PayPoint – positive Q3 Trading Update and recent acquisitions identify big UK build-up now underway

IT payments operator

Based in Welwyn Garden City, PayPoint (LON:PAY), which has around 700 employees, is a very interesting information technology services group.

It provides specialist consumer payment, transaction processing, settlement, and other services and products in the UK and Ireland as well as in Romania.

It not only serves consumers and convenience retailers, but also the business and public sectors.

This group is a leading national card payments business, with a network of some 30,000 small and medium enterprises and convenience retail partners.

Its customer base spans across sectors including food services, garages, convenience stores and hospitality.

Wide range of services on offer

It offers bill and general services, such as prepaid energy, bills, and cash out services, top-ups, including mobiles phones, eMoney vouchers, prepaid debit cards, and lottery tickets.

The group’s retail services include card payments, parcels, money transfer, SIMs, EPoS, and receipt advertising.

Its network of over 3,620 automated teller machines, is proving ever more useful as banks close local branches across the country.

We are all close to a PayPoint

The company also provides MultiPay, a payment solution, and PayPoint One retail terminals.

Some 99.5% of the urban population live within one mile of a PayPoint retailer partner and 98.3% of the rural population live within five miles.

Massive retail client list

Its retailer partner network is the largest of its kind covering over 27,700 stores across UK including Tesco, Sainsbury’s, Asda, The Co-operative Group, Booker, McColl’s, Nisa, Costcutter and thousands of quality independent retailers.

This network is bigger than all of the banks, supermarkets and Post Offices added together.

Reorganisation now underway

There is a big move by its management to reshape the fast-growing group. Its aim is to effect a re-organisation delivering a more streamlined and accountable structure across the whole of its business.

Last October it announced that it had agreed to sell off its entire Romanian business to Innova Capital, thereby enabling its management to realise value and focus strategically upon the UK business. That is conditional upon competition and regulatory approvals, which I understand are slow in coming.

Expansion by acquisition

In the UK, the acquisitions of Handepay and Merchant Rentals (card payments) and i-movo (digital vouchering), significantly expand the group’s capability to seize the significant opportunities in its core market.

They also help to accelerate the business shift to digital and services, away from cash. The enlarged business is reckoned to have around a 5% share of the UK card merchant market.

Getting deeper into Direct Debits

Way back in 2019 some 4.5bn Direct Debit payments were made, worth a staggering £1,327bn.

Just think how many were made last year and for how much.

With the various ‘lockdowns’ that we have endured for the last year or so, it has become very clear that the UK Direct Debit market is continuing to expand at quite a rate.

Over 90% of the population use these debits to pay some or all their regular bills.

Just a week ago the group announced that it had agreed to acquire RSM 2000, a leading digital payments business, with a diverse range of clients that includes charities, not-for-profit organisations, and SMEs.

The company considers that this acquisition will enhance its existing MultiPay digital payments portfolio, thereby bringing Direct Debit capability in-house, adding innovative mobile payment products and enabling the group’s reach into new sectors, such as charities, not-for-profit and events.

The RSM2000 innovative EventPay solution provides card terminal hire and connectivity for SMEs attending shows and fayres across the UK – which creates an opportunity of over 30,000 events a year with over 10,000 visitors.

The group is capitalised at £410m and there are some 68.6m shares in issue.

Large holders include Asteriscos Patrimonial (12.00%), Liontrust Investment Partners (11.90%), Sanford DeLand Asset Management (6.13%), Threadneedle Asset Management (5.63%), Schroders (5.06%), Evenlode Investment Management (5.01%), Link Fund Solutions (4.97%), M&G Investment Management (4.25%), Standard Life Investments (3.53%), and Hargeaves Lansdown Asset Management (3.50%).

Current year and prospective estimates

Analyst Joe Brent at brokers Liberum Capital estimates that the year to end March 2021 will have seen a slight fall of £5m in revenues to £102m, while he goes for a pre-tax profit almost £10m lower at £34.6m, generating earnings of 40.4p (58.1p). The dividend he has pencilled in are 31.2p (57.6p) per share.

However, going forward he sees the coming year sales up to £118m, then on to £122m for next year, producing profits of £44.0m then £46.8m respectively.

Those estimates would see earnings coming in at 51.4p then 54.7p per share, covering 39.5p then 42p per share in dividends respectively.

Share price fall over the last year offers a bargain

A year ago this group’s shares were trading at around 1,100p each, they fell to a virus-hit low last year of 389p, before recovering to trade the 670p range earlier this month.

They now trade at only 598p, which I consider to be a very low rating for a group with such expansion plans.

My view

I see them easily back up to 750p and then a lot higher as the Romania business sale goes through and the UK growth intensifies.

Ahead of the 27 May final results announcement I now set a Target Price of 750p.