SimplyBiz Group (LON: SBIZ) offers a combination of organic growth and integration and cross-selling benefits of the recent acquisition of Defaqto.
SimplyBiz is a UK-focused business that provides compliance and business services to financial advisers. It is the largest provider of these services that is not attached to financial product providers and it continues to add to member numbers and sell more services to them.
Verbatim, which provides investment funds for members, has £640m of assets under management and this generates more than £2m in annual revenues.
During the first half, SimplyBiz acquired financial information and technology business Defaqto for £74.3m in cash and shares. At the same time a placing raised £29.1m at 180p a share.
Defaqto has worked with SimplyBiz in the past and the two companies have plenty of cross-selling potential. As well as enhancing SimplyBiz’s position with financial advisers, the deal will provide access to general insurance and banking markets. SimplyBiz will also be able to sell Defaqto services to existing clients and exploit the technology expertise to enhance its compliance and regulatory services.
In the six months to June 2019, revenues improved from £24.2m to £29.1m. Defaqto made a three-month revenue contribution of £4.2m. SimplyBiz floated in April 2018 so the balance sheet was different for the early part of last year, which was why there was a first half loss in 2018. Underlying pre-tax profit increased 42% to £6.2m. The interim dividend was 1.41p a share.
Organic growth was 3% even after the decline in revenues from discontinued Zest employee benefit software contracts and a reduction in lower margin and housing-related business.
There are more than 6,000 member firms. Intermediary services members were flat at 3,704, but membership fees rose.
The distribution division, including Defaqto, was held back by lower surveying revenues on house transactions, although mortgage business increased.
Debt was taken on for the acquisition of Defaqto, so net debt was £30.1m at the end of June 2019. That figure could be halved by the end of 2020.
This means that SimplyBiz will be able to finance other add-on acquisitions if it finds suitable targets.
Earnings per share growth will be relatively modest this year – although many companies would be more than happy with an increase approaching 10%. It is next year when the real benefits of the Defaqto deal show through.
The optimism of brokers differs on the 2020 forecasts. Zeus expects a 23% increase to 15.7p a share, while Peel Hunt appears less optimistic with a 14.1p a share figure – a rise of 15% from a slightly lower starting point.
It would appear there is some potential upside in the Peel Hunt forecast, even if it does not reach the Zeus level.
On top of this is a steady expected increase in dividend. Again, Peel Hunt is the less optimistic of the two brokers. It expects an increase from 3p a share to 4.2p a share this year and then 4.8p a share in 2020, which is nearly three times covered on its own forecasts.
That is line with the policy to pay one-third of underlying post-tax profit in dividends.
Joint chief executive Neil Stevens bought 25,000 shares at 205p each following the results. He owns 1.69% of the company. The share price has slipped back to 195.25p.
The shares are trading on 16 times prospective earnings for this year, falling to 14p in 2020 – based on the more conservative end of the scale. The yield is more than 2%.
The decline in the share price has made SimplyBiz particularly attractive at this level, given the growth prospects.