I think FTK is uniquely positioned to increase its market share in Europe.
One think I don’t like is their pro forma figures. They exclude SBC provisions from SARs issued in 2020. This is totally deceiving since SBC is a very real operating expense (its actually a cash expense that just takes gets recorded in parts earlier). I am pretty sure that when SARs get exercised, management will exclude the corresponding cash expense. Don’t you think that this is a sign of management dishonesty, trying to paint a brighter picture?
I agree with you on their pro-forma figure. This is why I do not use flatexDEGIRO's pro-forma figures when computing its future equity value.
SBC expense was 15.5% of revenue in 2021, which gave me a c.28% EBITDA margin instead of 42.4% the company announced.
SBC and SARs are not a problem regarding my P&L projections since I just keep these expenses in, but they get more complicated when looking at FCF.
I add back SBC expenses when computing FCF (I know this a hot topic, and it merits even further debate), but simultaneously take account future dilution from SBC. The problem with my method is of course that SARs are paid in cash, not in share, so one cannot anticipate their future impact via dilution.
Yet, looking at the fine print, the impact of SARs (all of which stem from the 2020 SARs Plan), should not be too heavy:
- The SARs plan was drawn up in May 2020, when the share price was around 7€ (I will assume for simplicity's sake that the SARs plan does not take into account dilution when computing share performance). It was also signed at a terrible time for P&L: the stock price appreciated by c.80% in the 6 months that followed.
- Up to 1.6 million SARs can be issued, 1.1 million had already been granted by Dec 31st 2021.
- So far (Dec 31st 2021), a €75m provision has been included for the SARs, €60m of which came during 2021, a strong year for the company valuation.
- Given these numbers, at worse a further €32.5m (50% of 75) will be accounted for: that is if the stock price trades back to around 20€ per share and all remaining SARs are granted (1.1 * 1.5 = 1.6). These are very rough numbers of course.
- There is an initial waiting period until May 2023: by then flatexDEGIRO should be in an even better financial situation to take the hit given the cash that they are generating, even when projecting a tougher 2022 year if a recession arrives.
Hence, FTK could have a supplemental cash outflow around €108m in 2023, or more until 2025 if employees and management decide to exercise later (3 year exercise period) and the share price has risen.
It is not a negligible amount, but it won't put the company in danger either. In the €108m / 2023 scenario, my updated price target goes from €27 to €26. 2023 FCF drops by 50%, but longer term the company is fine.
Finally, there will likely be other SARs plan, but if it means slashing one year's FCF projection every 6 years while retaining talent and keeping cash longer, I'll take it! And this is all contingent on the stock price appreciating, which would already be great news for shareholders.
So, finance wise it is not too much of a problem. Regarding investors' trust and management dishonesty, I don't like it but it is nothing out of the blue. I know of almost no tech / fintech companies that give EBITDA or FCF projections and don't exclude the impact of SBC/SARs.
Most companies exclude such SBC schemes from pro forma but it is also true that most companies do not have such huge SBC plans. Anyway, I think you have made a miscalculation regarding one time cash outflow in 2023. These SAR provisions do not include the total expense but the total expense divided by the remaining vesting period (3 years). That means that when the 75M were expensed the company’s accountant projected a total expense in 2023 of 3*75M = 225M. So roughly, -taking your assumptions- the outflow will be 3*75 + 2*32.5=290M and not 108M. SBC schemes are complicated and make forecasts and DCFs so complicated and inaccurate, the only resource I found on how to account for them is IFRS2 (paragraph: “Illustration – Recognition of employee share option grant”), I hope it helps. Besides that I think your analysis and valuation are really great, would love to see other similar articles.
I'm likely off in my calculations but the SARs that FTK made does not vest equally.
I had noted that the CFO in the H1 2021 call said 2/3rds of provisions had already been made by then, and that this plan does not vest equally. An analyst for Goldman Sachs modeled a further $25m in 2022 and $5m in 2023, for a total around $115m (not sure I can show his computations for copyright and distribution restrictions), which would be rather in-line with the 2/3rds comment given the share price decline (and the GS model is already months old).
Finally, in that same H121 call he said that there were no plans for a new SAR plan until 2-3 years at least.
I guess the big difference here compared to your reply is that vesting is unequal, and that within just over a year, 2/3rds of vesting had already been done instead of 1/3rd if vesting had been linear.
Thank you so much for commenting by the way! I'll be writing other publications in the future, hope you'll like them as well!
Very informative analysis.
I think FTK is uniquely positioned to increase its market share in Europe.
One think I don’t like is their pro forma figures. They exclude SBC provisions from SARs issued in 2020. This is totally deceiving since SBC is a very real operating expense (its actually a cash expense that just takes gets recorded in parts earlier). I am pretty sure that when SARs get exercised, management will exclude the corresponding cash expense. Don’t you think that this is a sign of management dishonesty, trying to paint a brighter picture?
Hi Philip,
Thank you for reading!
I agree with you on their pro-forma figure. This is why I do not use flatexDEGIRO's pro-forma figures when computing its future equity value.
SBC expense was 15.5% of revenue in 2021, which gave me a c.28% EBITDA margin instead of 42.4% the company announced.
SBC and SARs are not a problem regarding my P&L projections since I just keep these expenses in, but they get more complicated when looking at FCF.
I add back SBC expenses when computing FCF (I know this a hot topic, and it merits even further debate), but simultaneously take account future dilution from SBC. The problem with my method is of course that SARs are paid in cash, not in share, so one cannot anticipate their future impact via dilution.
Yet, looking at the fine print, the impact of SARs (all of which stem from the 2020 SARs Plan), should not be too heavy:
- The SARs plan was drawn up in May 2020, when the share price was around 7€ (I will assume for simplicity's sake that the SARs plan does not take into account dilution when computing share performance). It was also signed at a terrible time for P&L: the stock price appreciated by c.80% in the 6 months that followed.
- Up to 1.6 million SARs can be issued, 1.1 million had already been granted by Dec 31st 2021.
- So far (Dec 31st 2021), a €75m provision has been included for the SARs, €60m of which came during 2021, a strong year for the company valuation.
- Given these numbers, at worse a further €32.5m (50% of 75) will be accounted for: that is if the stock price trades back to around 20€ per share and all remaining SARs are granted (1.1 * 1.5 = 1.6). These are very rough numbers of course.
- There is an initial waiting period until May 2023: by then flatexDEGIRO should be in an even better financial situation to take the hit given the cash that they are generating, even when projecting a tougher 2022 year if a recession arrives.
Hence, FTK could have a supplemental cash outflow around €108m in 2023, or more until 2025 if employees and management decide to exercise later (3 year exercise period) and the share price has risen.
It is not a negligible amount, but it won't put the company in danger either. In the €108m / 2023 scenario, my updated price target goes from €27 to €26. 2023 FCF drops by 50%, but longer term the company is fine.
Finally, there will likely be other SARs plan, but if it means slashing one year's FCF projection every 6 years while retaining talent and keeping cash longer, I'll take it! And this is all contingent on the stock price appreciating, which would already be great news for shareholders.
So, finance wise it is not too much of a problem. Regarding investors' trust and management dishonesty, I don't like it but it is nothing out of the blue. I know of almost no tech / fintech companies that give EBITDA or FCF projections and don't exclude the impact of SBC/SARs.
Thank you for the timely response.
Most companies exclude such SBC schemes from pro forma but it is also true that most companies do not have such huge SBC plans. Anyway, I think you have made a miscalculation regarding one time cash outflow in 2023. These SAR provisions do not include the total expense but the total expense divided by the remaining vesting period (3 years). That means that when the 75M were expensed the company’s accountant projected a total expense in 2023 of 3*75M = 225M. So roughly, -taking your assumptions- the outflow will be 3*75 + 2*32.5=290M and not 108M. SBC schemes are complicated and make forecasts and DCFs so complicated and inaccurate, the only resource I found on how to account for them is IFRS2 (paragraph: “Illustration – Recognition of employee share option grant”), I hope it helps. Besides that I think your analysis and valuation are really great, would love to see other similar articles.
Regards,
P.J.K.
Disclosure: I am shareholder of flatexDegiro
Hello again!
I'm likely off in my calculations but the SARs that FTK made does not vest equally.
I had noted that the CFO in the H1 2021 call said 2/3rds of provisions had already been made by then, and that this plan does not vest equally. An analyst for Goldman Sachs modeled a further $25m in 2022 and $5m in 2023, for a total around $115m (not sure I can show his computations for copyright and distribution restrictions), which would be rather in-line with the 2/3rds comment given the share price decline (and the GS model is already months old).
Finally, in that same H121 call he said that there were no plans for a new SAR plan until 2-3 years at least.
I guess the big difference here compared to your reply is that vesting is unequal, and that within just over a year, 2/3rds of vesting had already been done instead of 1/3rd if vesting had been linear.
Thank you so much for commenting by the way! I'll be writing other publications in the future, hope you'll like them as well!
Best regards,
Alaric