Fineos Positioned For Dominance

This story features FINEOS CORPORATION HOLDINGS PLC. For more info SHARE ANALYSIS: FCL

Existing customers have provided a glide path for insurance software platform Fineos Corp and strong earnings growth is anticipated in FY22

-Few new clients required to meet guidance, cross-selling opportunities abound
-Fineos Corp likely to spend above trend to secure dominant position
-Main concern is the trajectory of the recovery out of the pandemic
 

By Eva Brocklehurst

Existing customers now give insurance software platform provider Fineos Corp ((FCL)) a strong earnings trajectory into FY22, allowing the company to relax in terms of achieving its growth targets.

The company has set revenue guidance at EUR125-130m for FY22 which Macquarie calculates implies 17.17% growth in revenue at the mid point. This should allow the company to move faster in terms of its ambition to make its business the leading life, accident & health (LA&H) platform for the insurance industry.

FIineos Corp asserts the ramp-up of existing customers means that there are few new clients required to meet this guidance, while there are cross-selling and up-selling opportunities.

Ord Minnett suggests FY22 will benefit from a full contribution from acquired business Spraoi as well as strength in upgrade work and a return to growth in new customers as conditions normalise.

Subscription revenue was up 48.6% in FY21 and the company continues to invest materially in its R&D to reflect client demand and the Limelight Health acquisition. Cost of sales increased by 23.9% primarily because of additional contractors required to meet project timelines.

The top 10 clients signed in the past three years now represent 30% of revenue and the top five have now declined to 48% of revenue. Shaw and Partners points out stronger revenue also allows for faster investment in the platform.

Moelis notes challenging sales conditions in FY21 but believes the outlook is strong, given the company highlighted the depth of opportunities across its existing customer base.

FY21 sales of EUR108.3m were largely from higher services revenue and Ord Minnett considers the year was "forgettable", in terms of new customer additions, as the pandemic disrupted new IT projects across the insurance industry.

As a result, the broker was pleasantly surprised at the level of work the company achieved and the upgrades that existing customers undertook. Revenue growth beat expectations in FY21 which highlights the potential of the upgrade work in transitioning from legacy platforms to the cloud.

Ord Minnett expects Fineos Corp will continue to spend at above trend on developing the platform throughout FY22 in order to cement a dominant position as the insurance industry increasingly adopts cloud-based policy administration software.

Moelis assumes sales conditions gradually improve over the first half of FY22 before returning to pre-pandemic levels during 2022 as LA&H insurers resume spending trends.

Industry Leader

Moelis considers Fineos the industry leader, best placed to capture share in this US$6bn addressable market as LA&H insurers modernise legacy core software systems.

Shaw and Partners upgrades FY22-24 forecasts by 8-12% and now expects a "shallower" investment phase, assessing Fineos is one the most attractively priced long-duration software growth stocks on the ASX.

The broker highlights professional services have largely driven the upside in the business, particularly in North America. Strategically, moving customers to the cloud is important as a first step in cross-selling.

Issues?

What are the concerns? Shaw believes these include the trajectory of a recovery out of the pandemic while the cash balance, despite the improvement, does not leave much room for error.

Yet Moelis highlights the cash balance has increased in July upon receipt of EUR15m in delayed payments and a client approving an updated contract. Moreover Fineos believes the global insurance industry will recover more quickly from the pandemic that it did after the 2008 financial crisis.

While 2022 is likely to be a strong year, Shaw acknowledges predicting opportunities will be the challenge given the lumpy nature of new deals. The broker forecasts the cash burn will improve, down to EUR11m in FY22.

Citi expects the cloud-based Admin Suite will derive a benefit from the digital transformation efforts of the life insurers as well as Australian customers that are moving to the cloud. Yet the broker continues to anticipate a EUR25m equity raising in the second half of FY22.

Among those stockbrokers not monitored daily on the FNArena database Moelis and Shaw maintain Buy ratings with the former having a $5.34 target and the latter $5.30.

Ord Minnett has upgraded to Accumulate from Hold and the database now has four Buy ratings. The consensus target is $4.82, revealing 13.4% upside to the last share price.

See also, Quality Clientele To Underpin Fineos on February 3, 2021.

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