Equals Share Discussion Threads

[zebbo] 26/4/2024 19:42

Agree, time for some transparency and action. I have said for a while we have no bid premium in the share price and it may rise on no buyout news. Either way feels like the ongoing situation needs to draw to a close. Take a p1$$ or get off the pot

[ltinvest] 26/4/2024 09:06

Darktrace been bid for this morning. Shame to see a solid tech company go. UK PLC just too cheap. I agree it seems strange we have had 2 non-binding offers and no indication on price.

[carcosa] 26/4/2024 08:45

Thanks Mr Stephens,

Summarising the IC ( ):

The article examines the puzzling situation surrounding Equals Group, a fast-growing payments company that has been exploring a potential sale since October 2023. Despite its excellent technology, strong customer relationships, multiple revenue streams, and a massive total addressable market, Equals' shares have traded at a lowly valuation.

In October, news leaked that Equals had instructed its broker to gauge interest from potential buyers, prompting it to disclose that private equity firms Madison Dearborn and a consortium of Embedded Finance/TowerBrook Capital were considering bids. This kicked off a "put up or shut up" bid period under UK takeover rules.

However, over six months later, neither party has tabled a firm cash offer. The bid deadlines have been repeatedly extended, with the companies citing a need for further due diligence time. Equals itself has acknowledged the protracted process needs to reach a conclusion soon.

The article raises questions about why Equals is so intent on pursuing an outright sale. Its messaging has been muddled - suggesting a sale may maximize shareholder value, but also touting share buybacks to correct the undervaluation. The board has not clearly articulated what a fair takeover premium would be.

There are doubts about whether a bidding war will even materialize after such a drawn-out process. The low absolute and relative valuations of UK equities currently provide little incentive for bidders to pay up.

The article contrasts Equals' low valuation multiples to that of peer Alpha Group, despite their similar growth profiles. It argues that unless a formal bid tops 200p per share, representing a 50%+ premium, shareholders should demand answers from the board on why they are depriving investors of benefiting from Equals' strong growth prospects independently.

With the AGM coming in May, the article posits the board must soon bring clarity - either a compelling takeover offer or an acknowledgment they are remaining independent and outlining a plan to capitalize on the company's growth momentum and boost the undervalued share price themselves.

In summary, the piece critically analyses the opaque takeover process at Equals, questioning the board's intentions and arguing they must provide a clear path forward that maximizes value for shareholders, whether through a sale with a significant premium or articulating a plan to unlock value on a standalone basis.

It also suggests the bid price has to be 200+p and its more than likely a takeover will actually occur.

[mr stephens] 26/4/2024 08:22

Bearbull article in investors Chronicle critical of current bid process. Also says shares are undervalued. If a bid materialises it should be at least £2.00. If not shareholders can look forward to owning a growth stock that has momentum

[carcosa] 26/4/2024 07:14

There have been some recent posts regarding who gets the interest earned from customer balances i.e. the customer or the company. With reference to earlier statements from Equals Group they have indicated that:

- Equals Group has a different business model compared to Alpha Group when it comes to earning interest on customer balances.

- Alpha Group gains large customer balances largely from fund administration. During low rate environment (e.g. Euro negative interest rates) Equals Group absorbed the cost of negative interest rate costs whilst Alpha passed it to their customers. Equals Group treats interest as part of their revenue stream.

- Equals Group allocates interest earned to the specific business line that generated the customer balance. Equals interest income number is nowhere near as large as Alpha's, but Equals still indicated it is meaningful seven-figure sum (in 2022).

- Equals Group do not publicly break out interest income, but it is negotiated with customers on how to account for it when pricing services.

- Equals are not actively seeking customers just for the sake of earning interest on large balances as they do not want customers depositing large sums with them.

So in summary it seems that Equals utilise interest from customer balances to attract customers as part of their business to generate turnover from customers actually transacting core business with them. Must admit I would like to know more about this subject from Equals and whether or not they have changed their 'policies' from a low rate to a high rate environment. By including it in their revenue lines it prevents investors from gauging just how well the different business lines are performing. It really should be separated out.

Audio Source Link:

It's (sort of) interesting to note a recent RNS from Alpha Group detailing their blended (mix of currency balances) average interest rates on customer cash showing it to be considerably higher in recent times i.e.:

Q1 2024 4.0%
Q4 2023 3.8%
Q3 2023 3.8%
Q2 2023 3.8%
Q1 2023 2.8%

Hope we don't get another PUSU routine extension, at least without further detailed justification...

[mcl1] 25/4/2024 15:02

The flip side of the high rates benefitting EQLS is it's a negative where valuations are concerned for Private Equity. If rates stay higher for longer then their bar is raised as to expectations from any proposed takeover,or the takeover price lowered.

The interest rate picture has changed drastically in the US since November when 6 cuts were forecast, to barely any now, so perhaps this is weighing on the share price as it doesn't seem to reflect two interested parties.

[fft] 25/4/2024 08:35

EQLS features on Mello results special today starting at 1pm along with many other companies.

Its free.

[fft] 25/4/2024 08:09

With interest rate cuts on hold - certainly in the USA - one off interest rate gains will be prolonged. (Interesting point - when does one off become recurring ?) . This points to more cash in the bank going forward. When rate cuts occur there will be a slow down - possible decrease - in headline EPS. That may be holding back potential bidders, but the extra cash and organic growth should allow for that.

[66fingers] 24/4/2024 17:05

Carcosa, as a novice investor who knows nothing about company valuations it was very interesting, thank you for sharing. I'd be pleasantly surprised if any bid were to exceed £2 Pershore but what do I know!

[carcosa] 24/4/2024 08:17

Am getting a bit bored waiting...so here is some speculation...

Zeus Capital analysts are one of the very few analysts I can find online that cover Equals Group.

Prior to the last set of results they issued their forecasts on 12 September 2023. They were predicting the following and I have added the (actual results in brackets)

Revenue £95.0 (95.7)
Gross profit £49.9 (52.3)
Gross margin (%) 52.5 (54.7)
Adj. EBITDA £20.0 (20.6)
EBITDA margin (%) 21 (21.6)
Adj. PBT £13.5 (9.1)
EPS (p) f dil. adj. 4.7 (6.8 Company Adjusted, 4.3 Normalised)
Net cash £24.9 (18.7)
EV/EBITDA 10.3 (10.9)
EV/sales 2.17 (2.4)

So as can be seen they were very close but just under the company's actual performance across all measures which is the sweet spot for an analyst, except PBT.

TLDR: Zeus forecasts were accurate.

On 8 September 2023 they issued their note regarding the Strategic review saying that 'We see organic growth and bolt-on acquisitions justifying a value of 3x to 4x 2024E sales' At the time their 2024 forecasts were 110m but as time moved on those consensus estimates increased to 118m. However we have yet to see the updated forecasts since the recent results. 118m represents 16% growth. However Equals have already stated Q1/24 v Q1/23 growth of 27%. Whilst there are excellent arguments that 27% YoY growth is unlikely it is equally valid to suggest 16% growth is too low.

Lets assume 22% sale growth for 2024 (Compared to 37% growth last year) that gives 2024 revenue of 117m

So applying 3x sales that gives an enterprise value of £351m and an equity value of £369m (assuming all the cash does not include customer deposits).

£369m represents £2.04 per share valuation.

Zeus actually said somewhere between 3x and 4x sales. Applying the top end then that equates to £2.69/share.

TLDR: Applying Zeus methodology a takeover price of >£2.00 is more than reasonable.

I then asked Claude.ai (so this might be bit sketchy) what typical P/S ratios are for US fintech companies are in the US. Now this is a far cry from actual data which I cannot find but as a working hypothesis it came back with three ranges:

1) Early-stage or high-growth fintech companies: P/S ratios, from 5 to 20 or even higher.
2) Established and profitable fintech companies: Typically ranging from 2 to 8.
3) Mature fintech companies with slower growth: P/S ratios below 2

I think we can all agree Equals just sits in the second group which then makes a P/S 3x to 4x sensible.

Now here is the kicker, In the Zeus January 2024 note they forecast that Equals should reach 246p by end 2026 assuming 20% annual revenue growth without any takeover bid!

Be aware that this post is only looking at one financial ratio i.e. sales and is only referring to one analysts opinion and my application of those ideas.

Given we are six months into this process and Madison Dearborn Partners have submitted an offer (personally I discount the consortium bid) then surely we must be near the end of the road.

With so much M&A, buybacks, US/UK valuation 'anomalies' I would be disappointed with a c170p bid being recommended.

Hope some readers find the above speculation a bit of fun/informative.

[carcosa] 22/4/2024 10:17

'The results referred to in the RNS today are the same ones reported on 15th April 2024'

Incorrect.

The Annual Report has considerably more information than the (16 April) RNS. An example of which I mentioned in post #3244 but in fact there are many many more pages in the AR. Not least of which is the RNS omits the Chairman's report, Auditors statement, plus complete multi page sections etc.,


Using a site like this may be helpful in identifying the differences.

Since I'm here the AGM Letter and Notice can be downloaded from:

[weatherman] 22/4/2024 07:54

its in the post.

[slogsweep] 22/4/2024 07:52

The results referred to in the RNS today are the same ones reported on 15th April 2024
Not sure what the RNS today was about other than confirming date of AGM.

[its the oxman] 21/4/2024 23:06

Test of 140p would be nice to see. Not far away now.

[74tom] 20/4/2024 09:43

Off the top of my head the following LSE fintech companies have reported huge jumps in interest income;

CMC Markets (£18.4m in HY23 vs £4.3m HY22)
IG (£70.4m HY24 vs £24.2m HY23)
Plus 500 ($51.9m FY23 vs $0 FY22)
Wise (£157.8m HY23 vs £18.7 HY22)
Alpha (£73m FY23 vs £9.3m FY22)

Equals specifically mention having off balance sheet funds in 2018&19, and £52m is not a small number. Transaction volumes have since grown around 400%, so this figure could be far higher today.

They have loads of products which they could temporarily hold client cash and earn interest on overnight balances, I.e. for international payments, the client obviously has to transfer the funds to equals before they make the payment. If equals use Wise then most international payments can be same day, but many clients still expect 2/3 day turnaround like the old school IBAN system...

They disclosed in 2018, 19 & 20 that the revenue margin on international payments was between 0.73% and 0.8%, so to generate £39m revenue at 0.8% margin, they would need to process £4.875b of payments. Divide this by 260 working days and you get an average daily processed value of £18.75m

If the average holding period is 2 days, then they would typically hold around £37.5m of cash waiting to be paid. At 4.5% interest that would earn them around £1.7m PA

All the above is speculation based on what was disclosed a few years ago, the business has far more products now & doesn't disclose much. However, I find it very very hard to believe that they don't make material interest income, particularly when they mentioned the low rate environment in their FY19 accounts!

[ltinvest] 20/4/2024 00:31

I was also interested in this. As Alpha FX reported interest earnings of £73 million. They do have slightly different businesses though but they seperate it out from regular earnings as an extra. Would assume if equals did make a bunch from client balances they would report it if significant I would think as would sqew the earnings picture.

[74tom] 19/4/2024 16:00

I was listening to an old VOX podcast from December with Paul Jourdan of Amati;

Equals is briefly discussed alongside Alpha FX.

Paul said something interesting that prompted me to start digging into the accounts of EQLS.

'obviously they have benefitted a lot from the rise in interest rates, so that's now flowing through and that's been a big part of their profitability'

Anyone find it curious that they haven't disclosed how much interest income they have earned since the 2019 accounts? There hasn't been so much as a word on it as far as I can see?

In 2019 they said;

"Included in this segment is interest earned on house funds. Given the low interest rates and certain regulatory restrictions governing the deposits on which the Group can earn interest, the Group earned a total of £150k in interest during the year (2018: £145k). At 31 December 2019 the Group had fiduciary responsibility for a total of £52.4 million in bank accounts not included in the Group's consolidated balance sheet (31 December 2018: £48.0 million). Interest income has been included in the segmental revenue where earned."

2019 was also when they last mentioned off balance sheet funds;

"The funds attributable to customers are shown as memorandum item. Consistent with 2018, these funds, held on behalf of customers of both CardOneBanking and International Payments have been excluded from the balance sheet following legal advice received in connection with the risks and rewards to the Group. Nevertheless, these funds remain within the fiduciary obligations of the Directors and are included in the table above as an 'aide-memoire'. It is notable that these balances grew by 9.2% to £52.4 million up from £48.0 million at 31 December 2018. This reflects the growth of the underlying use of the Group's platforms."

-----------------------

If they had £52.4m in off balance sheet funds at the end of 2019, when international payments earned them just shy of £12m in revenue on £1.2b of transaction flows, what is that balance now, given international payments earned them £39m last year (which if revenue margin has stayed consistent at 0.76% since they last disclosed it in 2020, would mean transaction flows of some £4.5b)?

Even at an average of £100m per day earning 4% interest, that would equate to nearly 50% of last years PBT... But could it be significantly higher than this? Absolutely, looking at the group underlying transaction value of £12.6b in FY23 vs £2.8b in 2019...

Does this potentially explain the riddle as to why EQLS is up for sale? Hmmm. I certainly found it interesting!

[ltinvest] 19/4/2024 11:45

And up on not particularly high volume suggests not many sellers about either.

[amt] 19/4/2024 08:54

Still on the up while virtually everything else falls

[masurenguy] 18/4/2024 16:50

Closed at a four and a half year high today ! 😊

[ltinvest] 18/4/2024 12:38

Be Nice if we break above 130p surely only a matter of time.

[big7ime] 18/4/2024 10:59

Possible breakout here at last

[fft] 18/4/2024 10:49

After weeks/months of very little action on biggish volumes, we now have movement on little volume. Is it a false dawn, has a seller moved on, or a real re-rate (regardless of whether a TO happens) ?

[amt] 18/4/2024 10:42

Worth 1.70 without bid

[its the oxman] 18/4/2024 10:27

Surely due a move higher into the 130s at the very minimum. Seems to be underway.