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First amongst equals

A leading challenger brand in banking and payments that disintermediates the incumbent banks by providing a low-cost operating model has upgraded guidance again, but is only rated on a modest forward PE ratio of 12.
First amongst equals
  • First half revenue increases 84 per cent to £31.7mn
  • Revenue per day of £252,000 represents an 87 per cent year-on-year increase
  • Cash balances up 50 per cent to £15.1mn on June 2021
  • 2022 and 2023 earnings per share (EPS) estimates raised to 4.6p (9 per cent upgrade) and 6.2p (13 per cent)

Aim-traded fintech payments group Equals (EQLS:88p), 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, continues to materially outperform analysts’ expectations.

In a pre-close trading update released ahead of the group’s interim results on Wednesday, 7 September 2022, the directors revealed that revenue per day increased by an eye-catching 87 per cent to £252,000 in the latest six-month period, implying a run-rate of £222,000 in the first quarter of 2022 has accelerated to £270,000 in the past three months.

Equals is generating these stellar growth rates by focusing 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. For instance, revenue from international payments increased by almost two-thirds to £16.1mn and the solutions business that targets larger corporates generated £6.2mn of first half revenue, having only been launched a year ago.

Importantly, gross margin appears to be holding in the 48 to 50 per cent range, so gross profit is ratcheting ahead in the positive sales cycle, surging by 50 per cent to £15mn in the first half. Excluding the lower margin white label business, gross margin only dipped slightly to 59 per cent.

Analysts at housebroker Canaccord Genuity have taken note, raising their full-year revenue estimate from £62mn to £65mn, implying 47 per cent annual growth. Moreover, given the higher revenue per day run rate, they have also upgraded their 2023 estimate from £64.6mn to £77.3mn. On this basis, expect current year adjusted pre-tax profit to increase by two-thirds to £10.3mn (11 per cent upgrade) to deliver EPS of 4.6p, rising to £14.5mn (11 per cent upgrade) and 6.2p, respectively, in 2023.

Cash balances are building, too, up by half to £15.1mn (excluding £2mn of bank borrowings) in the first half and are forecast to hit £20mn by the year-end, rising to £28.3mn (15.7p a share) by the end of 2023. This implies Equals’ shares are trading on cash-adjusted price/earnings (PE) ratios of 17 (2022) and 11.8 (2023), a modest rating for a company that is set to deliver 133 per cent organic pre-tax profit growth over the two-year forecast period, and one that is in an earnings upgrade cycle.

Equals’ shares have risen 14 per cent since I first suggested buying, at 77p (Alpha Research: ‘A high tech fintech payments opportunity’, 8 April 2022) during which time the FTSE Aim All-Share index has lost 17 per cent of its value. Although the share price is unchanged since my last update (‘Delivering explosive earnings growth’, 18 May 2022), this represents outperformance as the FTSE Aim All-Share, which has declined 8 per cent in the seven-week period.

I strongly feel that the share price could absolutely fly when equity market conditions are more favourable to narrow the gap with Canaccord’s sensible upgraded target price of 144p (from 129p). Equals is a potential takeover target, too, given the high operational leverage in its fintech platform, and the ability of management to take market share in the SME sector. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

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