The UK’s foreign exchange market is big. According to a recent Bank of England survey, the City’s 28 largest financial institutions turned over an average of $2.86 trillion a day in April 2019. With its market share of around 0.05 per cent, Aim-traded Argentex (AGFX) isn’t in that hallowed group. Yet, given the currency broker’s focus – providing a personalised, cheaper service for smaller clients – it doesn’t need to be. And within its niche, it is growing at an extraordinary rate, with revenues, client numbers and operating profit up 65 per cent, 37 per cent and 43 per cent respectively in the year to March 2019. Since then, its June flotation on Aim appears to have given it a halo effect, yet its shares have only moved to close on 17 times next year’s forecast earnings. Plans to double headcount by the end of 2020 give us confidence that the current share price will, before long, appear cheap.
High growth prospects
Fat profit margins
Self-funding
Strong trading since flotation
Small player, big market
Value-based valuation looks rich
Though currency exchange can be a complicated business, Argentex’s services aren’t. The company acts only as a broker in spot and currency-options trades to corporates and wealthy individuals who might need to convert between £1m and £500m in foreign tender each year. Speculative and margin trades, spread betting and contracts for difference are all avoided.
For Argentex’s sales staff, the challenge is to convince finance directors to trust their currency management with someone other than their company's usual bank. That’s easier said than done; a chief financial officer isn’t going to lose her job if Barclays makes a mistake, but might if a small Aim-traded firm does.
Until June this year, the group was a limited-liability partnership, led by a young team of principals including co-chief executives Harry Adams and Carl Jani, and managing director Andrew Egan. Having been profitable since launch in 2012, the group floated to build collateral for more business (rather than provide a cash exit).
In the 97 days between flotation and the end of September, Argentex generated £9.3m in revenues. True, broker Numis thinks clients’ jitters around Brexit might explain some of this 45 per cent year-on-year rise. So the growth rate could simply level off and full-year revenues could clear just £30m.
But there are several reasons to believe a slowdown isn't imminent. The first is the productivity of Argentex's salespeople, whose revenues tend to double to more than £1m per head in their fourth year. This should only increase: Mr Jani told us that within two years, he wants to complete a move to new offices and expand the company’s headcount from 45 to more than 100. Then there is clients' 'stickiness', which means that some two-thirds of revenue is repeat (and growing) business.
With Argentex’s top 20 clients accounting for just a third of revenues last year, earnings are also diverse, while the sales team’s focus on cold calling means marketing costs are negligible. Mr Jani also says that, aside from the potential impact on passporting rights, he and his colleagues are “really not concerned by Brexit”.
| Argentex (AGFX) | |||||
| ORD PRICE: | 150p | MARKET VALUE: | £170m | ||
| TOUCH: | 145-150p | 12-MONTH HIGH: | 172p | LOW: | 126p |
| FORWARD DIVIDEND YIELD: | 2.0% | FORWARD PE RATIO: | 17 | ||
| NET ASSET VALUE: | 10.2p† | NET CASH: | £13.6m† | ||
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) | |
| 2017 | 10.6 | 3.43 | n/a | nil | |
| 2018 | 13.2 | 3.89 | n/a | nil | |
| 2019 | 21.9 | 8.20 | 5.7 | nil | |
| 2020* | 27.7 | 10.3 | 7.1 | 2 | |
| 2021* | 34.9 | 12.9 | 8.9 | 3 | |
| % change | +26 | +25 | +29 | +50 | |
| Normal market size: | 2,000 | ||||
| Beta: | na | ||||
| †Prior to June initial public offering *Numis forecasts, adjusted profits and earnings | |||||
