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Many technology companies trade at such vertiginous multiples of earnings that analysts prefer to value them in relation to sales instead, so that the number sounds less alarming. There’s no need in the case of Equals, however: shares in the tech-enabled currency exchange company trade at just 12 times some earnings forecasts (and a mere twice sales).
Normally such figures would suggest a stock in trouble or at least stagnating but Equals also offers, in the words of one investor, “surging top line growth”, much of which “will feed through to profits”. It has £10m in net cash on its balance sheet too. “This [combination] is a rarity in fintech and an anomaly,” says the investor, Richard Bernstein, manager of the Crystal Amber investment trust.
Unfortunately, while such an anomaly may offer an opportunity to anyone who buys now, at about 63p, it also reflects the serious paper loss suffered by readers who invested when we first tipped the shares in March 2019, when they stood at 97.5p.
Those savers can at least take heart from the stock’s highly undemanding valuation and a trading update it published last week, when it said it had generated revenues of £11.7m in the three months to the end of September. This was a third higher than in the previous quarter, 62pc more than in the third quarter of last year and, perhaps a more relevant comparison in view of Covid disruption, a 47pc improvement on the same quarter of 2019.
The Aim-quoted company’s broker, Canaccord Genuity, has forecast sales of £42m for the full year but “current trends indicate that this is way too low – we expect £50m”, Bernstein says.
With this kind of sales growth, and that important expectation that it will translate into earnings growth, why are the shares so cheaply valued?
It looks like another case of investors being once bitten, twice shy: they were burnt by a poorly communicated profits warning just before the pandemic began – a profits warning that, in Bernstein’s view, reflected an earlier culture of aggressive accounting, not helped by the fact that at that time the finance chief did not sit on the board.
That has now changed and the new chief financial officer, Richard Cooper, “is doing an excellent job”, he says.
The company was of course hardly helped by lockdown, when travel bans led to a slump in demand for foreign currency, and investors may worry that winter will bring a repeat.
Canaccord had a price target for the stock of 98p even before the latest trading statement. While we must take brokers’ targets with some caution, especially when the company concerned is a client, it does support the view that these shares offer significant scope for recovery.
Bernstein concludes: “I think the key is that this is a fintech that is operationally cash generative and is making record revenues. With that £10m in net cash it’s also ideally positioned to be acquired.” Hold.
Questor says: hold
Ticker: EQLS
Share price at close: 62.5p
Update: Tirupati
This company offers two distinct opportunities. The first, more mundane one is its mining of graphite, a substance likely to play a big role in the decarbonisation of transport and energy.
The other, more exciting – and more speculative – one comes from a new material it has developed, an alloy of graphene (an immensely strong substance derived from graphite) and aluminium, which could if all goes well replace copper wires in applications where saving weight is at a premium, such as in aviation.
We tipped the stock in June on the strength of its inclusion in funds run by Gervais Williams of Premier Miton, an experienced investor in smaller stocks. He says the company plans to increase graphite production dramatically over the next few years to meet demand for batteries for electric vehicles.
“Over the past few months its share price has drifted lower. In our view this doesn’t reflect any uncertainty about the future but rather a transition of investors’ interest to some of the areas of the market that are more exciting at present, such as small gas companies,” Williams says.
“The company appears to be in a position to deliver good and growing profits in the short term, with the chance of even more should its technology come good.” Hold.
Questor says: hold
Ticker: TGR
Share price at close: 87.4p
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