Re-Rating Ahead For Fineos Corp?

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This story features FINEOS CORPORATION HOLDINGS PLC.
For more info SHARE ANALYSIS: FCL
The company is included in ALL-ORDS and ALL-TECH

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.

Initiation

To fill the void, Canaccord Genuity last week initiated coverage with a Buy rating and $3.45 target.

The company has a deep understanding of the unique challenges faced by insurers, Canaccord suggests, having invested in excess of -EUR250m in R&D over the past five years. The broker believes the LA&H industry is an attractive vertical given the large proportion of insurance carriers still using legacy systems, representing an opportunity for Fineos.

The company estimates total annual spend on external core systems software of circa US$10bn by LA&H insurers, with an attainable addressable market of around US$2bn in North America from some 300 insurance carriers when including the direct-to-employer market.

Canaccord expects the ongoing structural tailwind of insurers moving from ageing legacy inbuilt systems to emerging purpose-built cloud-based platforms such as Fineos’.

Of the 300-odd addressable LA&H insurers in North America, less than 25% use third-party systems.

The company reports attractive unit economics, Canaccord suggests, with its mission-critical software resulting in negligible churn (1-2%), long-term customer relationships (average top ten customer length ten years) and high gross margins (greater than 75%).

The insurance industry has exited a period of under-investment, Canaccord points out, following the covid period that impacted carrier profitability and constrained investment in large transformational projects. Fineos reports a strong and improving pipeline of new, up-sell and cross-sell customers.

Canaccord believes Fineos is at an inflection point in its profitability and is on the cusp of achieving a positive free cash flow profile, given its most attractive pipeline of opportunities to date.

History Shows…

Canaccord’s positive investment view on Fineos is driven by a view that company valuations often undergo multiple re-ratings as they pass through free cash flow breakeven, which Fineos is expecting to deliver in 2025.

The thesis is the company operates in a large addressable market with strong industry tailwinds and strong competitive advantages as the leading insurance software provider in the LA&H industry with technological advantage over its competitors as illustrated by its R&D spend and market positioning.

Canaccord expects Fineos to report an accelerating subscription revenue growth profile, and rising profitability.

Based on revenue forecasts (five-year revenue CAGR 8%) and expectations for rising earnings margins (20% rising to 24% by FY27) and free cash flow generation, Canaccord sees Fineos as an increasingly high-quality software company with a large moat trading at a low relative valuation.

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