First Derivatives PLC

First Derivatives PLC (LON: FDP) is an FTSE AIM UK 50 Index listed Software & Computer Service Company. It provides consulting services to the world’s leading companies from the technology, energy, and finance domain.

Investment Rationale for Valuation – Speculative Buy at GBX 2,120.00

• FDP had projected FY22 revenue to show a significant increase (targeting 10%) from the FY21 levels.
• On the liquidity front, the current ratio (1.91x) remained higher than the industry median of 1.61x during FY21.
• With regards to the balance sheet, FDP had shown a substantial reduction of around 80% in net debt during FY21.
• The primary focus of the Company would be on KX, which represents a USD 39 billion addressable markets by 2025, growing at 30% per annum.

Key Risks

• The profitability and cash flow of FDP might get impacted due to the software bugs or lack of availability of hosted services.
• The Company is exposed to the risk of inability to deploy Customer requirements for services to comply with contractual requirements in a timely manner.
• The failure of partner relationships could adversely impact the business in the near term.

FY21 Financial & Operational Highlights (for the twelve months ended 28 February 2021, as of 18 May 2021)

(Source: Company result)

• The revenue remained flat during FY21. It stood at £237.9 million during the period.
• The Company had managed to reduce the net debt from £49.4 million during FY20 to £9.9 million for FY21.
• FDP had launched KX Insights for cloud-native streaming analytics during the period.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

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

Conclusion

The Company had anticipated FY22 top-line revenue to be ranging from £255 million to £260 million. Moreover, FDP is targeting revenue to become double by FY25, with significant growth weighted more towards recurring software revenue. Furthermore, the Company would aim to make accelerated investments focused on KX. Meanwhile, the proposed renaming of the Group as FD Technologies PLC is progressing well and would be subject to approval in the Annual General Meeting. The stock made a 52-week low and high of GBX 2,030.00 and GBX 3,625.00, respectively.

The next important support level on the technical chart is at GBX 1,752.00.

Based on the projected top-line revenue growth, significant net debt reduction and valuation as done using the above method, we have given a “Speculative Buy” recommendation on First Derivatives PLC at the closing market price of GBX 2,120.00 (as of 08 July 2021), with lower-double digit upside potential based on 3.19x EV/NTM Sales (approx.) on FY22E sales (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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