Making strides in forex: Should you buy Argentex shares?

I am sure many readers will be familiar with the impact of COVID-19 on the foreign exchange market. Subjugated to the rises and falls of major economies, the foreign exchange market faced wrath like so many other industries. As unemployment reached unimaginable figures, remittances fell to tragic lows.

The year 2020 is a year of disruption for trading floors at banks and hedge funds in Hong Kong, London and New York, as offices closed, and workers were sent home. Market volatility early last year widened bid-offer spreads to levels not seen since the last global financial crisis in 2008, while reducing market depth even in currency pairs considered to be liquid.

There were some reports suggesting an increase in demand for forex business as people were busy battling for their livelihoods. Anyone mad enough to spend time on Twitter will have noted the uptick in trader activity. These were headlines designed to sell papers and advertising space and not promote reality: reality was quite the opposite.

As my next feature company will demonstrate, the increased activity was due to furloughed traders entering the market, new entrants seeking thrills or new ways to make money.

What does Argentex do?

Argentex Group Plc (AGFX) provides foreign exchange services to clients across the globe including institutions, corporations and high-net-worth individuals. The company is listed on the AIM All-Share index in the Investment Banking and Brokerage Services. According to Bloomberg, Argentex are rated the most accurate forecaster for GBP, EUR and USD globally.

Argentex has developed a distinctly bespoke suite of online capabilities, structured products and analytical experts. It operates like a private bank, providing clients a bespoke service, including account management, analysis and trading through to settlements and compliance.

The company is expanding operation into Holland and Australia. Its Amsterdam office began to generate revenue in first year of operation, and Australian licence application is underway with the intention of opening in Sydney in FY22.

Brief History

The company was established in 2012 and listed on AIM in June 2019 at 133p. Its raised net £12.5 million in the initial IPO by placing 12.7 million new shares at 106p, plus a further 551,887 new shares for subscription. Additionally, 30.6 million existing shares were sold by current investors resulting in a market capitalisation of £120 million.

This was an important milestone for Argentex, marking the start of the next phase of its ambitious growth strategy designed to be taken more seriously as a PLC. Before the IPO the company already had a track record of delivering profitable growth by supporting increased trading capacity, enabling Argentex to meet the growing demand for its services.

Here and Now

Full-year ended March 31, 2021, the company reported revenues of £28.1 million, down from £29.0 million for the year 2019. Pre-tax profit fell to £7.4 million from £10.2 million. A short-term dip in market confidence had a noticeable impact on client volumes through the first half of the financial year. According to a company report:

“However, the skill and commitment of our employees in addition to our clients ongoing trust contributed to the group delivering the best six months of client activity on record during the period. This was reflective in the H2 revenues £16.4 million up 39% versus H1 £11.7 million.”

The company says key markets are on “right path” for sustainable recovery and trading volumes are encouraging. Final dividend held steady at 2.0 pence.

Of course, like most companies, Argentex was impacted with Covid-19. That said, the company continued to invest by adopting safer working conditions by moving successfully to new COVID-19-secure offices during the period, despite staff working remotely and the lockdown restrictions. A slight drop in revenue constitutes a credible result, and in some ways, provides proof the wider macro environment has not too adversely impacted the business as a whole.

When to buy Argentex shares

Flat interest rates as adjusted operating profit fell 30% to £ 8.7m at the end of March and *forward points (yields) approached zero. It is this figure which appears to concern investors, and which sees the company 50% down in value at 208p in January 2020. The shares now trade around 104p and therefore look good value on a long-term recovery as the world attempts to normalise over the coming weeks and months, which should be helped with record client activity throughout the second half of the reporting period.

I am not a holder, but I may well dip my toes at around the 95-97p level because I feel the market has overreacted to the full-year report, and I believe the company has laid solid foundations for the future.

Argentex added 499 new corporate clients during the year and a record 1,385 corporates actively traded in 2021, up 14% on 2020. However, I am a little concerned that the top 20 clients on the books account for 41% of the revenues. This suggests to me there is a group of clients with too much power.

Group chairman Lord Digby Jones said the rise in volatility at the beginning of the year “eventually led to hesitation in trading,” but since then the total number of trades and their averages have declined.

Broker Numis says Argentex’s foreign exchange service to small and medium-sized enterprises is a “very high margin business” with an operating margin of 46%. Unlike most of the rest of the sector, Argentex has almost no market or macro risk, very well diversified by customer and geography and has “little regulatory risk compared to the rest of the sector”.

“We also see the potential for international trades to grow, as Argentex currently generates most of its revenue from UK clients.”

Sector

Some banks are withdrawing from the market, while others like Deutsche Bank, JP and UBS, have grabbed 30% of the market worth $6.6 trillion per day. Companies that could not adapt quickly by offering clients more options and algorithmic trading are losing their positions. commercial opportunities are expanding, demonstrated by the company’s growing footprint in the Netherlands and Australia, so we cannot accuse Argentex of standing still and not adapting to the market and client needs.

Given few banks are entering the market, and the larger more established are expanding their reach and offerings, it seems to me the sector could enter a period of M&A activity; it may be the only way some of the smaller participants survive.

Afterthought

There is one point worth pondering. On the 10^th May the company reported the Co-CEO Carl Jani returns to work following a leave of absence for health reasons that began in January. Co-CEO Harry Adams had assumed the role of sole CEO during Jani’s absence. On the 11^th of May, Carl Jani resigns, Co-CEO Harry Adams becomes sole CEO immediately. I assume for health reasons! A curious affair from the outside. Carl Jani has since sold 13.7 million shares, which represents a 12% stake in company.