Argentex looks undervalued as client base continues to expand

Investors often ask how they can tell whether a stock is set for great things. Well to me, four of the most important indicators are whether the business is winning market share, profitable, cash generative and trading on a compelling valuation.  () – a tech-enabled foreign exchange dealer and international payments provider - fits the bill.

It said today that despite experiencing recent softness in institutional forex activity, notably among asset managers, due to “challenging trading conditions" between 1st July and 5th September - which saw revenues up 5.25% to £10m  - the group added 305 new clients in the first half to take the total to 1,493, and increase its share of wallet, up 18% to £16.5k. That leaves it on track to hit FY23 consensus of adjusted EBITDA, PBT & EPS of £17.5m, £13.4m and 9.1p on sales up 20% to £60m.

This comes after posting first half revenues 28% higher at £25m - having delivered £12.7m in Q1 and £12.3m in Q2 - reflecting continued demand for its best-in-class currency management services, overseas growth with European sales up 125% to £1.8m, alongside a better than expected performance from the online platform and the new Alternative Transaction Banking product. That means overall turnover in the year to date has risen an impressive 20% to £35m, from £29m last year.

Better still, Argentex is attracting higher quality clients too, resulting in a 55% jump in average revenue per new account to £18.6k.

On the profit front. first half adjusted operating profit improved 13% to £5.4m even after absorbing technology and product investment of £2.6m, up from £1.7m last year. That leaves EBITDA margins flat at 29%.

Elsewhere, PBT and EPS climbed 12% and 15%, respectively, to £4.8m and 3.1p, in turn generating £3.6m of positive free cash flow and underpinning a 0.75p interim dividend to paid from June net cash of £19.2m, which equates to 17p a share.
 
CEO Harry Adams commented: "I am very pleased to announce another strong set of results, despite a continuation of the prevailing macro-economic challenges, demonstrating significant progress in the diversification and growth of our offering both by product and geography. Our core business is driving double-digit revenue growth supported by the return on investments across new technology and product initiatives."

“The performance of our newly launched Alternative Transaction Banking product has exceeded initial expectations, demonstrating the potential of new tech-enabled products to increase our share of wallet while diversifying our revenue streams with new, higher-margin products. The Group continues to trade in-line with the Board’s expectations for the full year.”

Broker Singer Capital Markets has a BUY rating on the stock and a 200p a share 12 month target price. At 111p, the shares trade on corresponding PE and PEG ratios of only 12.2x - or 11x ex cash - and 0.7x.