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New AIM admission: Cornerstone FS

Cornerstone FS has a buy and build strategy in the international payments sector. It has invested in cloud-based technology that can handle a significant multiple of current levels of business with little additional cost. Cornerstone FS does not take on any risk with its foreign exchange trades.

There was £876,000 raised from 229 investors via Crowdcube in the original business owned by the holding company which was used as a shell to acquire the current business. They invested in a shaving products company and are not necessarily interested in the current business.

The original shareholders account for 2% of the enlarged share capital, but small sales can hamper a share price. There have been trades in the first couple of days, including one valued at £9. Most of the early trades were worth between £500 and £5,000. It is no surprise that the share price has fallen back to 55.5p.

They may take advantage of any upward movement in the share price. There is a danger this could hamper payment for acquisitions, but the deals are likely to be significantly earnings enhancing in any case.

The valuation seems high but even a couple of relatively significant acquisitions would make it look much more attractive. However, the share price may continue to come under pressure in the short-term if more of the original investors sell.

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Cornerstone FS (LON:CSFS)

International payments services

www.cornerstonefs.com

Market: AIM

Placing

Flotation date:  6 April 2021

Issue price: 61p

Amount raised: £2.24m

Expenses: £750,000

Market capitalisation: £12.4m

Nominated adviser: Spark                               

Brokers: Peterhouse / Pello

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What does it do?

Cornerstone FS is a former shaving products company shell into which an international payment services business was reversed. The original business was sold to management in July 2020 and there is a trade receivable of £95,000 relating to this disposal.

FXPress was founded in 2010 and reversed into the company last August. This was followed by the acquisition of Avila House, which has an e-money licence. The client focus is smaller businesses where management believes there is less competition from rivals.

There is a cloud-based technology platform that makes the business more efficient. This platform will be completed after additional investment is made – paid for out of the flotation proceeds.

Spot foreign exchange generates most of the revenues with forward foreign exchange, which generate higher commissions, around 11% of revenues. Forward trades require a margin payment. Most of the trades are in pounds, US dollars and Euros.

The group’s e-money licence is being extended and this will enable Cornerstone FS to hold customer deposits.

The plan is to broaden the range of products to include cross border payments and multi-currency electronic payment accounts. There will be other opportunities from the UK’s Open Banking initiative.

Cornerstone FS believes that it could acquire private businesses for less than twice revenues. The buy and build strategy will enable more transactions to be pushed through the technology platform but there will be minimal additional costs. This means that the company could become hugely profitable after it reaches the size where it passes breakeven.

Chief executive Julian Wheatland has a technology background and was a boss of Cambridge Analytica. The core management have foreign exchange and financial services backgrounds.

Financials

Figures in the prospectus relate to FXPress rather than the holding company. Revenues, which are foreign exchange commissions, are growing but costs have increased as management invests in growing the business.

In the year to March 2019, revenues were £1.18m and that figure was surpassed in the nine months to December 2019. In the six months to June 2020, revenues were £872,000, but the loss, which had been decreasing, jumped to £542,000. There was additional investment in sales and technology. Interim organic revenue growth was 28%.

A pre-IPO fundraising was done at 50p a share. With the latest fundraise this means that pro forma cash is £2.64m and pro forma NAV is £2.71m. There are also £450,000 of convertible loan facilities available – with a conversion price of 61p a share.

There is £1.3m earmarked for acquisitions and their subsequent integration and £200,000 for investment in technology. Shares will also be used to finance acquisitions.

Most of the acquired revenues will fall through to profit once the acquired businesses are integrated.

Directors

Elliott Mannis (Non-exec chairman)

Annual fee: £50,000 cash plus £28,000 in shares, rising to £65,000 cash and £37,000 in shares when annual revenues exceed £8m.

Julian Wheatland (Chief executive)

Annual salary: £180,000

Judy Happe (Finance director)

Annual salary: £140,000

Glyn Baker (Independent non-exec)

Annual fee: £35,000 cash plus £20,000 in shares, rising to £50,000 cash and £28,000 in shares when annual revenues exceed £8m.

Gareth Edwards (Non-exec)

Annual fee: £35,000 cash plus £20,000 in shares, rising to £50,000 cash and £28,000 in shares when annual revenues exceed £8m.

Daniel Mackinnon (Independent non-exec)

Annual fee: £35,000 cash plus £20,000 in shares, rising to £50,000 cash and £28,000 in shares when annual revenues exceed £8m.

Philip Barry (Non-exec)

Annual fee: £35,000 cash plus £20,000 in shares, rising to £50,000 cash and £28,000 in shares when annual revenues exceed £8m.

Shareholders

Non-exec Philip Barry is the largest shareholder with 17.6%. The directors own nearly 20.5% of Cornerstone FS. Elliott Mannis, Judy Happe and Gareth Edwards bought shares in the placing.

William Newton was the only large shareholder to add to their shares at the time of the flotation and he owns 12.48%. Along with Barry, Stephen Flynn (12%) and Terence Everson (3.82%) he was a vendor of FXPress. Newton has also provided a £350,000 convertible loan note facility, while 7% shareholder Robert Lee has provided a £100,000 convertible facility. These loan facilities are convertible into shares at 61p each.

Fully listed Thalassa (LON: THAL) bought shares at 50p each last year ahead of the flotation and retains the stake which has been diluted to 2.96%. It also has 600,000 warrants exercisable at 50p a share, while AIM-quoted Vela Technologies (LON: VELA) bought 400,000 shares at 50p each andhas 400,000 warrants exercisable at the same price.

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