Fiinu Bank (LON:BANK) will soon offer a Plugin Overdraft solution to millions of customers without anyone needing to switch their existing bank. The stand-alone unbundled overdraft can potentially be a Monzo-like phenomenon, and the long-term investing opportunity is immense.

About four years ago, 32 million people — or 62% of the population — used some form of overdraft annually. Today, only about 20% of the 100 million personal current accounts population include access to overdraft, whilst the cost-of-living crisis is increasing the demand.

The gap between supply and demand has resulted in over £10 billion short-term credit funding gap in the market and an increase in non-bank lending. By way of example, more than 21 million have resorted to BNPL, and according to FCA, some of these alternatives can have adverse effects on credit files. Fiinu’s primary research suggests that 53% of the population would be very likely to add a Plugin Overdraft to their current account for as long as they didn’t need to change their bank. Fiinu Bank plans a soft launch in late spring and a full launch this summer.

According to Panmure Gordon’s research (Jan 2023), the FTSE AIM fintech group with a ticker “BANK” could fetch a valuation of £1.2 billion — though, as usual with AIM investing, this is not a risk-free trade.

Plugin Overdraft: how it works

Fiinu was founded in 2017, by second-time entrepreneur Dr Marko Sjoblom, as a fintech platform and a provider of consumer banking products. The publicly listed group comprises two separate businesses: Fiinu Bank, which has been granted a restricted deposit-taking, will offer the flagship Plugin Overdraft, and Fiinu Services Ltd, which will provide Bank Independent Overdraft platform to other banks.

Podcast: Fiinu Plc: why this newly London-listed FinTech could be the next Monzo-like phenomenon

The Plugin Overdraft is an ‘unbundled’ overdraft solution. Fiinu provides customers with an overdraft facility by intelligently using the Open Banking scheme without anyone needing to switch their current account away from their present bank. Fiinu Bank loan book is funded through one-year fixed-term deposits, FSCS-guaranteed of up to £85,000.

The solution gives the customer access to mainstream credit, an overdraft, from a third-party bank, and unlike some non-bank alternatives, it does not negatively impact their credit score. According to the Experian website, an overdraft in the credit file can improve credit scores.

After receiving the restricted deposit-taking licence in July 2022, Fiinu is now in the ‘mobilisation’ period, where newly authorised banks typically operate for 12 months before fully opening up to trade. 

As with any other retail bank authorised by the Bank of England regulators, the PRA and the FCA, the company is currently undergoing its technical audit. It is also advancing its operational capabilities, recruiting senior managers, building out risk, internal audit, and compliance functions, investing in IT systems, contracting with third-party suppliers, and finalising the company’s recovery plan. At the same time, the PRA/FCA continue to assess whether the group is ready to exit mobilisation and become fully operational.

For context, the total deposits a new bank can accept in the mobilisation period is just £50,000 — little more than pocket change in banking terms. Fiinu plans to exit the mobilisation by 7 July 2023 after submitting a Variation of Permission to the PRA/FCA alongside evidence that required actions and capital is in place.

Fiinu FTSE AIM IPO

Fiinu launched its IPO mid-July with a valuation of circa £53 million (20p a share). In common with most tech-focused companies, the AIM company has fallen in value to circa £35 million just after launch. However, it’s risen by a third over the past month, with the volatility suggesting it remains in price discovery.

It’s worth noting that gaining its banking licence and launching the IPO was a five-year process. CEO Chris Sweeney argues that the company’s ‘unique Plugin Overdraft is the gateway to better financial inclusion and a welcome addition of a product made possible through Open Banking.’

Meanwhile, the founder, Dr Marko Sjoblom, believes the platform will ‘create a new market where unbundled overdrafts will increase financial fairness and freedom for everyone, everywhere.’ The company raised £14 million when it became public and expected to raise further funds by the end of the mobilisation period.

Recent developments

On 19 December, Fiinu announced that TransUnion will be ‘supporting Fiinu Bank to help enable its innovative overdraft solution, using TransUnion Open Banking capabilities and credit reference data.’ The Open Banking information will be used to check eligibility without impacting anyone’s credit score.

TransUnion director Stephen Wishart notes that ‘the use of TransUnion Open Banking capabilities, alongside our credit reference data, will provide a comprehensive view of the individual’s financial situation, helping Fiinu to assess the finance that’s right for the individual’s needs.’

Most recently, the FTSE AIM company provided an operational update on 26 January in advance of full year-financial results expected in April. Describing the ‘significant progress’ made since the IPO, the company listed a reel of achievements; signing a contract with core banking platform Tuum, hiring key management personnel, signing a contract with a decision engine services provider, and selecting a critical Payment Initiation Service Provider.

In addition, Fiinu has received regulatory senior management functions (SMF) approval for the CFO, chief risk officer, and chair of the board risk committee. As is the core banking platform configuration and testing, all key microservices to support new customer onboarding and payments are now completed. System integration testing is currently ongoing with support from contractor Maveric NXT to provide assurance testing. 

And most importantly, the FTSE AIM company remains on target to ‘exit from mobilisation following the required capital raise and subject to regulatory approval’ in July 2023.

However, the bank needs to raise £35-40 million before it exits mobilisation. But confident it will achieve this in the set timeframe and promises to ‘provide further regular updates as the business plan progresses over the coming months.

Potential valuation

Before getting into the specifics, there are three general points to consider for a potential valuation.

First, the UK and the world are generally on the straits of tightening monetary policy, with the UK base rate at 4% and rising. This is sub-optimal for a fintech like Fiinu seeking to get finance on decent terms — and it will need further financing to become self-sustaining; however, retail deposits tend to be the cheapest form of loan-book funding, especially in comparison to wholesale funding.

Second, valuing a company on its potential is, by its very nature, an imprecise exercise with a wide degree of variance. Fiinu has a banking licence, an excellent business idea, and a solid roadmap to profitability. However, things do go wrong, and this is not a risk-free investment — capital risks, credit risks, interest rate risks, liquidity risks, operational risks, and even potential conduct risks are the common pitfalls. Fiinu is not immune to these problems.

The third point is that Fiinu has serious potential. Other fintechs which have spotted a lucrative gap in the market — including Monzo and Wise — have jumped to multi-billion-dollar valuations. Wise has unbundled international transfers from the personal current accounts and proven the model as its valuation is nearly £6 billion.

This could be a similar opportunity to get in on the ground floor for those with a healthy risk appetite. Getting a UK banking licence is no easy task — possibly the most significant hurdle — which has already been cleared.

Now for the details.

Panmure Gordon analysts have put together an excellent research note and extrapolated their opinions based on a realistic hypothetical future model.

Under their model, they expect that Fiinu will grow to 500,000 customers within five years of operation, breaking even in year three, becoming fully profitable in year four, and will have broken even in aggregate by the end of year five.

Breaking this prediction down, they expect 75,000 net new customers in year one, another 75,000 in year two, and then further scaling up in years three to five. Panmure assumes initial average lending of £300 per client, with each use of the Plugin Overdraft lasting for circa 120 days per year/10 days per month. In terms of pricing, it assumes a competitive 32bps.

However, as previously mentioned, Fiinu must find £35-40 million in equity funding in the next four months. Panmure estimates this will need to rise to £100 million based on ‘conservative base case assumptions over the first few years of operation.’ To put this in context, Monzo needed to raise over £450 million in the same period, which is still loss-making.

For perspective, more rapid growth or collaboration with other financial services companies will require more capital to scale up and ensure smooth customer access to credit. However, such an increased growth rate would act as proof of work to potential lenders; therefore, additional financing would be reasonably easy to access.

But under Panmures, many assumptions, including that the customer base grows to 700,000 customers by year 10 — which seems a reasonable target — a DCF valuation would suggest an implied value of £1.2 billion within the next decade.

I think the terms and sourcing of Fiinu’s required financing is the key hurdle to overcome. After that, one problem that the company may have understated is getting those first 75,000 customers in year one; they may be underestimating just how hard it is to get UK consumers on board with new products, especially credit products, even if it is in their own best interests.

My final comment is Fiinu’s future competition problem.

Fiinu is currently targeting customers excluded from arranged overdrafts by traditional banks who must now seek far more expensive finance elsewhere. Suppose Fiinu can demonstrate that it can profitably offer overdrafts to these excluded customers. In that case, banks may again offer these customers overdrafts on better terms.

Fiinu would then compete for customers with the multi-billion-dollar titans. However, this is a future problem, most likely for the 2030s rather than today.

And at 13.2p per share, Fiinu is a solid speculative FTSE AIM opportunity for 2023.

This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.

Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

The FTSE 100 was a beneficiary of major oil results on Tuesday with BP echoing Shell in releasing surging profits for 2022 alongside increased returns to shareholders.

BP shares were 5% higher at the time of writing on Tuesday with Shell jumping on BP’s tailcoats and gaining 2%. The combination of both companies gains added a significant number of points to the index and helped the FTSE 100 higher by 0.5% to 7,879.

“BP may be enemy number one in the public’s eyes for its record profits, but its latest success has helped to drive up the FTSE 100, which in turn will benefit people up and down the country with exposure to UK stocks in their pension,” said Russ Mould, investment director at AJ Bell.

As the FTSE 100 bounces back from a soggy session yesterday, traders will be eyeing all time highs of 7,901 set on Friday last week.

UK Banks

UK banks were among the top risers as we approach quarterly updates from Lloyds, Barclays and Natwest. Lloyds is scheduled to release full year results 22nd February and Natwest’s and Barclays results are due 17th February and 15th February respectively.

UK banks have been benefitting from higher interest rates but investors will be watching closely for any provisions for bad debts caused by softer economic conditions.

Lloyds, Barclays and Natwest were trading between 1% to 1.5% higher at the time of writing.

With the banks and oil majors rising, there was notable risk-on tone to equity trade on Tuesday which also saw cyclical sectors such mining and the housebuilders gain.

“Over the past month or so, investors have become more optimistic that we’re near the top of the rate rise cycle, hence why you’ve seen higher-risk companies do well on the stock market,” Mould said.

“If this optimism turns out to be misplaced then we’ll likely see investors flock back to sectors where you can typically find value stocks such as banking, energy and tobacco. In a way, today’s movement on the FTSE 100 already reflects this investor thinking.”

The £94m capitalised Sanderson Design Group (LON:SDG) is a luxury interior furnishings company that designs, manufactures and markets wallpapers, fabrics and paints. 

In its latest Trading Update the group reported strong performances from the Morris & Co. brand, licensing and North America were offset by the group’s withdrawal from the Russian market, and a small decrease in manufacturing revenue.

The company’s high-margin licensing activities performed very strongly in the year to end January 2023, with revenues up approximately 23% at £6.4m, buoyed by the signing of new agreements and the renewal or expansion of existing licensing arrangements. 

Overall total revenue for the group for the last year was £112.0m (£112.2m), while the end-year net cash position was £15.2m.

The Business

The company derives licensing income from the use of its designs on a wide range of products such as bed and bath collections, rugs, blinds and tableware.

The group’s brands include Zoffany, Sanderson, Morris & Co., Harlequin, Scion, Clarke & Clarke and Archive by Sanderson Design. Its products are sold globally.

The group, which employs some 600 people, has showrooms in London, New York, Chicago, Amsterdam and Dubai. 

Analyst Opinion – still rated as a Buy, looking for 205p

Matthew McEachran at Singer Capital Markets rates the group’s shares as a Buy, looking for 205p as his Target Price.

He goes for adjusted pre-tax profits of £12.7m (£12.5m), with earnings of 13.9p (13.0p) and a dividend of 3.69p (3.50p) per share.

His estimates for the current year now underway are for £116.1m sales and a slightly lower £12.0m profit, with earnings of 12.7p and a standstill dividend of 3.69p per share.

David Jeary at Progressive Research considers that the group managed to steer a steady course in uncertain times.

His estimates for the last year are for adjusted pre-tax profits of £12.7m, worth 14.3p per share in earnings.

He expects to review his 2024 estimates when the group reports its final figures in April.

Conclusion – treading water

The group’s shares at 131p are likely to tread water for a while yet.

This group’s profits could treble this year.

REACT Group, the leading specialist cleaning, hygiene, and decontamination company, reported a 78% lift in its revenues in the year to end September 2022, to £13.7m (£7.7m).

The group saw its adjusted EBITDA up 20.0% at £953,000 (£795,000).

The performance represents a strong like-for-like organic growth of some 17% enhanced by the £8.5m acquisition of LaddersFree in May 2022, which contributed to the second half of the financial year. 

The Business

Momentum from the final few months of the previous year has continued into the new financial year, and despite the usual slow down across the festive period, the first quarter has delivered a record performance for the group.

The group reports three main areas of business; firstly, Contract Maintenance, where it delivers regular cleaning regimes, (such as in the healthcare, education, retail and public transport sectors); and secondly Contract Reactive, where it is the first responder to an on-call emergency response service operating under a formal contract or framework agreement, typically 24-hours a day, 7-days per week, 365-days of the year. Those two areas together are recurring in nature, having continued to grow at pace and represented some83% of revenue in FY22. 

The third area is Ad Hoc, where REACT provides a solution to one-off situations outside a framework agreement, such as for fly tipping, void clearance, and decontaminations.

CEO Shaun Doak stated that:

“We are delighted to report a strong financial performance for the year. The acquisition of LaddersFree has been transformational as it continues to win new blue-chip clients. 

The transaction has not only broadened the Group’s offering but has enabled the business to cross sell other business services into existing and new customers. This was evident in the recent new £800k contract win to provide services from all three segments of the business through a coordinated programme to a large fast-service food restaurant across all its sites in the UK. 

Strong demand for the Group’s services has continued into the current year and as a result the Board is confident of the outlook for the business.”

Analyst Opinion – shares are a Buy looking for 1.5p Target Price

Greg Poulton at Singer Capital Markets has current year, to end September 2023, estimates for £20.0m (£13.7m) revenues and a trebling in its adjusted pre-tax profits to £2.1m (£0.7m). Reflecting the acquisition equity issue earnings per share are expected to stand still at 0.1p per share.

Conclusion – shares are undervalued

With its shares currently around 1.1p each they are trading on only a 7.8 times price-to-earnings ratio, which is undervaluing the group’s potential.

BP have followed in Shell’s footsteps in releasing bumper 2022 full year results buoyed by higher oil prices during the period subsequent to the Russian invasion of Ukraine.

BP’s Underlying Replacement Cost Profit for 2022 more than doubled to $27.6bn, up from $12.8bn in 2021. Surplus cash flow rocketed to $19bn and provided plenty excess cash to increase the dividend and expand the buyback programme.

A total loss attributable to shareholders of $2.5bn was recorded in 2022 due to a $24bn charge related to the writing down of their Russian Rosneft asset.

However, this will be an irrelevance at this point with the focus almost entirely on bumper cash regeneration and returns to shareholders.

BP announced a $2.75bn buyback programme which was welcomed by investors with BP shares gaining 3.5% to 493p at the time of writing on Tuesday.

The fourth quarter dividend was increased to 6.61 cent from 6 cent in the third quarter.

“With so much cash being generated, BP has followed Shell in hiking its dividend, with the final payment for Q4 rising by another 10% to leave it 21% above the equivalent payment last year. If that sounds like a big jump, remember that the company slashed its payout back in the pandemic and the new level is still 40% below where it stood in Q4 2019,” said Steve Clayton, Fund Manager at HL Select.

The strong level of cash generation helped BP reduce Net Debt to $21bn from $30bn last year.

Energy Transition Investment

Speaking in an interview with Bloomberg TV, CEO Bernard Looney alluded to increased investment in their current infrastructure to service to energy needs of today, while increasing investment in the energy transition by $8bn this decade.

BP aims to increase their network of EV charging points by 65% over the next two years, when compared to 2021. In addition, investment in green hydrogen projects is gathering pace after the signing of MoUs in Mauritania and Egypt.

Tekcapital have released another instalment of portfolio company news with the market taking the updates positively and Tekcapital shares jumping 5% on Monday.

Having broken out of a tight trading range last week, Tekcapital shares have appeared to build a new level of support around 20p after an update from MicroSalt and Innovative Eyewear.

Old resistance has held as new support for TEK shares on Monday following news MicroSalt has secured yet another distribution agreement. MicroSalt has inked a deal with US Salt, a major distributor of salt products in the Northeast of the United States.

“We are proud to work with US Salt in their efforts to offer low-sodium solutions to their customer base. US Salt as a leader in salt distribution, offering lower sodium as an active option in its ingredient listing. Excess sodium intake is one of the world’s leading health concerns, and we believe that partnerships like this are a great way to expand our efforts to address the sodium reduction challenge.” Said Rick Guiney, CEO of MicroSalt.

MicroSalt have recently appointed Zeus Capital as their NOMAD for an AIM-listing which is expected in the coming months.

Innovative Eyewear

Tekcapital’s NASDAQ-listed smart eyewear company Innovative Eyewear produced spectacular share price gains last week and Monday saw the release of an update on the software powering the ‘smart’ element of their eyewear.

Innovative Eyewear said their Vyrd app will now support an “On Air” feature that will allow users to communicate in chat rooms of up to 100 people through their Lucyd smart eyewear. This presents various opportunities for collaborative work through Lucyd eyewear, particularly in the fitness industry.

“We are supporting our hardware platform with audio-focused software to enable seamless communication, content generation and social interaction on our frames as well as other wearables,” said Innovative Eyewear CEO Harrison Gross.

“The introduction of the On Air feature to our Vyrb app is a milestone where we have enhanced the popular and useful real-time chat functionality found in other social apps, by adapting it to an ecosystem purpose-built for wearable communications.”

Innovative Eyewear shares were trading at $2.27 on the NASDAQ shortly after the open on Monday and are now up 84% year-to-date.

The FTSE 100 retreated on Monday as stocks came back down to earth after the shooting down of a suspected Chinese spy ballon over the weekend.

The FTSE 100 was trading at 7,845, down 0.7%, at the time of writing on Monday.

’It’s glass half empty time on financial markets as unease spreads about a deteriorating geo-political backdrop and realisation that more interest rate hikes are set to be inflicted on economies,” said Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown.

“The shooting down of a suspected Chinese spy balloon off the coast of South Carolina has dashed hopes that reproachment between Washington and China could be achieved, causing a slide on the Hang  Seng in Hong Kong and the Shanghai Composite.”

The FTSE 100’s exposure to China was a significant drag on the index with miners and oil companies falling as traders sold companies reliant on the Chinese economies demand for natural resources.

US futures were heading for a weaker open as the prospect of lower rate in 2023 were dashed by robust US jobs data on Friday.

GBP/USD

The FTSE 100 was supported by sterling weakness last week after the Bank of England hinted at slowing rate hikes and the US economy added blow out 517,000 jobs in January.

However, sterlings influence on stocks diminished on Monday as GBP/USD’s declines reversed as the pair gained 0.12% to 1.2067.

Overseas earners were a major factor in the FTSE 100 reaching the all-time closing high of 7,901. With heavyweights such as Diageo, AstraZeneca and Unilever flat on Monday, pressure from commodity stocks drove a weaker index.

Gold M&A

Precious metals miner Fresnillo was among the FTSE 100’s top risers following news Newmont had approached Newcrest will a $16.9bn takeover offer.