A high-growth disruptor with a very low rating

Aim-traded fintech payments group Equals (EQLS:88.5p), a leading challenger brand in banking and payments, has delivered annual results ahead of market estimates and an eye-catching first-quarter trading update that prompted analysts to upgrade their earnings estimates yet again.

Buoyed by 33 per cent revenue growth in international payments (accounting for half of total revenue), and a standout performance from the large enterprises solutions business (more than trebled revenue to £15.6mn to account for 23 per cent of total revenue, up from 12 per cent in 2021), group revenue surged by 58 per cent to £69.7mn. In turn, average revenue per day jumped from £174,300 to £278,700.

Moreover, it’s higher-margin business, too, hence why underlying annual cash profit increased at a faster rate (81 per cent) than revenue. Adjusted cash profit of £12.1mn was 7 per cent ahead of house broker Canaccord Genuity’s previously upgraded forecast, a reflection of the operational gearing of the business as an increasing amount of incremental gross profit earned in a positive sales cycle is converted into both cash profit and operating profit.

The direction of travel is clear, as highlighted by a first-quarter trading update that revealed revenue per working day has risen 13 per cent to £342,000 compared with the final quarter of 2022, and is more than 50 per cent higher than the same period of 2022. Analysts at Canaccord have taken note, raising their current-year revenue estimate by 10 per cent to £88.1mn, which produces cash profit of £17.9mn (16 per cent upgrade and 48 per cent higher than in 2022), and 40 per cent growth in adjusted earnings per share to 7p.

It’s worth noting that the group’s cash generation has been equally impressive. Equals closed the 2022 financial year with 35 per cent higher net cash of £15mn, a sum that has since increased to £18mn (9.9p) with the benefit of £1mn of monthly operating cash flow. Canaccord Genuity is pencilling in closing net cash of £24.9mn (13.7p per share) by the 2023 year-end.

Smart acquisitions

Equals’ well-respected management team has been making some smart strategic moves to improve the functionality of the product offering and the addressable market, too. The £4.1mn all-share acquisition of Oonex, a regulated payment institution based in Belgium, was announced alongside the annual results. Strategically, it enables the group to bring its payments, cards and multi-currency account products to a new suite of customers across Europe and could be a game-changer for the business by massively expanding Equals’ total addressable market. The deal should get regulatory clearance by the end of June and chief executive Ian Strafford-Taylor expects it to achieve a break-even result within a year and be earnings accretive in the medium term.

It follows last November’s £2.25mn acquisition of open banking platform Roqqett, which provides the group with the two additional licences (ability to take payments and access financial data) the group needed to offer the full suite of opening banking services. It enables Equals’ business-to-business (B2B) clients to use open banking to acquire payments rather than rely on traditional methods of debit and credit cards.

Subject to FCA approval, Equals is also acquiring Hamer & Hamer, a B2B international payments business with annual revenues of £1.5mn, the deal being priced on two times revenue and three times cash profit, says finance director Richard Cooper.

It’s not the only smart deal-making as Equals bought out the minority 49 per cent shareholder interests in its white-label business for £3.3mn. That unit almost doubled revenue and gross profit to £15mn and £1.95mn, respectively, last year and has a favourable drop through of gross profit to cash profit, says Cooper. Taking complete control will enable Equals to offer the product suite to a wider addressable market.

Upside potential

The £160mn market capitalisation group has an enterprise valuation of £142mn, or 7.9 times Canaccord Genuity’s 2023 cash profit estimates and priced on a modest cash-adjusted forward price/earnings (PE) ratio of 11.2, falling to 10.7 at the 2023 year-end assuming the cash pile hits £24.9mn.

That’s a low rating for a high-growth business that is disrupting the market of traditional banks, which are reliant on more cumbersome payment legacy platforms and lack the agility and operational leverage of Equals. It’s also a low multiple for a business that has invested over £30mn (2019 to 2022) in its technology platform, including acquisitions and is forecast to deliver £16.5mn net cash from operating activities this year.

Equals’ shares are 13 per cent ahead of my 77p entry point since I (Alpha Research: ‘A high tech fintech payments opportunity’, 8 April 2022), during which time the FTSE Aim All-Share Total Return index has shed 23 per cent of its value, highlighting relative outperformance in the past year. Trading slightly below the level of my last buy call when I covered the bullish pre-close trading update (‘Good and bad surprises’, 23 January 2023), I maintain my 144p target price. Buy.

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