Equitable Investors' Martin Pretty is keeping an eye on profitable, dividend paying companies in 2022. Pic: Getty Images
MoneyTalks: Cashed-up fintech stocks are on this fundie’s watch list
Experts
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Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from Equitable Investors director Martin Pretty.
What’s hot right now?
Pretty says profitable, dividend paying companies are what Equitable Investors has its eyes on in 2022.
“We are seeing this play out around the fintech complex and either side of that conjunction of industries,” he says.
“We also invest in earlier stage businesses, but I must admit to having been frustrated in the past few years.
“Companies generating cash flow with positive business economics were being overlooked, while the market rewarded businesses that just spent a heap of money on customer acquisition without having worked out how to monetise those customers to the degree required to justify their valuations.
“Separately, a segment of the market we are now watching with interest – as ‘crossover’ investors who can invest a portion of our Dragonfly Fund assets in unlisted investments – is the pre-IPO space.”
Pretty says there was a period before the 2022 New Year where pre-IPO investing was in-vogue, and the returns were phenomenal.
“But IPO activity has been significantly curtailed so we are wondering whether any interesting opportunities emerge out of the portfolios of pre-IPO focused investors with strict mandates regarding how long they can hold or under what circumstances they can make follow-on investments,” he said.
Trends
It’s been a volatile few months, where positive news flow has struggled to excite on-edge investors focused on the implications of inflation, interest rate hikes and geopolitics, Pretty says.
“Sentiment has turned sharply on heavy cash burners and tech or fintech stocks on outrageous valuation multiples.
“At the same time a bit more discipline has emerged around business fundamentals and looking at attractive pricing of businesses rather than just momentum of on-screen stock quotes.”
Top picks
Earlypay (ASX:EPY)
EPY is one of the leading providers of alternative finance for small and medium businesses – primarily through invoice finance – and has continued to grow its market share in Australia organically and through acquisition for many years.
It is growing EPS (excluding amortisation) to more than 5c this year from ~1c five years ago, Pretty says.
“A takeover battle for EPY in late CY2019 and early CY2020 between the private equity owners of larger competitor Scottish Pacific and listed finance broking aggregator COG demonstrated EPY’s strategic position in the market, despite the ‘binding’ deal falling over when COVID-19 impacted on markets.
“In the absence of such a deal, EPY’s next step to reinvigorate growth was the acquisition of digital invoice funding company Skippr.”
The company has since leveraged the tech platform to create efficiencies and open up new opportunities.
“This Skippr platform provides EPY with the ability to service smaller clients profitably, typically targeting smaller clients with receivables book of less than $200k – a market sector that has previously been cost prohibitive for traditional invoice finance providers,” Pretty says.
“EPY upgraded its FY22 full year earnings guidance in February to $15m+ net profit (before amortisation), compared to $14m+ guidance in January and $12.2m prior to that. That translates to FY22 EPS of ~$0.055 – so at a market price of $0.485, EPY is priced on a single-digit PE multiple, with a solid dividend yield.
“Next year growth is expected to continue, with EPY last week announcing its primary invoice finance warehouse facility has been expanded to $200m from $125m. EPY noted that this would support growth in its Total Transaction Volume of $1.25 billion – 50% up on the TTV expected for FY22.”
Earlypay (ASX:EPY) share price today
Reckon (ASX:RKN)
Accounting and legal software company RKN has been around since the original dot.com era and remains a company in which its board and management are significant equity holders.
Today RKN has three key business segments.
“Its Accounting Practice Management segment (CY2021 $11.9m EBITDA) that services major accounting firms was historically considered the ‘jewel in the crown’ and RKN had agreed to sell it to MYOB for $180m back in 2017,” Pretty says.
“But the Australian Competition & Consumer Commission (ACCC) engaged in lengthy investigations and MYOB ultimately chose to pull out.
“The Business Group segment (CY2021 $20.4m EBITDA) offers accounting and payroll solutions to small and medium businesses, including the Reckon One cloud accounting offering.”
The third segment, Legal Practice Management (CY2021 $0.5m EBITDA), represents the Zebraworks business.
According to Pretty, RKN says five of the top 10 legal firms in the world were using its products prior to the Zebraworks merger – and in the new business RKN owns a 70% stake, with Zebraworks management able to move their position from 30% to 45% if they achieve revenue targets that are fully met with a 5x increase by 2027.
“RKN is trading on a lowly single-digit EV/EBITDA multiple of <5x on CY21 results and a >5% dividend yield – those metrics largely reflect the current business, with RKN’s 70% stake in nQzebraworks not really factored in (the segment contributed $0.5m EBITDA to CY2021’s total $29.5m).”
Reckon (ASX:RKN) share price today
Omni Bridgeway (ASX:OBL)
OBL is classified as being in the financial services sector but is a bit different to the others, making its returns by funding legal cases and emerging as a fund manager by raising third party funds to invest in its case book. It has ~$2.4 billion of funds under management, Pretty says.
“The company isn’t currently paying dividends but has flagged it will look at paying franked dividends and buying back shares given it had $166m cash on balance sheet at December 31, 2021,” Pretty says.
“It is projecting significant cash inflows and delivered a presentation to investors highlighting its expectation, based on past experience, that its current book of funded cases will generate ~$1.2 billion of cash to OBL.”
