Shareholders who kept the faith with TechFinancials Inc (LON:TECH) after its trading update in early February last month were handsomely rewarded in early March.
The shares were the best performers in London, rising 30% after the company announced it would receive a US$1.53mln dividend from its 51%-owned subsidiary, DragonFinancials.
That’s on top of the US$2.55mln TechFinancials received from its subsidiary at the interim results stage.
To put that into context, TechFinancials expects revenues for 2016 will be at least US$21mln.
House broker Northland Capital said: “This is positive news for TECH and strongly supports its strategy of looking to grow the business in high growth regions like the Asia Pacific region.”
The news buffed up a share price dented by the impending loss of its largest software licensee Richfield Capital, the owner of the 24option.com site, which has served notice that it intends to terminate its current agreement with TechFinancials with effect from 1 April 2017.
Richfield is moving to an in-house system, and the possibility exists that TechFinancials will continue to provide some services to Richfield as part of this process.
TechFinancials said it had prepared for this eventuality by embarking on a diversification strategy last year, and this will mitigate the effects somewhat of the client cancellation.
All of which begs the question: what does TechFinancials do?
In a nutshell, it is a creator of electronic trading platforms.
Its business-to-business arm (B2B) provides software and back-up to brokers, enabling them to allow their customers to trade binary options, foreign exchange and certificates for deposit (CFDs).
The business-to-consumer division (B2C) includes the aforementioned DragonFinancials and is largely focused on binary options trading – a win or lose (hence “binary”) a fixed amount variant on traditional options.
It is, to say the least, a fast growing sector.
A report from ForexMagnates last year predicted that the binary options industry would grow to around US$20bn in traded volume by the end of the year.
That represents a doubling in size since 2014 and provides a significant backdrop for TechFinancials to grow the business.
While it is expanding rapidly, the industry is also becoming more regulated, which also plays to TechFinancials’ strength. The group works hard to maintain its competitive advantage by ensuring its trading platforms and solutions are regulatory compliant in all relevant jurisdictions.
All of which takes money, but the group has a strong cash position, with net cash of US$3.9mln at the end of June 2016.
Strong 2016 performance but there are clouds on the horizon
The group’s performance in 2016 was marginally ahead of the market’s expectations.
The final figures have not yet been totted up, but the company indicated revenues would be at least US$21mln, up from US$13.6mln the year before, while underlying earnings (adjusted EBITDA) should not be less than US$2.8mln, versus just US$600k in 2015.
That’s the good news.
The bad news is the loss of the Richfield Capital contract, which is sure to have an effect on the business.
Northland has placed its forecasts for the current year on hold until it has more clarity on likely impact on the business.
For its part, TechFinancials is deferring a decision on whether it will pay a dividend for the year just ended until it sees how the land lies.
It’s a setback, for sure, but the group has been well aware of its over-reliance on this one customer, and it responded by changing its strategy to focus on joint-ventures where the risks are shared.
Indeed, the highly successful and cash generative DragonFinancials business is a joint venture - with Optionfortune.
“We are extremely pleased by the performance of this partnership and we remain focused on building on its success going forward. This partnership is also an important part of our strategy to penetrate markets with high growth potential as it provides us with crucial exposure to the fast growing Asia Pacific region,” Bell told shareholders in September.