First Derivatives PLC (LON: FDP) – Well-positioned to capitalise on considerable opportunities ahead.

First Derivatives PLC (LON: FDP) is a FTSE AIM UK 50 Index listed Software & Computer Service Company, which provides consulting services to the world’s leading companies from the technology, energy, and finance domain. Its Kx technology provides pioneer in-memory computing, operational intelligence, and high-performance streaming analytics. The Company has over 20 years of experience and operates from 15 offices across North America, Europe, and Asia Pacific. It is headquartered in Newry and employs over 2,400 people globally.

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

The growing demand for digital acceleration has created ample opportunity for the Group. The release of the 4.0 version of Kx shall increase the Company’s competitiveness. The resilience of the business model has ensured revenue growth despite the challenging trading environment. It is also making strong progress against strategic objectives with the enhancement of go-to-market capabilities and internal structure. Further, the Company progressed towards the market leadership position by significant contract wins in the core FinTech market. During H1 FY21, industrial recurring license revenue demonstrated 46% year-on-year growth in revenue. Overall, FDP is confident of growth opportunities in the medium-term and will continue to invest in research and developments to maximise its market position.

However, increasing incidents of cyber-attacks can put data security at risk. Also, the travel restrictions can have an impact on new business and pipeline opportunities. Similarly, lengthening of the sales cycle could have an impact over cash flows. Adjacently, increased competition can affect the Company's leadership position and its growth trajectory. 

Industry Outlook Dynamics

The UK technology sector is both diverse and broad as it is involved in the development, scaling, and implementation of various technologies, including the Internet of Things, 5G communications, and artificial intelligence. As per the Valuates’ publication, the market size for global Software as a Service is projected to reach from US$158.2 Billion in 2020 to US$307.3 Billion by 2026, representing a CAGR of ~11% during 2020 to 2026. The drivers that will influence the market size includes the convergence of artificial intelligence, increased usage of smartphones and laptops, and increased adoption of SaaS solutions for human capital management. However, the increased threats to data security could impact market growth.

(Source: Presentation, Company Website)

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of First Derivatives Plc. 

Recent Developments

On 25 January 2021: The Company had allotted 28,000 new ordinary shares, which is at a price of 0.5 pence each. Therefore, the total issued share capital of FDP will increase to 27.66 million ordinary shares.

Graham Ferguson had stepped down as Chief Financial Officer and from the Board on 1 January 2021. Ryan Preston has been appointed as a new Chief Financial Officer.

A Glimpse of Business Segments (H1 FY21)

Financial and Operational Highlights (for the six months ended 31 August 2020 (H1 FY21), as on 27 October 2020)

(Source: Company Website)

• During the period, the Company delivered a highly resilient performance, with an increase in Group revenue of 3% YoY.
• FDP witnessed 12% YoY growth in software license revenue driven by 46% growth in recurring revenue in Industry and 10% growth in recurring software revenue in FinTech.
• Despite lower event and marketing expenditure, the sales and marketing costs surged by 2% YoY, and total R&D (Research and Developments) increased by 37% YoY, while administrative costs were flat.
• As per the segment, the total software revenue surged by 4% YoY and Managed services & consulting revenue were in line with the previous period, while delivering a software gross margin of 52% and Managed services and a consulting gross margin of 21%.
• Adjusted profit before tax for H1 FY21 declined by 19% YoY, driven by increased financing costs and higher depreciation and software amortisation charges.
• Moreover, the reported profit after tax was down by 8% YoY to £6.1 million and reported diluted earnings per share declined by 10% YoY to 21.8 pence.
• Overall, the underlying performance stays consistent with the AGM trading update.
• Over the period, the Company saw strong cash conversion, with net debt falling substantially to £30.6 million.
• It has increased its demand for digital transformation, with the release of version 4.0 of Kx.
• Further, the medium-term outlook for First Derivatives stays positive.
• Looking ahead, the Company remains confident that demand will recover to pre-crisis growth patterns over the medium term.

Financial Ratios

Share Price Performance Analysis

On 2 February 2021, at the time of writing (before the market close, at 9:15 AM GMT), First Derivatives PLC’s shares were trading at GBX 3,140.00, up by 1.29% against the previous day closing price. Stock 52-week High and Low were GBX 3,625.00 and GBX 1,700.00, respectively.

From the technical standpoint, 200-day SMA (2,895.48), and 200-day EMA (2,930.63) are supporting the upside potential. 

In the past two years, FDP’s stock price has remained resilient with a positive return of ~45.54%; it has significantly outperformed the FTSE All Technology and FTSE AIM UK 50 index with a positive return of nearly +13.86% and +28.45%, respectively.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative

Business Outlook Scenario

FDP has been growing recurring revenue within FinTech and having an attractive pipeline of opportunities across geographies and solutions in which they operate. It entered FY21 with good momentum and a clear strategy to deliver strong growth. Moreover, no material impact from Covid-19 was observed over the business. It has a high level of financial liquidity and robust balance sheet to weather any disruption and grow the business further through strategic investments. In the short-term, high level of recurring revenue shall also provide business resilience. In the longer-term, it is confident of the growing demand for Kx streaming analytics from both partners and potential customers.

(Source: Presentation, Company Website)

Considering the resilient performance, high level of recurring revenue, strong liquidity position, sustainable business growth rate trajectory, solid balance sheet, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on First Derivatives at the current market price of GBX 3,140.00 (as on 2 February 2021, before the market close at 9:15 AM GMT) with lower double-digit upside potential based on 4.42x EV/NTM Sales (approx.) on FY21E sales (approx.). 

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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