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Boring is best for Equiniti

Equiniti is using solid cash generation to pay down debt and make growth-focused acquisitions while increasing the profitability of the existing business
June 15, 2017

The ever-rising tide of financial services red tape faced by UK companies underpins prospects for Equiniti (EQN). And while the financial admin services it offers clients may not be very glamorous, they have the great attraction of targeting recurring, non-discretionary spending. What's more, the complexity and tedium of the tasks, along with Equiniti's ability to deliver, means customers, many of which are blue-chip companies, rarely move their business. Given these solid foundations, we see scope for Equiniti's shares to re-rate as the company whittles down the high debt levels built up under previous private equity ownership, while at the same time improving margins and using acquisitions to plump up growth.

IC TIP: Buy at 220p
Tip style
Income
Risk rating
Low
Timescale
Long Term
Bull points
  • Beating analyst forecasts
  • Solid cash generation
  • Rising margins
  • Compliance-led revenues
Bear points
  • High debt
  • Little track record as a listed company

Equiniti is split into three divisions. Pension solutions, which accounted for 26 per cent of last year's underlying cash profit, is focused on administration for pension scheme clients, including giant schemes for the civil service, the National Health Service and the Armed Forces Veterans. Investment solutions, which generates 42 per cent of cash profit, focuses on sharedealing, wealth management and payments. Meanwhile, intelligent solutions, which accounts for the remaining 32 per cent of cash profit, helps clients manage complex or regulated activities, such as dealing with "know your customer" anti-money-laundering regulations, where the group recently strengthened its capabilities with the acquisition of a company called KYCnet.

 

 

Equiniti has performed well since it listed at the end of 2015 and last year beat analyst profit expectations, reporting 7 per cent growth in adjusted cash profits to £92.4m. The profit growth was well ahead of top-line growth of 3.7 per cent, which the company believes is something that will continue. Indeed, management has a clear focus on improving efficiency, including through offshoring, to push up margins. The group is also using its solid cash flows to pay down debt while funding growth-focused acquisitions. Management expects to spend around £20m-£30m on deals in 2017.

The business makes money by building or buying technology platforms. Once set up, these are relatively cheap to maintain and deliver fairly predictable revenues. Investment is needed to grow and improve these operations and last year the £12m spent on acquisitions and £28m on capital expenditure was comfortably covered by net (after tax) operating cash flows of £54m. The company was able to use its leftover money to reduce net debt by 4.4 per cent to £251m. Coupled with the rise in cash profits, this brought the ratio of net debt to cash profit down from 3 times to 2.7 times. A relatively high level of indebtedness has been a key concern for investors since the company floated in October 2015, so the progress here is important and broker Liberum forecast that this ratio could be below 1.5 times by 2020, providing grounds for a potential re-rating.

The compliance-led nature of a lot of what Equiniti does makes much of its service non-discretionary. As a result, the group has also proved itself to be good at keeping clients, retaining 100 per cent of customers at its most recent trading update covering the first four months of the year, while also adding household names such as Sainsbury's and House of Fraser.

EQUINITI (EQN)

ORD PRICE:220pMARKET VALUE:£659m
TOUCH:219.5-219.75p12-MONTH HIGH:225pLOW: 146p
FORWARD DIVIDEND YIELD:2.6%FORWARD PE RATIO:12
NET ASSET VALUE:128p*NET DEBT:62%

Year to 31 DecTurnover (£m)Pre-tax profit (£m)**Earnings per share (p)**Dividend per share (p)
20153695.30.00.7
201638359.010.24.8
2017**40063.017.25.2
2018**41970.019.05.7
% change+5+11+10+10

Normal market size: 2,000

Matched bargain trading

Beta: 0.28

*Includes intangible assets of £670m, or 223p a share

**Liberum forecasts, adjusted PTP and EPS figures