FY21 update: ahead of market expectations

Cornerstone is experiencing strong growth, benefiting particularly from favourable underlying market trends and from the expansion of its Asia-focused operations during FY21. The trading update for FY21 to end-December confirms strong revenue momentum (38% year-on-year growth) and an emphatic 21.7% point YoY uplift in gross margin. The margin uplift was driven by higher customer revenue through direct channels (c.56% of total revenue in FY21), versus the indirect introducer network, although all channels saw growth. With a coherent product development roadmap in place and a strong pipeline of acquisitions, Cornerstone should continue to deliver solid growth over the medium term.

• Established forex services provider focused on SMEs: Cornerstone is a provider of forex, payment and currency risk management services, with a focus on small and medium-sized enterprises (SMEs) internationally. A key secular trend is that SMEs are doing more business than ever outside of their domestic markets.
• Revenue growth ahead of estimates: Cornerstone’s international expansion is paying off, and the acceleration in growth seen in 2H21 (and expected to persist in FY22) has been driven partly by the expansion during the year into the Asia and Middle East markets. The company’s FY21 revenue of £2.30m is ahead of our £2.17m estimate.
• Swing in favour of direct sales: A marked shift has been seen in the revenue mix towards direct sales: in FY20, only 12% of revenue was direct, rising to c.56% in FY21. There are strategic benefits to be derived from this trend beyond the sharp increase in gross margin in FY21E, to 51.5%, versus 29.8% in FY20.
• Acquisitions in prospect: Cornerstone believes that a compelling opportunity exists to acquire smaller service providers in the forex market, yielding benefits in terms of customer footprint and growing transaction volumes through its core platform. Discussions with potential targets are likely to remain ongoing.
• Investment summary: Cornerstone is experiencing favourable trends in the SME market, on which it focuses, and a strong early contribution from its international expansion. We revisit the multiple organic and acquisition-centric growth drivers from which we expect the company to benefit over the next few years. Focused enhancements to the platform to integrate with key SME finance and accounting systems will also be a key element. Our valuation approach centres on a discounted cash flow (DCF) analysis, where we consider two scenarios: the implied fair equity valuation range is between £12.5m and £24.6m; the latter scenario includes acquisitions planned for 1Q22.