- First-half transaction values surge 43 per cent to £6bn
- First-half revenue up 43 per cent to £45mn
- Cash profit doubles to £9.8mn
- Operating profit up five-fold to £5.5mn
- Net cash up 19 per cent to £17.9mn since start of 2023
Aim-traded fintech payments group Equals (EQLS: 104p), a leading challenger brand in banking and payments, has delivered a robust set of interim results that highlight the operational leverage of its business. The group has also reported a robust trading performance in the third quarter, with revenue per working day up 39 per cent to £370,000 year on year. The directors raised full-year earnings guidance, too.
Supported by investment in a cutting-edge technology platform, digital marketing initiatives and astute bolt-on acquisitions to expand the group’s offering and addressable market, the high-growth business continues to disrupt the market of traditional banks reliant on more cumbersome legacy payment platforms.
The group differentiates itself from rivals by offering both account-to-account transfers and cards, through a technology platform that provides bank-grade connectivity and security. Providing one unified platform to business customers is becoming increasingly vital. For example, many ecommerce businesses only accept card payments, whereas other companies may typically only accept bank transfers.
Within the payments market, Equals is 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 SME customers has been a real game-changer, as has the added capability for them to connect to Equals’ platform via API – a software application used for payment data transmission between two systems. It has increased Equals’ total addressable market and is attracting larger customers.
Focus on SMEs delivers strong results
In the six-month trading period, the group's larger enterprises solution segment more than doubled revenue to account for 30 per cent of total revenue of £45mn. This is a higher-margin business, too, as highlighted by a seven percentage point rise in divisional gross profit margin to 54 per cent. The net result was an eye-watering 155 per cent increase in the segment’s gross profit from £2.9mn to £7.4mn, or 31 per cent of the group total.
The decision to buy out the minority shareholder interests in its white-label business last year has also proved a shrewd move. Reflecting an improved customer mix, divisional gross profit margin surged from 11 to 19 per cent on 23 per cent higher revenue of £8.9mn, which more than doubled the unit’s gross profit to £1.7mn. Finance director Richard Cooper believes that margins are sustainable at these levels for both divisions.
Cooper also notes that the recently completed £4.1mn all-share acquisition of Oonex, a regulated payment institution based in Belgium, should hit break-even by next summer. Strategically, it enables the group to bring its payments, cards and multi-currency account products to a new suite of customers across Europe and has massively expanded Equals’ total addressable market.
Robust trading outlook underpins earnings upgrades
Chief executive Ian Strafford-Taylor flagged up the strong pipeline of sales opportunities and the bumper cash generation of the group, too. This has not been lost on analysts at Peel Hunt, who upgraded their full-year cash profit estimates by 10 per cent to £20.2mn based on annual revenue rising from £70mn to £95mn, implying 2023 adjusted earnings per share (EPS) could more than double to 6.3p (16 per cent upgrade).
In addition, the group’s free cash flow generation is forecast to add £7.8mn to the current £17.9mn cash pile by the year-end, and net cash could hit £37.3mn (20p) by the end of 2024, say analysts at Zeus Capital. The board plans to declare a maiden dividend of 1.5p a share at a cost of £2.8mn at the full-year results.
The burgeoning cash pile means that the best metric to value the £193mn market capitalisation company is on a multiple of operating profit to enterprise valuation. On this basis, Equals is rated on 14 times (2023) and 9.8 times (2024) operating profit, a rating that fails to reflect the possibility that earnings per share (EPS) could double again to 12p by 2026 as analyst Paul Hill at investment firm PMH Capital believes.
So, having first advised buying the shares at 77p (Alpha Research: ‘A high tech fintech payments opportunity’, 8 April 2022), and last reiterated that advice at 100p (‘Equals in line for further earnings upgrades’, 7 July 2023), I feel there is strong potential for a narrowing of the share price gap to Peel Hunt and Canaccord Genuity’s raised target prices of 175p. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
