spending showcased a significant spike in recent quarters but remains below pre-COVID levels, manifesting possibilities of spending dilution. Gradual phase-out from containment measures poses potential cannibalization of online transactions with cash transactions. The industry assumes high competition due to unbounded surcharge, promoting intensive competition among payment schemes and providers. Affordability and spending must be managed as it is the key restraining factor for mass digital incorporation. Cybercrime rates may skyrocket with compromised data protection infrastructure possibilities, which may negatively impact the fintech industry.
Outlook
Surged Electronic Payments: Australians recorded around 625 electronic transactions per person in FY21 relative to 275 a decade ago. The pandemic reinforced a long-term shift from cash payments to electronic payments via debit cards or mobile phones.
Strategic Partnerships Unlocking International Operations: Australian fintech companies are keen to expand into international markets and explore opportunities. Established Australian financial institutions are constantly forming strategic partnerships with foreign and domestic fintechs.
Increasing Funding Levels in Australia: Australian capital raising activities and deals are now rating globally.
Increased use of Credit Cards and Embedded Options of BNPL Transactions: Cash, as a mode of payment, has been cannibalized by online transactions, primarily via credit cards. As a result, the recent surge in credit card payments and increased integration with BNPL payment models are expected to manifold in coming years.
Investments in 5G Network Infrastructure: The Australian government announced a $20 million Australian 5G Innovation Initiative, promoting the value of 5G networks. In NBN wholesale markets, the total number of services and total CVC capacity acquired stood at 8.4 million (up by 1.2%) and 23.0 Tbps (up by 9.2%), respectively, illustrating a favourable outlook.
(1) Bravura Solutions Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 700.35 million, Annual Dividend Yield: 0.00%)
Building Recurring Revenues and Strong Financial Position may Strike Sustainability: Bravura Solutions Limited (ASX: BVS) is a software solutions provider of life insurance, wealth management, and funds administration industries. In FY21, total revenue declined to $243.0 million, down by 11%. Wealth management revenue slipped 11%, and respective EBITDA fell by 5%; however, margins increased to 32% relative to 29% in FY20. Funds administration revenue dipped by 12%, and respective EBITDA fell by 18%. The results were broadly attributed to COVID-linked decline In UK professional services work and lower licence fees due to the timing factor of new sales and renewals.
BVS acquired Delta Financial Services (DFS) for $42 million in October 2020. The acquisition leverages SaaS technology to empower complex pensions administration across the UK. Growth in Delta’s product sales is underpinned by robust demand in the UK pension market. Circa 80% of Delta’s revenue is recurring and is reported in the wealth management segment. BVS held a robust financial position with cash of $73.6 million with a pipeline of additional organic growth and acquisitive opportunities. Cash flow from operations stood at 51.8 million, reflecting a cash conversion of 105%, in line with long-term prospects.
Outlook: Structural shift towards microservices, SaaS, and cloud platforms has strengthened as COVID-19 accelerated digital transformation. As vaccine rollout programs are in the maturity phase in the UK, demand may resurge to pre-COVID-19 levels. Despite COVID-19 discrepancies, the sales outlook remains stable as demand in the UK has begun to improve.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
BVS Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of BVS went down by ~12.969%. The stock made a 52-weeks’ low and high of $2.440 and $3.980, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s average, considering the potential resurgence in the UK pension market. For valuation, peers like Gentrack Group Limited (ASX: GTK), Reckon Ltd (ASX: RKN), Iress Ltd (ASX: IRE), have been considered. Considering the stable sales outlook, developments in the UK pension market, tilt towards recurring revenues, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $2.785, as of 25 October 2021, at 12:11 PM (GMT+10), Sydney, Eastern Australia.
(2) Gentrack Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 175.57 million, Annual Dividend Yield: 0.00%)
Resurgence Warranted by Cost-Saving Measures and Improved Top-line in Utility: Gentrack Group Limited (ASX: GTK) develops, integrates, and facilitates enterprise billion and customer management software solutions for the utility and airport industry. In FY20, GTK reported NZ$100.5 million in revenue, down by 10% PcP; however, ARR surged to NZ$81.3 million, up by 4.9% PcP. EBITDA closed at NZ$12.1 million, considerably down by 51%, primarily attributed to reduced R&D capitalization, revenue shrink, and increased personnel costs. Adjusted NPAT fell by 75% relative to FY19, while net cash surged considerably by 263% PcP and stood at NZ$16.8 million.
In H1FY21, total revenue stood at NZ$51.0 million, marginally up by 0.7% PcP, and ARR stood at NZ$40.4 million, up by 1.5% PcP. EBITDA for the period inclined by 63.2% PcP and was registered at NZ$7.0 million. Utility growth in Committed Monthly Recurring Revenue (CMRR) edged up by 2.4% PcP, primarily driven by new business wins in Australia and the UK. Veovo revenues declined by 19.8% PcP; however, ARR stood up by 5.8%. Veovo was considerably affected by customer-driven delays and re-evaluations. Net cash for the period stood at NZ$22.4 million relative to NZ$16.8 million.
Outlook: For FY21, GTK expected EBITDA to revolve around NZ$5 million and revenues to report NZ$100.5 million. Incremental R&D costs are expected to manifest an exit rate of ~NZ$3 million per quarter. As a result, the company is estimated to turn cash flow positive by FY21, leveraging NZ$16.8 million of net cash.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
GTK Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of GTK went up by ~13.354%. The stock made a 52-weeks’ low and high of $1.085 and $2.080, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at some premium compared to its peer’s average, considering the prudent financial position and cost-saving measures. For valuation purposes, peers like Bravura Solutions Limited (ASX: BVS), Reckon Ltd (ASX: RKN), Adacel Technologies Ltd (ASX: ADA), have been considered. Considering the improving financial performance, profound cost-saving measures, high cash conversion rate, and upside suggested by valuation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.780, as of 25 October 2021, at 12:29 PM (GMT+10), Sydney, Eastern Australia.
(3) Pushpay Holdings Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.98 billion, Annual Dividend Yield: 0.00%)
Rising Transaction Value and Surging Customer Base Shall Translate to High Profitability: Pushpay Holdings Limited (ASX: PPH) is engaged in providing a strong platform for electronic payments, mobile commerce, and tools for merchants. IN FY21, PPH catered 35.2 million transactions over the year with an average transaction value of US$199. In addition, the company reported US$179 million in operating revenue, up by 40% PcP, primarily attributed to US$6.9 billion of total processing volume over the year, up by 39% PcP.
Operating metrics improved with EBITDAF margin surging to 34%, considerably up by 12 ppts from the prior year. The company delivered on its guidance and increased EBITDAF from US$25.2 million in FY20 to US$58.9 million in FY21, a surge of 133%. PPH’s NPAT stood at US$31.2 million, up by 95% PcP, owing to enhanced focus on cost-saving initiatives and a higher revenue base. Total customers grew by 2%, and total product holdings surged by 10%, comprising 9% PcP incline from Donor Management System and 11% PcP incline from Church Management System.
Outlook: The company remains focused on engagement and ramping go-to-market resources for the Catholic segment. EBITDAF is estimated to wander between US$64.0 million and US$69.0 million. PPH anticipates continuous growth in digital adoption within PPH’s customer base.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
PPH Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of PPH went down by ~3.116%. The stock made a 52-weeks’ low and high of $1.405 and $2.250, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight discount compared to its peer’s average, considering the high competition in the industry. For valuation, peers like Mcmillan Shakespeare Ltd (ASX: MMS), Future First Technologies Ltd (ASX: FFT), Smartgroup Corporation Ltd (ASX: SIQ) have been considered. Considering the strong financial performance, improved customer base, ramping up go-to-market strategies, and valuation, we give a ‘Hold’ rating on the stock at the current market price of $1.695, down by 2.587% as of 25 October 2021.
(4) FINEOS Corporation Holdings PLC (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 1.24 billion, Annual Dividend Yield: 0.00%)
Opportunity Pipelines and Top-Line Resurgence may Deliver a Favourable Outcome: FINEOS Corporation Holdings PLC (ASX: FCL) offers core systems (FINEOS platform) for the accident, life, and health insurance carriers globally, with the top carriers in Australia and the US. In FY21, FCL reported EUR108.3 million in revenue, up by 23.3%, wherein subscription revenue stood at EUR40.1 million (up by 48.6% PcP) and service revenue at EUR66.4 million (up by 13.9% PcP). Total revenue growth was primarily driven by up-selling and cross-selling to the existing client base.
Gross Profit stood at EUR72.0 million (up by 23.0% PcP) and Pro-forma EBITDA at EUR7.9 million (down by 49.7% PcP). Operating expenses surged significantly, primarily due to a 40.4% increase in R&D expenses due to an increase in headcount. Further, general and administrative costs increased by 54.6% and cloud operation support expenses surged by 141.8%. The cash balance as of 30 June 2021 stood at EUR14.0 million.
Key Business Highlights: On 22 October 2021, FCL reported its Q1FY22 activities and business updates. The period reported EUR31.1 million in cash receipts from customers, up by 37% PcP and headcount increased to 1,075 on 30 September 2021. The closing cash balance stood at EUR50.4 million.
Outlook: On 5 October 2021, FCL reported the results of its security purchase plan (SPP) offer to raise $3.7 million. The proceeds will primarily be allocated to support FCL’s working capital management and opportunity pipeline. FY22 revenue is expected to wander in the range of EUR125 – 130 million, with 30% growth anticipation in subscription revenue. In addition, elevated R&D invested in FY21 and FCL Cloud Upgrades will sustain in FY22.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
FCL Daily Technical Chart (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of FCL went down by ~12.045%. The stock made a 52-weeks’ low and high of $3.360 and $5.040, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company can trade at a slight premium compared to its peer’s average, considering top-line growth. For valuation, peers like TechnologyOne Ltd (ASX: TNE), Infomedia Ltd (ASX: IFM), Praemium Ltd (ASX: PPS) have been considered. Considering the growing top-line, potential improvements in working capital management, the constant pursuit of opportunity pipeline, and valuation, we give a ‘Hold’ rating on the stock at the closing price of $3.910, up by 0.256% as of 25 October 2021.
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.
Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.
Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.
There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.
You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.
The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.
Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.
Please also read our Terms & Conditions and Financial Services Guide for further information.
On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website.
Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.