What’s new: SimplyBiz’s (LON:SBIZ) acquisition of the leading financial information business, Defaqto, should be immediately enhancing. Key elements of the deal are:
Total consideration of £74.5m (including £3.4m cash acquired) is funded 50% by debt, 10% through Defaqto management rolling half their equity, 1% through SimplyBiz’s own cash and 39% by an institutional placing.
Defaqto has a wide range of products including independent fund and product information, ratings, as well as an end-to-end financial planning tool, Engage Core, which is included in SimplyBiz’s Centra product.
Defaqto adds relationships with intermediaries & financial institutions: Defaqto provides products to 2.4 thousand intermediary firms (in addition to SimplyBiz’s Member firms using Centra), as well as to over 300 financial institutions (of which 222 are new to SimplyBiz’s Distribution Channels).
Defaqto 2018 revenues of £12.8m and EBITDA of £5.3m, would have enhanced Group 2018 reported revenue by 25% and adj EBITDA by 46%.
Defaqto is growing its revenue by c. 10%, and with high operational gearing should grow EBITDA by c. 15% in 2019.
Defaqto has attractive financial characteristics: it has a high level of recurring or subscription income; the incremental profit margins are exceptional; is highly cash generative (“free cashflow”/EBITDA of 67%).
SimplyBiz management expect the acquisition to be enhancing for 2019.
Zeus view: We expect this transaction to both enhance earnings and strengthen the Group’s relationships with Financial Institutions and Intermediaries. We calculate the deal should enhance group adj EPS 0.8% for 2019E and 4.7% for 2020E (see Exhibits 1 & 2 for details). We have not included revenues or profits from SimplyInsight (the nascent SimplyBiz Defaqto JV). On our forecasts, we expect Group net debt to adj EBITDA to be c. 1.6x by end 2019.
We expect a positive response from institutional investors as they will recognise the quality of the Defaqto brand, should appreciate its financial characteristics and recognise the excellent strategic fit with SimplyBiz. We expect consensus forecasts to be similarly upgraded in due course.
Valuation: At 207p and on our new forecasts, we calculate SBIZ to be trading on a 2019 PER of 16.0x and PEG of 0.74x. With prospects of 15% pa earnings growth over the next 3 years, a valuation of 15x 2020 adj EPS of 15.7p (i.e 235p) is credible. We expect SimplyBiz to provide investors with higher than market earnings growth and defensive qualities.
