Equiniti swings into the red as corporate actions decline

Providing financial administration services, Equiniti (EQN) was hit hard by the disruption to capital markets last year. As companies cancelled their dividends and opted to raise money through non-pre-emptive placings rather than rights issues, this weighed on the group’s higher margin commissions.

So, while it remained profitable at the operating profit level in 2020, this metric still collapsed by almost 90 per cent to £5.8m, and when financing costs are included, Equiniti swung to a pre-tax loss.

The group earns interest income on the balances it administers on clients’ behalf, as well as interest rate hedges. With central banks lowering rates, this income dropped by £17m last year and is expected to decline by a further £14m in 2021. As such, chairman Philip Yea says that interest-related income “can no longer be relied upon as a significant revenue source in the near term.”

It wasn’t all bad news. Underlying free cash flow rose by a fifth to £45m, benefitting from the deferral of VAT and disposal of non-core assets. As a result, net debt fell by a tenth to £308m – equivalent to 3.4 times underlying cash profits (Ebitda) – and will come down further once the £48.5m sale of direct-to-consumer business EQi to interactive investor completes in the summer.

Looking ahead, corporate activity should rebound alongside the global economy and Equiniti entered 2021 on the front foot – having won new clients and retained 99 per cent of its existing customers, its order intake in 2020 was a third higher than a year earlier.

House broker Liberum is forecasting that operating profit will recover to £23m this year and climb to £32m in 2022.

While the shares have yet to bounce back to pre-pandemic levels, it’s worth noting that Equiniti could be a potential takeover target – Sky News reported in February that it was being circled by technology-focused private equity firm Siris Capital. Buy.

Last IC View: Buy, 115p, 30 Jul 2020