Strong FY22 update and Avila House divestment

The new CEO is proving to be decisive, while benefiting from continuing strong underlying momentum in the company’s end-markets. The trading update released on 11 January 2023 confirmed a strong finish to FY22, with revenue for the last two months of the year coming in £0.5m ahead of expectations, taking the FY22 outturn to £4.8m versus previous guidance of £4.3m. The Avila House disposal announced in December is timely, realising £300,000 upfront and a further similar sum during FY23 from a licensing arrangement. The e-money licence that Avila brought had been superseded by Cornerstone’s own licence. Our DCF-implied fair equity value for Cornerstone is £8.9m.

• Organic growth drivers have remained consistent and set to persist: From an organic growth perspective, Cornerstone is benefiting from the previous new market initiatives for Asia and Middle East, with salespeople based in London and Dubai now contributing strongly to the organic growth trajectory.
• Revenue mix is evolving in an attractive fashion: Clients served directly contributed 78% of total revenue in FY22 compared with 56% in the prior year. This shift continues to drive gross margin expansion, increasing to 61% in FY22 versus 52% in FY21. The medium-term gross margin objective is in excess of 75%.
• Avila House licence superseded by Cornerstone’s full e-money licence: The Avila acquisition was originally undertaken for its small e-money licence to enable Cornerstone clients to hold deposits across a range of currencies in e-wallets. Cornerstone subsequently obtained a separate full e-money licence.
• Financial focus on cash breakeven by 4Q23: A series of measures 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: An excellent trading outturn for 4Q22 reflects a combination of strategic initiatives and favourable underlying market drivers. These solid trends are expected to persist in 2023, suggesting scope for the valuation disconnect that Cornerstone has experienced in the past 12 months to progressively dissipate. Management is committed to achieving cash breakeven, driven by organic revenue growth – consistent news flow on these milestones will help the rating to normalise. The current market capitalisation of £3.6m compares with our DCF-implied fair equity value of £8.9m, which is our assessment of the underlying medium-term equity value of the company.