- Strategic review commenced
- Earnings momentum supports decent bid premium
Aim-traded fintech payments group Equals (EQLS:112p), a fast-growing challenger brand in banking and international payments, has commenced a strategic review that could lead to a bid for the company.
Although the board is confident in the long-term prospects of the business and can see the potential to deliver significant shareholder value as an independent entity, the directors acknowledge that other counterparties may be able to deliver even greater value to shareholders. A small number of counterparties have been contacted to assess their interest in the company, including Madison Dearborn Partners LLC, an American private equity firm.
Supported by investment in a cutting-edge technology platform, digital marketing initiatives and bolt-on acquisitions to expand its offering and addressable market, Equals has been disrupting the market of traditional banks by focusing on small and medium-sized enterprises (SMEs). Momentum in the business is such that analysts at Peel Hunt upgraded their full-year cash profit estimates by 10 per cent to £20.2mn following September’s interim results. The forecast is based on annual revenue rising from £70mn to £95mn, implying 2023 adjusted earnings per share (EPS) more than doubling to 6.3p. Free cash flow generation is impressive, too, hence why broker Zeus Capital expects net cash to increase 71 per cent to £25.7mn this year, rising to £37.3mn (20p) by the end of 2024.
Based on this year’s forecast closing net cash, Equals’ enterprise valuation of £182mn equates to 13.1 times (2023) and 11.7 times (2024) operating profit estimates. That’s a modest rating that suggests a hefty bid premium in the event of a bid materialising and one that could materially narrow the share price discount to Peel Hunt and Canaccord Genuity’s target prices of 175p.
So, having advised buying the shares at 77p (Alpha Research: ‘A high tech fintech payments opportunity’, 8 April 2022), and last reiterated that advice at 104p (‘Equals on course to deliver 70 per cent upside’, 13 September 2023), I see scope for 50 per cent more share price upside. Buy.
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