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Delivering explosive earnings growth

A building services contractor boasts a record order book, buoyed by data centre projects, while an Aim-traded fintech payments group is outperforming expectations, too.
Delivering explosive earnings growth

It pays to take note of changes in the narrative in company announcements. That’s because it’s an indicator of the level of confidence directors have in trading prospects.

For instance, building services contractor TClarke (CTO:149p) issued a bullish update at its annual meeting. Not only has the forward order book hit a record high of £585mn, up 24 per cent since the start of the year, with an implied book-to-bill ratio of 130 per cent, but the group boasts a strong pipeline of potential opportunities across all its targeted market sectors. Data centre projects are driving the growth, so much so that the segment will account for a third of revenue by the year-end and offers significant potential for years to come.

The strength of the order book is such that the directors are “very confident” of delivering 25 per cent higher revenue of £410mn and 36 per cent higher operating profit of £12mn in 2022. House broker Cenkos believes its forecasts “are eminently beatable and bring 2023 revenue estimates of £500mn confidently into view.” That’s not embedded in a current year PE ratio of seven, falling to six in 2023, while a forward dividend yield of 3.4 per cent is attractive, too. Fair value is 186p.

A fintech winner

  • 2022 revenue and profits to be ahead of market expectations
  • Revenue run rate up strongly year-on-year, and has accelerated in past seven weeks
  • Gross margin trending in line with budget at just below 50 per cent

Aim-traded fintech payments group Equals (EQLS:87p) is a leading challenger brand in banking and payments that disintermediates the incumbent banks by providing a superior user experience and a low-cost operating model.

Equals differentiates itself from rivals by offering both account-to-account transfers and cards, overlaid on a technology platform that provides bank-grade connectivity and security on superior customer interfaces. Providing one unified platform to business customers is becoming increasingly vital. For instance, many e-commerce businesses only accept card payments, whereas other companies may typically only accept bank transfers.

Within the payments market, Equals is strongly focused on the business-to-business (B2B) customer segment, having identified small and medium-sized enterprises (SMEs) as the optimal target audience for its products and services. The focus on B2B customers has been a real gamechanger. Having listed its shares on Aim in 2014 as FairFx – a business-to-consumer (B2C) dominated travel money and foreign exchange dealing business – management pivoted towards the B2B segment in 2017, transitioning the business to become a payments provider in this area. A series of acquisitions has enhanced the product and service offering and with tangible benefits, hence why I suggested buying the shares, at 77p (Alpha Research: ‘A high tech fintech payments opportunity’, 8 April 2022). The news since then has been very positive.

In the first 91 trading days of 2022, Equals generated total revenue of £22mn, representing an average of £241,000 per day or 86 per higher than in the same period in 2021. Moreover, growth rates have accelerated since the end of March as Equals has delivered revenue of £8.4mn in the past seven weeks, implying an average of £280,000 per day. House broker Canaccord Genuity has taken note of management’s raised guidance, lifting its full-year revenue estimate by 14 per cent to £62mn, equating to 40 per cent annual growth, and is pencilling in adjusted pre-tax profit of £9.3mn and earnings per share (EPS) of 4.2p. I think these upgraded estimates are still too conservative for two main reasons.

Firstly, even more SMEs are now likely to take advantage of Equals market leading foreign currency rates as they look at their cost bases in the current environment, thus further underpinning the ongoing strong momentum.

Secondly, millions of UK holidaymakers are taking to the skies in search of sunnier climes, a major positive for the group’s FAIRFX currency travel business which now has far fewer rivals to compete with than prior to the Covid-19 pandemic. That’s good news for the profit margin to be earned, too.

Furthermore, with group gross margin holding steady just shy of 50 per cent, the operational leverage of the business model is such that Canaccord believe that Equals pre-tax profits can rise a further 40 per cent in 2023 to deliver EPS of 5.5p. On this basis, the shares are trading on a forward PE ratio of 15.6, less than half the rating of Alpha FX (AFX), a larger provider of foreign exchange risk management and payments solutions to corporate customers. Finance director Richard Cooper can see value, having this week made a market purchase of 33,334 shares, at 86.75p, and exercised options over 666,000 shares which he has retained to lift his stake to 850,000 shares, or 0.74 per cent of the share capital.

I fully expect the ratings discount to narrow as Equals continues to outperform market expectations, hence my target price of 120p. From a technical perspective, a chart break-out above April’s highs (90p) would be a bullish signal and will undoubtedly attract momentum traders, too. Buy.

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