Simplybiz (SBIZ) – Modest growth, massive returns

Simplybiz (SBIZ) – Modest growth, massive returns

Simplybiz (SBIZ) is listed in the business support services sector and on face value is not exciting. The group provides services to financial intermediaries such as Independent Financial Advisors (IFAs). However, this enables Simplybiz to act as a highly profitable marketing platform for financial product providers.

Simplybiz (latest share price 155p, market cap £118 million) was founded in 2002 and listed on the AIM market in April 2018 at 170p. With the shares trading below the listing price, it is a good time to take a closer look.

A notable investor in Simplybiz is the quality-focused Liontrust UK Smaller Companies Fund (link). The fund has performed well (link) and is run by the respected fund managers Anthony Cross and Julian Fosh.

Simplybiz is number 1

(Source: Simplybiz.)

Management and share ownership

While AIM IPOs are tricky it is reassuring that founder and non-exec chairman Ken Davy (76) owns 40% of the group. Joint CEOs Matthew Timmins and Neil Stevens each own over 2%, having bought additional shares after the IPO.

Mr Timmins (39) has been with Simplybiz since inception while Mr Stevens (40) joined in 2003. Mr Stevens is responsible for strategy while Mr Timmins is responsible for sales and marketing.

Simplybiz’s Joint CEOs: leading the group since 2010

(Source: Simplybiz.)

Valuation backdrop

Simplybiz trades on a modest 12X forecast P/E for 2019 and 10.3X in 2020. Subscription (membership) income gives Simplybiz a high degree of recurring revenue and makes the business cash generative.

In my view, the current valuation is low given the quality of the underlying business and the growth prospects.  The current share price (155p) appears to offer the best risk/reward ratio of all the stocks I have covered to date at Cube.

Simplybiz is expected to deliver profitable growth

(Source: SharePad.)

Forecast P/E ratio: a low multiple going forward

(Source: Google Finance.)

What does Simplybiz do?

Simplybiz has two divisions: Intermediary Services and Distribution Channels. Intermediary Services supports financial intermediaries and in particular UK-based Independent Financial advisors (IFAs) with their compliance, marketing, technology and other needs.

Intermediary Services is the market leader with around 30% market share of directly authorised UK IFAs. This division has an impressive Net Promoter Score of 59 in this area (NPS ranges from -100 to +100).

Distribution Channels uses the group’s intermediary relationships to help financial services groups distribute their products (events, brochures etc). Simplybiz therefore offers a targeted marketing platform for financial services companies.

Simplybiz: “enabling retail financial services”

(Source: Simplybiz.)

Market backdrop

It is estimated that 80% of retail investment products in the UK were sold through intermediaries in 2016. In the mortgage market the figure is estimated at over 70%. So much for disintermediation in financial services!

Independent Financial Advisors (IFAs) in the UK can either be directly authorised or act as appointed representatives. The appointed representative route is deemed to be “more expensive and inflexible”, according to the Simplybiz prospectus.

The number of directly authorised IFA firms grew by 2.9% a year from 2012 to 2017 and is expected to grow at this pace from 2018 to 2021. Simplybiz only deals with directly authorised IFAs and is therefore well placed.

(Source: Simplybiz)

Simplybiz’s two divisions

Nearly all membership revenue generated by the Intermediary Services division is recurring in nature. Financial intermediaries need a regulatory compliance function, for example, if they are to operate legally.

Revenue generated by the Distribution Channels division may be more volatile given that it depends on spending by financial services firms. When markets are weak they are likely to be less willing to spend heavily on marketing

Simplybiz generated half of 2017 revenue from the Distribution Channels division and half from the Intermediary Services division. However, the Distribution Channels division generated 64% of adjusted EBITDA profit in 2017.

EBITDA profit breakdown: driven by Distribution Channels

(Source: Simplybiz)

Simplybiz: growth backdrop

Simplybiz saw organic revenue increase at an annualized pace of 7% in the two years to the end of 2017. In the first half of 2018, organic revenue increased by 5.1% on a year ago.

The group didn’t make any acquisitions in 2017 or 2016 but did buy Landmark Surveyors for £3.8 million in January 2018.

Growth drivers include the increasing number of UK directly authorised IFAs and market share gains. The group’s Verbatim asset management business allows third parties to manage funds for IFAs and is seeing rapid growth.

Simplybiz revenue growth

(Source: Simplybiz)

Simplybiz: return backdrop

The lease-adjusted ROCE excluding goodwill for Simplybiz came in at a robust 27% in 1017. However, the group’s leases are short-term in nature and if we factor this in the ROCE increases to around 77%.

Cash conversion has been strong with free cash flow per share exceeding earnings per share in two of the last three years. Free cash flow conversion is a good test of whether shareholders are being rewarded in cash.

Simplybiz generates strong free cash flow

(Source: Simplybiz)

Risks

Whether IFAs have a long-term future given the rise of robo-advisers and investment platforms is up for debate. There has been some evidence that IFAs help individuals to avoid emotional biases when it comes to investing.

In my view, some of us will prefer to deal with people rather than robots given the volatile nature of markets. IFAs don’t just help on the investment side; they also help in areas such as tax planning.

A severe downturn will hit the marketing budgets of financial services groups along with the number of UK IFAs. Simplybiz should be resilient given the group’s net cash position and 21% operating profit margin.

Simpybiz share price since listing at 170p

(Source: Google Finance)

Summary

Simplybiz is not a rapid growth business but does generate a high return on capital and has robust cash generation. Modest growth and high returns tends to deliver better result for investors than rapid growth and low returns (link).

It is set to payout a third of earnings in the form of dividends and this should result in a 2.8% dividend yield in 2019. Net cash is expected to be 15% of the current market cap by the end of 2020, in the absence of acquisitions.

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    Compliance Director buys £48k of shares. Adds to the previous director buys. Fairly rare for directors to buy shares so this is reassuring for me.

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