Investors’ Chronicle: Argentex, D4t4, Saga

BUY: Argentex (AGFX)

Increased sterling volatility proves to be a positive for the foreign exchange dealer, writes Julian Hofmann.

The main virtue of Argentex is that bumpy forex markets matter less to it than its stable of corporate and institutional clients who trade currency, or take out hedges and swaps, more when times are uncertain. Being the middleman in this context is proving to be a consistently profitable strategy for Argentex as companies cope with the sagging value of sterling by taking out forward contracts.

The trend was reflected in the breakdown of Argentex’s sources of revenue, where forward contracts sales surged by 50 per cent to £27.2mn for the year as customers offset their currency risk. The leap in sales was mirrored partly by the increase in staff costs as Argentex added capacity to its dealing and operations teams to increase its ability to handle new client business. That meant that staff costs for the year rose by 20 per cent to £15.2mn. The slower costs increase means that Argentex’s profit line clearly benefited from operational gearing generated during the year, particularly with a high spot cash conversion rate of 85 per cent.

As Argentex revenues tend to be second-half weighted, management said it is moving to a calendar year end for the 2022 results and will publish these for the nine months ended December 31 2022 no later than April next year.

The valuation has held up well in a falling market and holds steady at 11 times house broker Numis’s forecasts for 2022. Its main problem will be achieving scale and dealing with emerging competition in what is a relatively commoditised forex market, but the business looks well run.

HOLD: D4t4 (D4T4)

Even with economic headwinds, D4t4’s top-line growth is still a little underwhelming, writes Arthur Sants.

Like many B2B software companies, D4t4 is going through the expensive process of converting itself into a recurring revenue business. The company has a data marketing platform called Celebrus and the newly created Celebrus Fraud Data Platform.

The premise from D4t4 is that both these products will receive regulatory tailwinds. The marketing product only uses first-party data, so increasingly tight data regulation should give an advantage over rival products that use second-party data. For fraud, large fines are being handed out to financial businesses that fail to prevent it, increasing the need for D4t4’s product.

On paper, these arguments seem sound, but D4t4 is still waiting for growth to justify the price/earnings multiple. Revenue grew only 7.3 per cent and rising costs due to increased investment in the sales team meant adjusted profit before tax fell 25 per cent. The company explained this by saying the “global economic situation continued to slow buying decisions from prospective customers”, which suggests the product might be a “nice to have” rather than a “need to have”.

The good news though is that annual recurring revenue — the holy grail for software companies — grew 32 per cent to £14mn. It now accounts for 57 per cent total sales, up from 47 per cent last year. Management expects this ratio to improve to 65 per cent in the medium term. There was also the first sale of the fraud product within six months of its launch when it was upsold to an existing banking customer.

The FactSet broker consensus is for earnings per share to grow to 11.45p by 2024. This would give a 2024 price/earnings ratio of 21. However, the direction of travel isn’t favourable. The 2024 consensus has fallen from 13p in the past few months — presumably because of worsening economic conditions. Top-line growth is needed.

HOLD: Saga (SAGA)

Regulatory reforms continue to effect the group’s substantial insurance business, writes Christopher Akers.

Saga is on the road to profit this financial year, despite highlighting difficulties with the insurance side of its business in a trading update covering the five months to July 4. Given that the over-50s specialist’s customer base is the most vulnerable to Covid-19, it is no surprise that the pandemic has been a disaster for the business (the shares have cratered by almost 75 per cent since February 2020). But the company’s fortunes are improving as the travel sector recovers, and its demographic target group has felt comfortable sailing off into the sunset on cruises once again.

An insurance environment with high claims inflation and many customers sitting on fixed-price policies is a challenge, however, and a “decline in new business” hit sales in the period. Total policy sales were down by 2 per cent, with motor and home policy sales down by almost a tenth and policies in force down 4 per cent since January 31 this year.

The impact of the Financial Conduct Authority’s (FCA) insurance pricing reforms, which mean that renewing customers cannot be quoted more than a new customer would be for an equivalent policy, “was larger than we expected” on Saga’s trading performance according to Numis analysts. On the positive side, policy sales should be boosted in the second half by new products, which include an electric vehicle offer.

With punters now spending on holidays and cruise bookings once again, progress is being made in the company’s travel business. A cruise load factor of 75 per cent is expected for the full year, with an “exceptionally strong” summer performance, while bookings for the 2024 season are “well ahead of expectations”.

The company forecasts an underlying profit before tax of £35mn to £50mn for the full year, which is in line with analyst expectations. While net debt is expected to be slightly higher at the end of July than it was in January, leverage should fall in the second half. Saga’s shares look cheap at six times Numis’s adjusted forward 2023 earnings, but insurance troubles have added further pressures.

Hermione Taylor: Can household savings save the day?

The pandemic saw household savings soar: they hit £30bn a month during the first lockdown, up from a longer-term average £5.5bn. This was thanks to what the ONS calls “forced savings” — lockdowns significantly reduced our opportunity to spend, so we saved more as a result.

Even as restrictions eased, households kept their belts tightened and were still putting more aside than they did before the pandemic. But the latest BoE Money and Credit Report shows that we are saving less than we did last month. This has huge consequences for what comes next.

The relationship between savings and economic performance is not clear. Sometimes during hard times, savings decline as households choose to cut back on deposits, rather than consumption. During the Great Recession between 2007 and 2009, however, the savings rate started to rise — households were so worried about unemployment and fluctuating house prices that they built up a savings buffer and cut back on purchases instead.

UK economic growth is now stagnating — but we don’t know which path consumers will follow. The answer will have significant ramifications for the UK economy. When people save, it benefits them on an individual level: they build up a financial safety net and sleep easier at night. But saving can prove detrimental to the economy overall — if everyone cuts spending, total consumption falls — dragging economic growth down with it. In aggregate, saving isn’t always a good thing. This, in a nutshell, is Keynes’ famous ‘paradox of thrift’.

Recent research from Oxford Economics highlighted the very real interplay between individual savings decisions and economic performance. US households also built up large savings buffers during the pandemic, and Oxford Economics calculated a “baseline” scenario that assumed households would spend $1.1tn (£900bn) of this by the end of 2023, meaning real GDP growth of 2.3 per cent this year. If households hold on to their savings instead (a Great Recession scenario), the resulting lower consumption would knock 1.2 percentage points off real GDP growth in 2022. But if they deplete their excess savings, GDP growth would be lifted to 4.5 per cent — a staggering 2.2 percentage points above the baseline case.

What households do with these savings pots will have microeconomic impacts, too. According to research from Hargreaves Lansdown, firms dealing in non-essentials saw sales volumes fall over April and May, with furniture sales hit particularly hard. “As time goes on, more of us have put a dent in our lockdown savings and are hanging on to whatever we have left . . . There’s no room for splashing out on new sofas and patio furniture right now,” said senior personal finance analyst Sarah Coles. Expect shares in firms dealing in consumer non-durables to have a bumpy ride over the next few months if consumers prove reluctant to drawn down their savings pots.

Consumer savings decisions could impact a wider array of stocks. too. An NBER working paper by Robin Greenwood, Toomas Laarits and Jeffrey Wurgler looked at the impact of US government stimulus checks on the stock market over the course of the pandemic. Their research found that up to 33 per cent of stimulus payments were used to increase savings and that a good chunk (perhaps 10-15 per cent) found its way into the stock market. This led to increased retail trading and higher share prices of retail-dominated portfolios. They found that stocks with high retail trading, small capitalisation and low nominal share prices were most affected.

Demand for these stocks was in many cases a function of spare cash — the same thing that drove high levels of savings. Commentators 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 in lockdown. But as savings buffers deplete, demand for these stocks could decrease, and prices are likely to wobble. Will these retail investors cash out to try and maintain their current living standards, or will they hold their investments for the longer term? If there is a sell-off, we will could see share prices topple — and some tough lessons learned by those bored pandemic investors.

Hermione Taylor is an economics writer for Investors’ Chronicle