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Argentex at peak operational leverage

The foreign exchange group faces an inflection point, as it seeks to rapidly expand its enormously profitable business
November 20, 2019

Argentex’s (AGFX) first half-year accounts as a public company are an awkward read. For one, they don’t have any true comparatives. And because the currency exchange business was structured as a limited liability partnership until its June initial public offering, the revenues and profits in the table below reflect just over three months of trading.

IC TIP: Buy at 163p

An appendix to the unaudited accounts gives some indication of recent progress. In the six months to September, Argentex LLP – now part of Argentex Group plc – posted a 46 per cent rise in its top line to £13.8m, and a 62 per cent operating profit margin. The latter was up from 47 per cent in the prior period, but does not reflect rising costs and the price of admission to the Alternative Investment Market (Aim).

Investors therefore must work with an “underlying operating profit” figure for the plc, which, at 46.2 per cent, is still well ahead of a three-year target. A shift away from low-margin ‘netting' trades has also led to profits rising at a faster pace than the total value of trades.

This could soon face pressure. To co-chief executive Carl Jani, a limited cost base and mature sales team mean the business is currently “experiencing peak operational leverage”. Ambitious plans to double the sales team in the next two years brings with it a steep learning curve, and is likely to reduce the average profitability per employee.

Analysts at broker Numis upgraded their earnings forecast from 7.1p to 8.7p per share for the year to March 2020, and from 12.2p to 12.3p for the year after.

ARGENTEX (AGFX)   
ORD PRICE:163pMARKET VALUE:£185m
TOUCH:162-169p12-MONTH HIGH:179pLOW: 124p
DIVIDEND YIELD:nilPE RATIO:na
NET ASSET VALUE:107p*NET CASH: £32.1m
Half-year to 30 SepTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2018^nanananil
2019^9.293.972.8nil
% change----
Ex-div:na   
Payment:na   
*Includes intangible assets of £103m, or 91p a share ^Previous period not incorporated; recent half-year is 26 Apr to 30 Sep