I’m always willing to have a look at a potential recovery bet (note – I said ‘potential’), and while there are no shortage of current candidates following the stock market crash, today I’d like to look at one of the lesser lights of the market.
Equiniti Group (LSE: EQN) is a ‘back office’ provider of financial and administration services, and counts several FTSE constituents among its clientele. However, the shares have fallen from a high of 234p in February, to 109p at time of writing.
Is it just the stock market crash that’s to blame?
At first glance, the headline numbers from July’s interim results don’t make for good reading. Revenue down 11.7% and a pre-tax loss of £0.7 million, followed by the inevitable cancellation of the interim dividend, aren’t usually components of a cocktail that has investors rushing to buy in.
Unsurprisingly, Equiniti laid the blame firmly at the Covid-19 and stock market crash door, citing reductions in UK/US interest rates, and suspension of dividends by major clients as a reason for this. Crucially, it expects these headwinds to continue on all business fronts. The pandemic has also slowed the decision making and investment process with corporate clients, pushing sales of software and delivery of service projects until later this year. Given this explanation, I don’t expect Equiniti to recover until the market itself, and underlying economics, recover.
Debt continues to be an ongoing worry, an issue touched on by Alan Oscroft in his last examination of the share prospects. Debt in itself isn’t necessarily a problem, but the concern comes when doubts are raised about the ability to pay it off. On this count things have improved slightly; net debt was reduced by around 4%, and is well covered by operating cash flow. It is encouraging that Equiniti has been proactively cutting costs, and has paused acquisition activity, leaving it in a better place to ride out the pandemic.
Foolish final thoughts
However, I’m avoiding the shares for now. If Equiniti only offers market benchmark growth potential and an uninspired future dividend, I believe there are several better investment options. It will be interesting to revisit the case for the shares on a regular basis as global commerce adjusts to the current conditions following the events that led to the stock market crash.
In my opinion, a better home for my money would be City of London Investment Trust. My Foolish colleague Harvey Jones recently extolled its virtues, and the facts on this one are well known. Managed by Job Curtis since 1991, the board have moved quickly to reassure income seekers that they will use Trust reserves to maintain their impressive 54-year record of raising the dividend, currently standing at a healthy 5.79%. If the FTSE 100 also continues its journey back towards 2019 levels, I would expect to see share price growth to its previous value of around 400p.
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Ben Watson holds shares in City of London Investment Trust. The Motley Fool UK has recommended Equiniti. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.