Pragmatic strategic reset under the new CEO

After a relatively tricky period for the company, the arrival of the new CEO has seen the adoption of a more pragmatic and focused strategy that takes nothing for granted in terms of availability of incremental funding. Efforts to reduce transaction costs, redirect capex towards more immediately realisable initiatives and a resolute focus on reaching cashflow breakeven are encouraging markers. At the same time, with a reduced emphasis on acquisitions, Cornerstone needs to deliver consistent underlying revenue growth to demonstrate that its core platform and augmented sales resources are able to deliver market share gains. Our updated DCF-implied fair equity value is £7.4m.

• Management changes: Following extensive changes in the board structure, new non-executive directors with payments and forex market experience have been brought in. The executive team remains broadly intact, creating continuity, with the benefit of a more focused strategy under an experienced new CEO, James Hickman.
• Consistently positive underlying growth rates: Despite a degree of upheaval in the business, growth rates remained strong throughout FY22, reflecting strong contributions from the Asian and UAE activities, and favourable underlying trends in the international forex markets. Acquisitions added revenue of £0.5m in FY22.
• Favourable trends in margin profile: Gross margins are expected to expand significantly over the next few years to c.78% (2022E: 61%). The major driver should be reduced reliance on white-label agreements, where the gross margin profile can be as low as 30%. Introducer and affiliate revenue is favoured as it is higher margin.
• Financial focus on cash breakeven by 4Q23: A series of initiatives have been put in place to achieve this, including i) cost controls through the reduction of the more ambitious platform developments and the addition of transaction counterparties, and ii) a focus on driving direct organic revenue growth.
• Investment summary: The pronounced market setback for technology companies, combined with management turbulence, has created a pronounced valuation disconnect for Cornerstone during the past 12 months. However, if a consistent trajectory towards cash breakeven can be maintained, driven by organic revenue growth, the rating could start to normalise. The core business is in good health, and capex is being focused on projects with near-term ROI potential. The current market capitalisation of £2.8m compares with our DCF- implied fair equity value of £7.4m, which is our assessment of the underlying medium-term equity value of the company.