Berenberg raises target on First Derivatives, but expresses concern

Analysts at Berenberg raised their target price on consulting services firm First Derivatives from 2,100p to 2,750p on Wednesday, highlighting the group's "strong growth" despite having little cash to show for it.

The company's 2019 full-year results last Wednesday revealed "strong" revenue growth of 17% and adjusted EBITDA "slightly ahead" of expectations, leading Berenberg to increased its 2020-21 estimates for adjusted EBITDA by 8-9%, respectively, in line with management guidance.

However, the German bank said there were still some concerns.

Berenberg noted that revenue growth slowed to 13.7% in the second half of the year to its lowest level since 2015, while EBITDA margins declined 40 basis points year-on-year.

"With both needing to improve in FY 2020 to meet guidance, it suggests there may be less headroom to guidance compared to previous years," said Berenberg's analysts.

Consensus was for revenue growth of at least 13-15% in 2020.

In addition, Berenberg noted that First Derivatives generated only around £6m worth of free cash flow in 2019 - on around a 3% margin, bringing its cumulative FCF since 2011 to about £24m, compared to the £800m increase in the group's market cap over that same time frame.

On the flip side, valuation multiples in the sector had re-rated and the broker expected group EBITDA margins rising back by 40 basis points by the end of the financial year 2021.

But given the above concerns and "lofty valuation", while revising its target price higher, Berenberg retained its 'hold' rating on First Derivatives.

As of 1457 BST, shares of First Derivatives were 2.37% lower at 3,295.0p.