UK Edition
Eleven months ago we tipped FairFX, the foreign exchange firm since renamed Equals, and for the first four months all went well. Since then, however, it has been virtually all downhill – first slowly, then more quickly.
To be fair to the company, the first phase of decline was probably not its fault; smaller British stocks were hardly in vogue at that time, when Brexit paralysis was at its height. The second phase can certainly be blamed on the firm, however.
That slide was precipitated by a trading update it published on Jan 27. Frustratingly, there was nothing in the wording of the update to explain why the shares should lose 16.7pc of their value that day and another 15.5pc the following day.
Only those with knowledge of what the company had previously said would have realised that the release, headed “Strong growth focused on corporate customers and platform for rapid expansion in 2020”, was actually a profits warning.
The update said “adjusted Ebitda is expected to be 30pc higher than [in] 2018” (“Ebitda” is a measure of underlying profitability). The adjusted Ebitda figure for 2018 was £7.5m so last month’s update told us that Equals expected to make £9.8m in 2019.
There’s nothing wrong with a 30pc increase, of course, but the company had previously told the City that it expected to make £13m on the adjusted Ebitda measure.
“Investors were disappointed by the mismanagement of forecasts,” said Richard Bernstein, of the Crystal Amber investment trust, whose holding of a large stake in Equals prompted our tip last year.
He said the firm’s new finance director, Richard Cooper, who took up his role in October, had decided that the previous accounting policy was too aggressive. We can take some comfort from the fact that Mr Cooper has a seat on the board; his predecessor was not in so strong a position to influence the company’s policies as he did not sit on the board.
Mr Bernstein said the profits warning had a double impact on the shares: not only had investors marked down the price in proportion to the loss of profitability but they had applied a lower multiple to those profits to reflect their displeasure at missed expectations. “The rating [earnings multiple] has been smashed and some big investors have sold,” he said.
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But the firm should now start to turn the corner, the fund manager said. “It needs to grind out results, reset profit expectations and rebuild trust. There is a new culture and the new finance director should be more cautious.”
He added: “We now have a business that trades on a price-to-earnings multiple of 8.5 once you strip out its net cash of £16m. We think it will rebuild – it is profitable and generates cash. It should be able to succeed as an independent business but would probably be better off being bought.
“At present there are few buyers for such shares, partly because so much money goes into tracker funds, partly because of the Neil Woodford fallout. So it may be that the value of a stock such as this is recognised only by a trade buyer. We are buyers, not sellers.”
Questor says: hold
Ticker: EQLS
Share price at close: 43.25p
Update: Manchester United
We tipped shares in the football club in August 2018, although “more in the nature of a punt than a home for significant sums of money”.
We noted that among its shareholders was Nick Train, manager of the Finsbury Growth & Income investment trust. In December Mr Train drew his investors’ attention to the purchase by Silver Lake, an American investment firm, of a stake of almost 10pc in the owner of Manchester City.
He said: “The current market value of Manchester United is £2.3bn – a notable discount to the Silver Lake transaction. I leave the debate to rage about which of the ‘noisy neighbours’ should be more valuable than the other, but it was understandable that Manchester United shares should rise by more than 10pc in November.”
Questor says: hold
Ticker: NYSE: MANU
Share price at 8:30pm GMT: $19.35
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