After a break of several months from the markets its time to get back on the saddle and start searching again for those hidden gems that might become very profitable investments. One such potential gem is Apex Clearing.
Apex Clearing mainly provides custody, clearing and settlement for fintech companies and (online) brokers. The business itself has been around for a long time and there are plenty of companies providing those services. However, given the rapid pace of digitalization and customization of financial products and services over the last decade, many legacy companies had to start adapting (fast). As is often the case with legacy tech and systems, platforms are not build for flexibility and adapting to a new environment is easier said than done. Often the result is layer upon layer, or just patch-work. That makes Apex interesting; the company has built its platform and systems from scratch. Their tech is flexible, easier to integrate and much more customizable. As a result, Apex has been acquiring customers at a rapid pace and has even been accelerating over the past year.
That said, it is not my intention to dive into the Apex business here. You can find a good write-up of Apex on Value Investors Club here. I highly recommend you to read it in order to better understand the company and its growth potential. Instead, I would like to focus on why I believe Apex is now interesting, and the main reasons are that the market seems to have ‘forgotten’ the Apex deal while at the same time the company’s results have been shooting the lights out.
In February this year Apex struck a deal to go public via Northern Star Investment Corp II (NSTB), a spac, at an enterprise value of $4.6bn (~$5.5bn market cap). At the time I thought it was a very interesting company, but the deal was a bit too expensive for my taste. I nevertheless put it on my watchlist and kept an eye out. The deal initially proceeded according schedule. Preliminary merger documents (S-4) were filed in April. A few months later, a special stockholder meeting was scheduled for August 30 to vote and close the deal. During this time, Apex updated the market regularly about the process and its performance, including an analyst day in May. All seemed on track, up until the end of June when things quieted down. This is a bit strange as SEC reviews of S-4 revisions generally don’t take much time (particularly the later versions) and the special meeting deadline was approaching. However, after providing Q2 estimates in June, Apex did not communicate anything up until the end of August, where they announced a postponement of the special meeting as the SEC review still was not completed.
During the first half of the year, Apex announced blow-out Q1 results and H1 guidance, estimating ebitda to reach ~$92m for the first half. This compared to a previous guidance of $106m for FY2021. Apex was on pace for 100% ebitda growth in 2021. Clearly forward guidance was way too conservative.
Some clarity about the reason of the postponement was provided in an NSTB filing early September. It appears that the SEC had a last minute (during the 4th revision) change of mind regarding the accounting treatment of revenues and expenses of the company’s cryptocurrency trading facilitation business:
(As a side note, the reporting of cryptocurrency trading revenues and expenses on a gross basis is pretty annoying as it blows up your gross revenue and expense base. This change also shifts the focus to adjusted ebitda and net income as main performance metrics).
Apex had to restate its financial statements, which naturally takes time. The delay also caused the company to need to seek (re)new(ed) PIPE agreements as they were due to terminate on the merger date (August 31). But the NSTB filing also provided good news. Although Apex did not communicate H1 results, the filing included H1 results and an upward revision of 2021 and 2022 guidance:
So based on 2021 trading, FY2021 ebitda guidance was increased from ~$106m to ~$135m (and $92m net income) and FY2022 ebitda from ~$133m to ~$170m. The big upward revision in guidance was expected given the H1 run-rate, but still appears on the conservative side.
After another couple of months of complete silence, NSTB recently filed another revised S-4 form containing the restated financials as well as a Q3 update. Though (again) not directly communicated by Apex, the company continues to crush it, with YTD ebitda of $127m and $85m net income. Compared to these results, the previous updated guidance indeed still looks conservative. Assuming the same ebitda increase during Q4 would result in >$160m ebitda for 2021.
These results are very strong, particularly when compared to an initial guidance of $106m for 2021 and $178m for 2023.
So let me recap some of the interesting points of this thesis:
- The company is attacking a big, sticky, but rapidly changing market with plenty of legacy players. The opportunities are plenty and Apex currently seems to be able to more than deliver on its promises.
- The >6 months delay in closing the deal, the lack of communication and the many other announced spac deals have caused the Apex-NSTB deal to be forgotten. A simple Twitter search indicates there are very few eyes on this deal at the moment.
- In the meantime, Apex has been hitting it out of the park so far and is on track to deliver ~100% ebitda growth and >100% net income growth this year.
- Given the strong results, the deal looks much more attractive now. Assuming $200m ebitda in 2022 (only ~$40m additional ebitda – remember, the company is likely to add ~$80m this year), Apex will list at ~23x 2022e ev/ebitda. This doesn’t appear much to me for what looks like a quality company growing >20% with >40% ebitda margins.
Furthermore, Apex is not going to be a small company with a market cap of >$5bn. This will attract interest and definitely plenty of sell-side research. Another interesting item is that Apex will benefit from an increasing interest rate environment; according to management, every 25bps increase in Fed funds will add ~$10m to the bottom line.
Finally, it’s also worth considering that NSTB shares are still trading <$10. Should something happen to the deal, the probability of losing money here are nil (pre deal-closing). However, I suspect that once the latest form S-4 has been declared effective and a new merger date is set, both NSTB and Apex will become (again) more vocal.
Discl: long NSTB shares and warrants
Toffcap