Re-Rating Ahead For Fineos Corp?

Small Caps | 10:00 AM

Insurance software company Fineos Corp should become free cash flow positive this year – a milestone that typically triggers a multiple re-rating.

• Fineos Corp a dominant SaaS player in the global insurance industry
• Heavy investment in R&D has weighed on valuation to date
• Extensive addressable market of insurers moving to the cloud
• Free cash breakeven expected in 2025

By Greg Peel

Fineos Corp ((FCL)) is one of leading providers of insurance software to Life, Accident and Health (LA&H) insurers worldwide. Headquartered in Dublin, the company was listed on the ASX in 2019 at a price of $2.50 per share and closed last Monday at $3.06.

Fineos has established itself as a dominant SaaS player in the sector through extensive client relationships, with customers including seven of the ten largest employee benefits insurers in the US, the largest LA&H insurer in Canada, and 70% market share of employee benefits insurance in Australia.

The company is yet, however, to reach positive free cash flow.

Being Irish, the company reports in euro, and the EURUSD exchange rate has proven a headwind in recent months. But the real drag has been Fineos’ heavy investment in R&D towards its purpose-built, cloud-based platform.

This was the issue for Moelis back in August ahead of Fineos’ interim earnings result (December year-end). Moelis noted the company was maintaining its strategic trajectory, but longer-term growth was dependent on new client acquisition and deeper penetration of large accounts.

Caution led Moelis to downgrade Fineos to Hold from Buy, setting a target price of $3.27. (The 52-week high for the share price is $3.29, earlier this month.)

Seeking Guidance

Also reporting ahead of Fineos’ interim result was Macquarie, who in early September drew upon US-based rival Guidewire’s FY25 result to assess implications for Fineos.

In FY25, Guidewire's annual recurring revenue (ARR) grew 19%, revenue rose 23% and the cashflow margin was 25%, beating the top end of guidance. Initial FY26 guidance was for 22% ARR growth and a 52% rise in operating cash flow.

Macquarie suggested Guidewire's strong subscription-driven growth and profitability highlights the potential path for Fineos but also underscored the current gap. Fineos trades at a steep discount, justified by its slower growth and heavier R&D capitalisation, but offers optionality if execution on cloud transition accelerates, the broker believed.

Macquarie retained an Outperform rating on Fineos, lifting its target to $3.48 from $3.29.

Blood from a Stone

Whether it be a loss of interest, or the result of down-sized analyst teams being overstretched, neither Moelis nor Macquarie have updated on Fineos’ result, maintaining radio silence to date.

Cit has stepped up, but noted by way of apology its late September update was rather belated.

Fineos added EUR5m of ARR in the first half 2025, the strongest half of incremental ARR since 2023, with ARR growth benefiting from three new wins towards the end of the half (as well as lower churn).

With stronger-than-expected first half cash flow removing concerns of a potential equity raise, and strong ARR growth, Citi reiterated its Buy call, hiking its target up to $3.25 from $2.35 to reflect earnings upgrades due to lower opex and higher peer multiples, as well as applying a lower discount to peers to reflect reduced probability of an equity raise after the stronger than first half cash flow.

However, said Citi, there is still more work to be done for Fineos to hit mid-term Subscription revenue targets.

The broker’s forecasts assume Subscription revenue grows of 61% of group revenue (assuming Services is flat), which is below Fineos’ target of 65% of group revenue. While Fineos is seeing good momentum in Absence/Claims deals, Citi sees winning larger Policy & Billing contracts as key for acceleration of subscription revenue.