Argentex benefits from volatility

Foreign currency hedging and broking is a vital function for any corporate treasury department that does business in lots of foreign markets. It is also a niche that can be serviced effectively by specialist brokers, which is exactly what Argentex (AGFX) does alongside direct competitors like Alpha FX (AFX). The return to pre-Covid levels of activity, combined with currency volatility linked to interest rate speculation, was behind the more than 34 per cent increase in demand for the company’s forex swaps, but it was the general need to move forex around in trade-related transactions that drove the half.

Swaps represent only about 6 per cent of total revenues, with the company’s core business still focused on enabling forex flows. The sheer scale of the recovery in demand since the effective end of restrictions on economic activity generated a notable operational gearing effect in the half, despite an increase in administrative costs of £2.9m as the company scaled up its overseas operations and increased headcount in its sales and marketing teams. Around £1.3m of that increase was related to variable compensation costs, which tend to increase in-line with the overall rise in revenues.

The company’s business model is reliant on achieving scale in its operations before the needle can move significantly on its profits, so the investment in sales and marketing makes sense. House broker Numis forecasts EPS for 2022 of 7.9, rising to 10.8 the following year, which gives an undemanding forward PE rating of 11 and 8, respectively. The clear discount to its peers looks a good opportunity to lock-in a potential re-rating. Buy.

Last IC View: Buy, 125p, 1 July 2021