5th Oct 2023. 9.00am

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BUY Argentex (AGFX) – Second Tranche

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Regency View:

BUY Argentex (AGFX) – Second Tranche

Argentex: Strong fundamentals and growth prospects drive second tranche buy

We initially purchased a first tranche of Argentex shares for several compelling reasons.

Firstly, Argentex operates in the SME-focused foreign exchange (FX) market, which offers a vast growth potential. They cater to businesses with an annual FX turnover of $5-$500 million, where traditional high street banks struggle to compete with smaller, more dynamic specialists in terms of price, service, and flexibility. This positioning allowed Argentex to capture a niche market with significant room for expansion.

Secondly, Argentex follows a riskless principal broker model, generating revenue solely from the spread without engaging in speculative activities. This approach not only minimizes risk but also ensures stable and predictable income streams.

Furthermore, the management team’s significant ownership stake in the company, with the CEO Harry Adams holding 12.2% of the stock and the board and senior management collectively owning 34%, instilled confidence in their commitment to long-term shareholder value.

Argentex’s strong financials were another key factor in our decision. They had a proven track record of delivering profitable growth, and strong cashflow maintained a healthy debt-free balance sheet with substantial net cash reserves.

These factors collectively made Argentex a compelling investment opportunity and all these factors remain. And with the shares pulling back to a key level of support we’re keen to snap up a second tranche.

Record half-year results

Last month, Argentex released a record set of interim results for the first six months of 2023.

Despite muted market reaction due to reduced volatility in major currency pairs, there were many positive indicators.

In terms of financial performance, the company achieved substantial growth, with Group revenue surging by 28% to £25m, up from £19.5m in H1 2022. Notably, revenues from new products and geographies now constitute 23% of total revenues, showcasing successful expansion efforts.

Argentex’s operating profit also grew by 16%, reaching £5.2m in H1 2023, compared to £4.5m in the same period last year. Earnings per share showed improvement, reaching 2.8p on a basic level and 3.1p on an adjusted basis, compared to 2.4p and 2.7p, respectively, in H1 2022. This rise in EPS underlined the company’s strong financial performance.

Diversification and growth

Argentex’s diversification and growth strategy continued to yield positive results. They witnessed an 8% increase in the number of trading clients, totalling 1,493 clients in H1 2023.

This growth was supported by a broader product offering and higher wallet share, with average revenue per client traded increasing by 18% to £16.5k. The introduction of new, higher-margin products like Structured Solutions also made meaningful contributions to their revenues. Digital revenues doubled and 16% of clients now utilise the platform.

Argentex’s Alternative Transaction Banking product, launched in March, outperformed expectations. In terms of international expansion, Argentex Europe’s revenue contribution more than doubled, reaching £1.8m, with 24% of these revenues generated outside of The Netherlands. Leveraging their license from the Dutch National Bank, the company successfully launched its Alternative Transactional Banking product in Europe.

Prices pull back towards key support zone

Prolonged periods of sideways consolidation are part and parcel of holding any stock. Argentex’s share price has been locked in a choppy sideways consolidation range since the turn of the year.

Whilst frustrating, these periods of consolidation can often create prime opportunities to snap up a second tranche at favourable levels of risk-to-reward.

Argentex’s recent price action has seen the shares pull back down into a key area of support created by the large October 2022 price gap (see chart below).

This price gap formed on the back of a market-beating trading update, and it was a key catalyst behind our original entry.

We expect the low of the price gap to be well support by buying volume and this provides a platform for our second tranche buy.

AGFX Daily Candle Chart

AGFX Daily Candle Chart

Quality and growth at a reasonable price

Argentex continues to trade on a highly attractive valuation relative to the quality of its financials and projected growth rates.

Investors are being asked to pay 11 x forward earnings. Whilst this does not scream bargain at first glance, you should consider that Argentex has consistently delivered a Return on Equity above 20%, operating margins are north of 33% and the balance sheet is debt free with a £32.6m net cash position.

Argentex’s forward PE of 11 also look favourable relative to projected growth rates. Revenue is growing at 26.5% (5yr CAGR/Avg) and set to almost double this year to £60m and hit £74m in FY24.

Earnings per share are forecast to grow by 33.5% on a 12-month rolling basis – putting Argentex on an eye-catching forward Price-to-Earnings Growth (PEG) ratio of just 0.4.

We continue to believe that Argentex offer quality and growth at a reasonable price.

AGFX 3-Year Chart

AGFX 3-Year Chart


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