BUY: Argentex (AGFX)
The increased volatility of the British pound is proving positive for the forex trader, writes Julian Hofmann.
Argentex’s main virtue is that bumpy foreign exchange markets matter less to it than its stable of corporate and institutional clients who trade currencies, or underwrite hedges and swaps, more when times are uncertain. Being the middleman in this environment is proving to be a consistently profitable strategy for Argentex as companies deal with the declining value of the pound sterling by entering into forward contracts.
The trend was reflected in Argentex’s revenue stream split, where futures sales jumped 50% to £27.2m for the year as clients offset their currency risk . The increase in sales was partly reflected in higher personnel costs as Argentex strengthened the capacity of its trading and operations teams to increase its ability to manage new business with its customers. . This means personnel costs for the year rose by 20% to £15.2m. The slower cost growth means that the Argentex profit line clearly benefited from the operating debt generated during the year, in particular with a high cash conversion rate of 85%.
As Argentex’s revenue tends to be weighted in the second half, management said it is heading towards a calendar year-end for 2022 results and will release them for the nine months ended Dec. 31. 2022 no later than April next year.
The valuation has held up well in a falling market and remains stable at 11 times house broker Numis’ forecast for 2022. Its main issue will be achieving scale and dealing with emerging competition in what is a foreign exchange market. relatively unmarked, but the company seems well managed. .
HOLD: D4t4 (D4T4)
Even with economic headwinds, D4t4 revenue growth is still a little disappointing, writes Arthur Sants.
Like many B2B software companies, D4t4 is going through the expensive process of converting to a recurring revenue business. The company has a data marketing platform called Celebrus and the new fraud data platform Celebrus.
The premise of D4t4 is that these two products will receive regulatory tailwinds. The marketing product only uses first-party data, so increasingly stringent data regulation should give an edge over competing products that use second-party data. When fraud occurs, heavy fines are imposed on financial firms that fail to prevent it, increasing the need for D4t4’s product.
On paper, these arguments seem solid, but D4t4 is still waiting for growth to justify the price/earnings multiple. Revenue was up only 7.3% and higher costs due to increased investment in the sales team caused adjusted pre-tax profit to decline by 25%. The company explained this by saying that “the global economic situation has continued to slow potential customers’ purchasing decisions”, suggesting that the product could be a “nice to have” rather than a “need to have”. .
The good news, however, is that annual recurring revenue – the holy grail of software companies – has increased by 32% to £14m. It now accounts for 57% of total sales, compared to 47% last year. Management expects this ratio to increase to 65% in the medium term. There was also the first sale of the anti-fraud product within six months of its launch when it was sold to an existing banking customer.
The consensus of FactSet brokers is for earnings per share to increase to 11.45p by 2024. This would give a price to earnings ratio of 21 for 2024. However, the direction of travel is not favourable. The 2024 consensus has fallen from 13p in recent months – likely due to deteriorating economic conditions. Revenue growth is necessary.
HOLD: Saga (SAGA)
Regulatory reforms continue to affect the group’s important insurance business, writes Christopher Akers.
Saga is on track to turn a profit this fiscal year, despite struggling with the insurance side of its business in a business update covering the five months to July 4. Given that the specialist’s over-50 clientele is the most vulnerable to Covid-19, it’s no surprise the pandemic has been a disaster for the company (stocks have cratered nearly 75% since February 2020). But the company’s fortunes are improving as the travel industry recovers, and its target demographic has felt comfortable sailing back into the sunset on cruises.
An insurance environment with high claims inflation and many customers on fixed price policies is however a challenge, and a ‘decline in new business’ affected sales during the period. Total policy sales were down 2%, with auto and home sales down nearly a tenth and policies in force down 4% since January 31 of this year.
The impact of the Financial Conduct Authority’s (FCA) insurance rate reforms, which mean that repeat customers cannot be priced any higher than a new customer would be for an equivalent policy, “has been greater than expected” on Saga’s business performance according to Numis analysts. On the positive side, policy sales should be boosted in the second half by new products, including an offer of electric vehicles.
With punters again spending on vacations and cruise bookings, progress is being made in the company’s travel business. A cruise load factor of 75% is expected for the whole year, with an “exceptionally strong” summer performance, while bookings for the 2024 season are “well ahead of expectations”.
The company expects underlying pre-tax profit of £35m to £50m for the full year, in line with analysts’ expectations. While net debt is expected to be slightly higher at the end of July than it was in January, leverage is expected to decline in the second half. Saga shares look cheap at six times Numis’ adjusted earnings forecast for 2023, but insurance issues have added further pressures.
Hermione Taylor: Can household savings save the day?
The pandemic has seen household savings soar: it hit £30billion a month during the first lockdown, compared to a longer-term average of £5.5billion. It was thanks to what the ONS calls “forced savings” — the closures have significantly reduced our ability to spend, so we have saved more as a result.
Even as restrictions eased, households kept the belt tight and still put away more than they did before the pandemic. But the BoE’s latest money and credit report shows we’re saving less than last month. This has huge implications for the sequel.
The relationship between savings and economic performance is unclear. Sometimes, during bad times, savings decline because households choose to reduce their deposits rather than their consumption. During the Great Recession between 2007 and 2009, however, the savings rate began to rise – households were so concerned about unemployment and fluctuating house prices that they built up a reserve of savings and rather reduced their purchases.
UK economic growth is now stagnating, but we don’t know what path consumers will take. The answer will have important ramifications for the UK economy. When people save, it benefits them on an individual level: they build a financial safety net and sleep better at night. But saving can prove detrimental to the economy as a whole – if everyone cuts spending, total consumption falls – bringing economic growth with it. All in all, saving is not always a good thing. This, in a nutshell, is Keynes’ famous “thrift paradox”.
Recent research from Oxford Economics has highlighted the very real interplay between individual savings decisions and economic performance. US households have also been building up large savings reserves during the pandemic, and Oxford Economics has calculated a ‘baseline’ scenario which assumed households would spend $1.1tn (£900bn) of this by the end of 2023, which means real GDP growth of 2.3% this year. If households instead kept their savings (a Great Recession scenario), the resulting fall in consumption would depress real GDP growth by 1.2 percentage points in 2022. But if they exhausted their excess savings, the GDP growth would rise to 4.5% – a staggering 2.2 percentage points above the baseline.
What households do with these savings pots will also have microeconomic impacts. According to a study by Hargreaves Lansdown, businesses that sell non-essential goods saw their sales volumes plummet in April and May, with furniture sales particularly hard hit. “Over time, more and more of us have reduced our lockdown savings and are clinging to whatever we have left. . . There’s no room to splash out on new sofas and patio furniture right now,” said Sarah Coles, senior personal finance analyst. Expect stocks of companies specializing in consumer non-durables to see a bumpy ride over the next few months if consumers prove reluctant to dip into their savings pots.
Consumer savings decisions could impact a wider range of stocks. too. A NUMBER working paper by Robin Greenwood, Toomas Laarits and Jeffrey Wurgler examined the impact of US government stimulus checks on the stock market during the pandemic. Their research found that up to 33% of stimulus payments were used to increase savings and a good portion (perhaps 10-15%) ended up in the stock market. This led to an increase in retail trade and higher stock prices of retail-dominated portfolios. They found that stocks with high retail, small capitalization and low nominal prices were the most affected.
Demand for these stocks was in many cases a function of available cash – the same thing that led to high levels of savings. Commentators have even coined the phrase “the bored markets hypothesis” to describe the rise of investors trading meme stocks for fun when there was nothing better to do during lockdown. But as savings reserves are depleted, demand for these stocks could decline and prices should falter. Will these retail investors cash in to try to maintain their current standard of living, or will they hold on to their investments for the longer term? If there is a sell-off, we could see stock prices plummet — and some hard lessons learned by these bored pandemic investors.
Hermione Taylor is Economics Editor for Investors’ Chronicle