Fresh from joining the stock market in April 2018, shares in SimplyBiz (SBIZ:AIM) are starting to gain traction as more people become aware of its story.

The £137m business provides compliance and business support services to over 3,400 UK directly authorised independent financial advisers (IFAs). It is a beneficiary of changing regulation and has a high quality earnings stream with 92% recurring revenue – i.e. sales from the same underlying customers each year for the same services.

There are around 12,000 licensed IFAs practicing at the moment, sitting between product manufacturers (such as asset managers) and the end customers. The market of IFAs is split between those who are members of networks and those who are directly authorised.

SimplyBiz offers help to advisers looking to become directly authorised as it’s a complex process involving the Financial Conduct Authority, a regulator. Those seeking accreditation need to provide a five year business plan, cash flow forecasts as well as a compliance monitoring plan. SimplyBiz has helped over 3,000 clients to become directly authorised to date.

REGULATORY DRIVERS

One of the main challenges in the industry is ever increasing regulation such as the updated Markets in Financial Instruments Directive (MiFID II). This European Commission rule has brought new responsibilities to both the manufacturers and the distributers of financial products.

Matt Timmins, co-chief executive officer of SimplyBiz, says ‘regulation is a real friend to our business’. Part of his company’s offering is advising its clients on regulation.

SimplyBiz offers a manned helpdesk that its clients can call if they have any queries over the rules of doing business.

While regulation is a key driver of SimplyBiz, it sits inside the intermediary services division of the business. The company is split into two divisions; the other being its distribution channels business.

While the two segments bring in roughly the same amount in revenue, it is the distribution channels business which generates the most earnings before interest, tax, depreciation and amortisation (EBITDA). For its full year 2017, the division accounted for 64% of group EBITDA.

SimplyBiz’s distribution channels division provides marketing and promotion services to its clients. Timmins gives an example of insurer Vitality which uses sensors that monitor and will adjust insurance policies accordingly to its users’ health.

Rather than have Vitality drive around explaining to thousands of IFAs individually the benefits of its system, SimplyBiz organises events where companies such as Vitality can present their complex products to thousands of advisers in one place.

Timmins sums up the business model saying the number of member firms drives the business. The more firms, the more support services they can buy and this enhances the value of its distribution channels arm.

WHO ARE ITS RIVALS?

The company’s rivals include businesses owned by large players such as Standard Life Aberdeen’s (SLA) Threesixty and Aviva’s (AV.) Bankhall subsidiaries.

The presence of these FTSE 100 giants in the market doesn’t seem to worry Timmins. He makes the point that IFAs don’t just want one big provider to offer them all their products; his company has the flexibility to offer services from a variety of providers.

There are four companies on the UK stock market which have similar sources of revenue and operate on similar EBITDA margins to SimplyBiz and could therefore be seen as useful benchmarks. The relevant stocks are Tatton Asset Management (TAM:AIM) which owns Paradigm, a direct competitor to SimplyBiz; Curtis Banks (CBP:AIM), Mattioli Woods (MTW:AIM) and Mortgage Advice Bureau (MAB1:AIM).

SimpyBiz has its own asset management business with a range of investment funds marketed under the Verbatim brand. Money from IFAs using SimplyBiz’s support services only accounts for 2% of Verbatim’s total invested money. Fund managers which manage assets in Verbatim’s funds include Liontrust, Architas and Sarasin.

HOW MUCH MONEY COULD IT MAKE?

According to data from broker Zeus Capital, SimplyBiz had the largest market share of support services to directly authorised IFA firms by revenue in 2016, around 31%. Zeus also views that economic risk is low with the company, as its revenues are largely uncorrelated to broader themes such as interest rates, inflation rates and investment returns.

The broker adds: ‘Arguably an economic slowdown may result in increased need for SimplyBiz’s services by both intermediaries and financial institutions, as they focus on being more efficient.’

Zeus sees three main drivers of revenue growth: increased number of members; increased average subscriptions and fees paid by members; and increased use of distribution channels by members.

Other drivers include pushing up average revenue per members and money paid by financial services firms in support of accessing SimplyBiz members.

Adjusted pre-tax profit (i.e. excluding one-off items like IPO costs) is forecast to jump from £6m in 2017 to £10m in 2018 and £12.3m in 2019.

At 178.99p, the shares currently trade on 17 times current year’s forecast earnings. The company floated on 16.3 times earnings and Zeus last month said you could make more than 20% total return each year if the stock continued to trade on that valuation multiple.

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