- 43 per cent growth in first-half revenue to record £45mn
- Gross margin up from 47 to 50 per cent
- Average revenue per day hits all-time high of £363,000
- 20 per cent full-year cash profit margin guidance, up from 17.4 per cent in 2022
Aim-traded fintech payments group Equals (EQLS:100p), a leading challenger for banking and payments, has released a bullish pre-close trading update that opens the possibility of earnings upgrades at the interim results on 12 September.
Average revenue per day increased 42 per cent to £363,000 year on year and at a 3 percentage point higher gross margin of 50 per cent, implying first-half gross profit of £22.5mn on revenue of £45mn, up from £14.8mn and £31.4mn, respectively, in the first half of 2022. The combination of rising revenue and margin expansion explains why profits from the operationally geared business continue to outpace revenue growth. This is not being priced in.
For instance, house broker Canaccord Genuity forecasts 16 per cent growth in full-year revenue to £88.1mn. This is the case even though Equals has already booked half that forecast and entered the second half with a much higher average revenue per day run rate than at the start of the year. Moreover, with the directors guiding the market to expect a cash profit margin of 20 per cent for the full year, up from 17.4 per cent in 2022, Canaccord’s cash profit estimate of £17.9mn has upgrade potential, too.
Even Peel Hunt’s newly raised cash profit estimate of £18.5mn (upgraded from £17mn) looks conservative. That’s because the forecast is based on full-year revenue of £93.6mn, up from £69.7mn in 2022. However, if Equals maintains its current momentum, annual revenue could potentially hit £95mn to £100mn.
Cutting-edge technology winning new clients
The potential for Equals to outperform market estimates seems a distinct possibility given that its cutting-edge technology is enabling the business to take market share from incumbent operators by offering customers a full suite of opening banking services, and at market-leading prices. The volatility of sterling is also playing a part as corporate finance departments look to lock in forward exchange rates on international payments, and at the keenest prices, too.
For instance, the group’s small and medium-sized enterprise (SME) business continues to disrupt a market that had previously been dominated by traditional banks reliant on cumbersome legacy payment platforms and lacking the agility and operational leverage of Equals. First-half revenue from the SME business surged by 44 per cent to £16.8mn, accounting for 37 per cent of group revenue. Equals’ large enterprises solutions division produced a stand-out performance, too, more than doubling revenue to £13.6mn.
Importantly, the directors are making smart strategic moves, too, enhancing the functionality of the product offering and the addressable market through small bolt-on acquisitions. The recently completed all-share acquisition of Oonex, a regulated payment institution based in Belgium, enables Equals to offer payments, cards and multi-currency account products to a new suite of customers across Europe. It dramatically boosts Equals’ addressable market, as I highlighted at the last trading update.
Modest rating
To put the undervaluation into perspective, adjusting for a likely two-thirds rise in net cash to £25mn this year, as Peel Hunt predicts, Equals’ enterprise valuation equates to only 8.5 times conservative cash profit estimates. That’s a modest rating for a group that is forecast to deliver 50 per cent cash profit growth this year and is highly cash generative, too. Analysts at Peel Hunt expect free cash flow of £13.4mn (2023) and £18.5mn (2024), implying the £182mn market capitalisation company is priced on attractive free cash flow yields of 7.4 per cent (2023) and 10.1 per cent (2024).
Equals’ shares are 27 per cent ahead of my entry point (Alpha Research: ‘A high tech fintech payments opportunity’, 8 April 2022), outperforming the FTSE Aim All-Share Total Return index, which has dropped 27.7 per cent in the 15-month period. More importantly, if the current momentum is maintained, expect a re-rating towards the target prices of Peel Hunt (160p) and Canaccord Genuity (164p) to narrow the ratings’ discounts with larger peers. Buy.
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