Insurance industry software provider FINEOS Corp ((FCL)) has hit the ground running on ASX, delivering revenue and operating earnings that were well ahead of prospectus forecasts.
Insurers need to modernise their claims and compliance systems because of greater regulatory complexity and the demands for a better customer experience. Moreover, legacy systems suffer from heightened risk and costs.
Macquarie found plenty to like in the outlook from the Irish company that listed on ASX just a year ago, noting significant opportunities in its existing claims client base in the northern hemisphere for both up selling and cross selling products.
The broker assesses growth in cloud-based revenue globally should drive margins as clients continue to migrate to the cloud. The company is experiencing high demand for Integrated Disability and Absence Management (IDAM) support from both US-based new and existing clients.
FINEOS is investing more in sales to capture the growth potential, which Moelis welcomes because current investment in sales is around 5% of revenue whereas product development is around 34%.
Macquarie notes R&D investment was up 24.3% compared with FY19. Demand for new product development remains high and the company is expanding its capability. Additional engineers are being hired to accelerate the transition of products to market and around 43% of employees are in R&D.
Still, Ord Minnett suspects more cost growth should be anticipated, which implies margins for the base business may be lower in FY21. Given the size of market potential — that is if the company’s administration suite becomes the default modern LA&H (life, accident and health) core platform — the broker, too, supports accelerated investment.
Management is confident it is uniquely placed as the only end-to-end LA&H platform. There was limited detail around the recently-acquired Limelight Health with the result, although integration work has started and should take 6-12 months.
Large Potential Market
Ord Minnett points out record new customer gains in FY20 demonstrated the pre-IPO deals were not “one-off”. Rather, the pandemic is underscoring a need for carriers to upgrade legacy systems.
Revenue of EUR87.8m increased 40% in FY20 and top-line targets have been reiterated. Total revenue growth of 20% and 30% growth in subscriptions is expected in FY21, which does not include Limelight Health.
Moelis believes most of the subscription growth guidance for FY21 is near enough to being banked, given the high level of conversions over the past 18 months and with many contracts featuring multi-year ramp-up periods.
The stock trades at a high multiple, at 6.8x enterprise value/FY22 estimated sales but Moelis is confident in the company’s ability to win material share in what is a more than US$7bn LA&H opportunity. Moelis and Ord Minnett have Buy ratings with targets of $6.15 and $5.00, respectively. Macquarie has an Outperform rating with a $6.06 target.
