- 2023 total revenue up 47 per cent to £32.7mn
- Gross profit margin above 50 per cent, or three points higher than in 2022
Aim-traded fintech payments group Equals (EQLS:108.5p), a leading challenger for banking and payments, has delivered an eye-catching annual meeting trading update. Its share price shot up to the highest level since September 2019, and it’s more than warranted.
In the 90 working days to mid-May 2023, group revenue per working day increased from £248,000 to £363,000 year on year to lift total revenue to £32.7mn. Moreover, it implies that Equals revenue per day run rate has risen from £342,000 in the 59 working days to 24 March 2023 to £404,064 in the last 31 working days of the reporting period. The acceleration suggests that analysts at Peel Hunt are erring on the conservative side in predicting 26 per cent growth in 2023 revenue to £88mn, embedding average revenue per working day of only £350,600 in their estimates.
For instance, Equals’ large enterprise solutions business more than doubled revenue to £8.8mn in the 18-week period, accounting for 26.9 per cent of total revenue, up from 19.4 per cent in the same period of 2022. In addition, international payments account for half of the group's revenue and organic growth is being complemented by astute acquisitions that will dramatically expand Equals’ total addressable market.
The £4.1mn all-share acquisition of Oonex, a regulated payment institution based in Belgium, should gain regulatory clearance in the coming months so that Equals can offer its payments, cards and multi-currency account products to a new suite of customers across Europe. Subject to FCA approval, Equals is also in the process of acquiring Hamer & Hamer, a foreign exchange broker operating a business-to-business international payments business. It’s an earnings’ enhancing acquisition as the £3mn consideration equates to two times revenue and three times cash profit.
Operationally geared for bumper profit growth
Equals is becoming more profitable, too, as highlighted by a three percentage point expansion in gross margin to above 50 per cent. The combination of rising revenue and margin expansion explains why profits from the operationally geared business are expected to outpace revenue growth. Indeed, analysts at Peel Hunt expect adjusted pre-tax profit to surge 80 per cent to £10.6mn on 26 per cent higher revenue of £88mn this year. These estimates are based on cash profit increasing 40 per cent from £12.1mn to £17mn. I would be surprised if Equals doesn’t outperform forecasts.
Furthermore, based on a run rate of £422,600 per working day, so only 4.5 per cent above the current run rate, Peel Hunt expects 2024 revenue to rise by a fifth to £106mn. On this basis, three-quarters of the incremental £4.9mn cash profit earned in 2024 would boost pre-tax profit from £10.6mn to £14.4mn. It implies the debt-free and cash-generative group is rated on only eight times 2024 cash profit estimates to enterprise value even though Equals is forecast to deliver 80 per cent cash profit growth over the two-year forecast period.
The shares have risen 22 per cent since the annual results (‘A high-growth disruptor with a very low rating’, 27 March 2023), and are 41 per cent ahead of my 77p entry point (Alpha Research: ‘A high tech fintech payments opportunity’, 8 April 2022). However, they still trade well below reasonable fair value targets of Peel Hunt (150p), Canaccord Genuity (164p) and Zeus Capital (180p). The recent chart break-out above the 100p key resistance level is worth noting, too, as there is now little in the way of technical resistance to prevent a share price rally to the September 2018 all-time high (151p). Buy.
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