Rising interest rates boost Wise’s profits

International payments business Wise (WISE) is one of the few companies actually benefiting from the interest rate hikes. The company can now receive returns on the customer cash it has lying around. In the 12 months to March, it made £118mn of interest income, against a loss of £2.8mn the year before.

This contributed to a 73 per cent year-on-year increase in income to £964mn. This was ahead of the growth guidance of between 68 per cent and 72 per cent it issued back in January. The interest rate income doesn’t come with any extra cost, so it is dropping straight through to profitability, meaning the cash profit (Ebitda) margin rose 2.9 percentage points to 24.7 per cent.

Wise prides itself on offering cheaper transaction costs than banks so will look to return some of the extra interest income to users in the form of lower prices. However, the company expects margins to stay permanently above 20 per cent and says the margin should be ahead of its previous 2024 target.

It is not just interest rates driving growth, though – active customers also rose 34 per cent. Promisingly, 66 per cent of new customers joined through word of mouth, meaning it shouldn't need to invest as much in customer acquisition initiatives. Yet marketing costs did increase by 33 per cent to £37mn. And the imperative to keep updating its technical capabilities saw R&D expenditure rise by 71 per cent.

Interest rates may not be far from their peak, so earnings growth could slow in the coming years. Peel Hunt is expecting adjusted earnings per share of 18.6p in 2024, giving a price/earnings ratio of 27. This is expensive, but customer growth has accelerated from last year’s 24 per cent and rising immigration will only drive more cross-border transactions. Move to buy.

Last IC View: Hold, 610p, 29 Nov 2022