Key points
- I estimate this founder-led currency specialist stock could double
- Half-year results show a strong return to growth
- High profit margins and good cash generation
Currency specialist Argentex (LSE: AGFX) has fallen out of favour with investors over the last year. However, I can still see a lot to like about this business. For this reason, I’m looking at this penny stock as a possible buy for my Stocks and Shares ISA.
Essentially, Argentex’s business is quite simple. It helps businesses and wealthy individuals handle their foreign exchange requirements. In addition to straight transfers, this includes services such as hedging and other forward deals that provide protection against future exchange rate movements.
This is a sector where the big banks previously dominated. But clients have grown tired of their high fees and slow service. Challenger companies like Argentex are aiming to take market share away from the banks by offering a better, cheaper service.
A contrarian opportunity?
Argentex floated in 2019 and was growing fast until the pandemic struck. But growth stalled during the 2020/21 financial year, with pre-tax profit falling from £10.2m to £7.4m. Some disruption to client activity might seem understandable given the impact of the pandemic, but rival firms such as Alpha FX continued to report rising profits.
The company says that around two-thirds of last year’s profit drop was due to the cost of setting up a new headquarters. Even so, there’s no doubt in my mind that it was a disappointing year. The risk for shareholders is that Argentex won’t be able to regain its previous momentum.
Fortunately, the firm’s most recent results do show an encouraging return to growth. Revenue rose by 33% to £15.7m during the six months to 30 September, while pre-tax profit rose 22% to £3.3m.
If founder and CEO Harry Adams can maintain this rate of growth into 2022, I think Argentex shares could re-rate to a significantly higher valuation. Here’s why.
I reckon this penny stock could double
Argentex and rival Alpha FX are both very profitable, with a return on equity of around 25%. To put this in context, I usually consider anything over 15% to be high.
Argentex shares are currently valued at just 10 times 2022 forecast earnings, whereas Alpha FX is trading on 32 times 2022 forecast earnings. That’s a big difference. To be honest, it seems too big to me, but that’s the way the market rewards (and punishes) growth stocks.
As I mentioned earlier, Argentex’s latest results suggest this business is returning to growth. Broker forecasts believe earnings could rise by 38% during the current financial year, and by 36% the following year. That gives the shares a price/earnings growth (PEG) ratio of just 0.3 — well below the 1 level usually seen as good value.
If Argentex can hit broker forecasts, I think the shares could perform very strongly, re-rating to a higher valuation.
Valuing Argentex at 30 times earnings (like Alpha FX) would see the stock triple from here. That might be a little ambitious, but I can certainly see the potential for this penny stock to double.
For this reason, I’m considering adding a small holding in Argentex to my ISA portfolio.
