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FD Technologies: short-term pain for long-term gain in AI?


FD Technologies LON:FDP the County Down-based, AIM-listed software and computer services specialising in data and Artificial Intelligence, has had something of a stop-start year, with some parts of the company travelling full-speed ahead and other parts being half-astern.

This has been reflected in FD’s full-year results to end-February, published today (21st May).

Subsidiary KX, which FD acquired in 2019 and describes as: “The world’s fastest database for vector, time series and real-time analytics,” saw a 12% growth in constant currency annual recurring revenue (ARR) to GBP73m but also experienced lower conversion rates and longer sales cycles because of the feeble economic backdrop.

The other part of FD’s business, First Derivative, its capital markets IT security, financial crime, and compliance consultancy practice had a disappointing year with an 8% decline in revenue to GBP170m, which the Northern Irish company said it mitigated by cost control measures that maintained EBITDA margins. The company blamed the fall on its financial services clients not using its products as often as they had previously, and in terms of new business FD blamed industry-wide caution stemming from lower investment banking revenues.

Group losses widen significantly

On a group-wide basis, FD saw its revenues decline by 2% to GBP248.9m. The company’s gross profit inched up year-on-year by GBP400,000 to GBP105.7m. However, once operational costs were calculated losses widened significantly (by 1,825%) to GBP7.7m when compared with a loss of GBP400,000 the year previously. Loss per share ballooned from 14.4p to 145.2p.

The company advised that First Derivative should achieve revenue in the range of GBP160m to GBP170m at maintained EBITDA margins, based on continued caution on consultancy spending by the company’s  capital markets customers, and that KX is expected to achieve annual contract value added in the range of GBP16m to GBP18m in FY25, resulting in gross ARR growth of 20% to 25%.

The market has not taken these results too well and over the past year hasn’t been showing FD Technologies a lot of love. The FD Technologies share price opened the day at 1,280p and fell to 1,182p in early trading before rallying a bit before the afternoon’s trading session to 1,230p. Over one-year FD is down 30.8% with its shares ranging between 740p and 2,245p over a 52-week period. This is a long way to climb back to its peak six years ago at 4,660p and the direction of travel has generally been downwards since then.

Structural reorganisation to blame

A lot of the blame, said the company, lies with the structural reorganisation the group has undertaken in the last year, with it completing the all-share merger of MRP with CONTENTgine, a provider of B2B technology buyer insights and lead generation, and a planned separation of KX and First Derivative to maximize shareholder value.

MRP was the third leg of FD’s stool, and strategically management decided to rationalise the group, and see where it could unlock hidden value with the constituent parts of the group possibly being more valuable on a standalone as opposed to consolidated basis.

The MRP/CONTENTgine merger was the first step in this process, a process completed at the start of March. FD Technologies will own 49% of the combined entity, which will be reflected as an associate investment rather than consolidated in group financial statements with the net asset value of MRP at the date of the transaction approximately GBP19m, which it may in time seek to divest.

The next step was the separation of KX and First Derivative, again valuable entities on a discrete basis each taking divergent paths withing the IT sector. Martin O’Sullivan is an analyst for Shore Capital, which has FD under coverage – and also acts as the software company’s broker and nomad.

O’Sullivan thinks that FD is greatly undervalued, and his firm has a ‘Buy’ recommendation for the IT Services company with a fair value price of 1,560p. O’Sullivan’s rationale is that FD’s current malaise is just a short-term issue, and the sum of the parts of the company are a lot more value than the market gives FD credit for. He believes that if FD sells off First Derivates, leaving it to just focus on KX, which it believes is the most valuable part of the group, FD could expect to raise GBP144m from the sale – citing a 10x EBITDA multiple of GBP20m, meaning it could in a favourable market get up to GBP200m.

Investor patience required

He said in a research note: “[…] Whilst the rationale for the separation of the business units is clear, patience from investors and strong execution from management may be required, given that the path to value creation may await both improved market conditions for First Derivative and KX, and a healthy dose of self-help within KX. Hopefully, the news from here will be incrementally positive both in terms of trading performance and the separation of KX and First Derivative.”

Bridgewise, the AI analyst, when casting opinion on another AI-focused company takes a slightly different view with a ‘Hold’ recommendation, and that before topping-up, or buying in, see how the short-to-mid-term pans out as: “[…] in light of FD Technologies’ recent financial performance, it’s unlikely that the company’s stock will substantially outperform the industry benchmark.”

FD Technologies operates in very fast-paced markets, which are hard to predict. Only yesterday, Professor Geoffrey Hinton, a former alumni of Google, dubbed the ‘Godfather of AI’ warned of the significant financial and societal impact the evolving technology could have on human development, going as far as warning of “human extinction-level threats” from AI. Thing is, no one can categorically state where this technology is heading, and with FD Technologies you have a dog in the fight. We add FD Technologies to The Armchair Trader’s AIM stocks to watch’ list.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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