Description

Equiniti is a businesses services company based in the UK. It reports out of five main segments:

1. EQ Boardroom (~30% of 2019 EBITDA): Handles share registry & employee share plans for companies listed in the UK

2. EQ Digital (~30%): Mix of small businesses cross-sold to share registry customers. Includes complaints management, case management, and regulatory services

3. Pension (~10%): Handles pension administration for UK government and corporate customers

4. Interest (~10%): Includes interest earned on UK public company balances

5. EQ US (~15%): Share registry & plans for US public companies

The share registry & plans business is a high-quality business because it is regulated, sticky, and oligopolistic. New public companies choose a share registry provider at IPO and rarely switch thereafter because the process is cumbersome with little upside. There are three main share registry providers in both the US and the UK and market share is consolidated and stable. Share registrars are able to leverage their relationships with company secretaries and boards to cross-sell additional back-office products.

Thesis & Opportunity

· Equiniti was uniquely and negatively impacted by COVID because of its impact on rates and corporate actions. Although ~70% of Equiniti revenues are recurring, the non-recurring portion is exposed to corporate actions, dividends, and interest income which all declined precipitously during 2020. The tough environment was exacerbated by the fact that the market was already disappointed by the pace of integration of the 2018 EQ US acquisition, which cost ~£50mm in integration expenses and took longer than expected to execute.

· As a result of these factors, Equiniti is trading at its lowest valuation since IPO and at a significant discount to its public peers. The share price has declined by -45% over the last year and now implies a valuation of only 6.3x 2019 EBITDA compared with an average trading multiple since IPO of 9.2x. Leading peer CPU trades at 11.3x FY19 EBITDA.

· Despite a very tough trading environment in 2020, Equiniti’s business is not fundamentally impaired. It has not lost any significant customers and in fact has won share of new IPO’s during the pandemic. Furthermore, the trading environment is starting to pick up. The US is seeing stronger IPO’s that at any point since 2000 and M&A is climbing back past 2019 levels. Although rates remain depressed today, the forward curve has started to recover which should give EQN an attractive inflection point in 2022. Unlike the rest of the market, the post-COVID recovery is not priced in to the shares at all today.

· We expect EQN to generate ~£115mm of EBITDA by 2023. Given the US acquisition integration expense are behind them, this should translate to ~£54mm in FCF which represents a 12% yield on the current market cap. At a normalized multiple of 10.0x EBITDA, this implies a 3-year share price of 306p or 155% above where the shares trade today. EQN investors are also getting a free option on rates – if rates simply go back to 2019 levels, we expect EQN to generate £142mm of EBITDA in 2023 and £74mm in FCF, which would represent a 17% yield on the current market cap and a share price of 375p at the same 10.0x exit multiple.

Potential Risks

· Delayed vaccine roll-out and new COVID variants may push back the return in corporate actions and remediations activity

· The rate curve may stay at zero or even go negative. EQN is not responsible for paying clients interest if rates go negative, but negative rates would impair the company’s earnings potentia.  The company is exploring ways to get paid in fees rather than by holding float, but we expect it will take some time for customers to accept that.  

· LTM Leverage of 3.3x EBITDA is high relative to small-cap UK peer, though EBITDA is artifically depressed

Catalyst

EQN recently appointed a new CEO, Paul Lynam, who will start in April

Post-COVID return of activity will help corporate actions, remediations (within EQ Digital), and the rate curve

EQN is actively selling non-core assets, such as the EQi retail trading platform, to de-lever and simplify the business