SPY - Smartpay Holdings

[Muse]

Great stock, but at what stage does it become overvalued?

It's a fair question to ask of anything that has run this hard so fast.

Around announcements Smartpay's SP action has looked like taking an elevator up followed by taking an escalator down in between announcements, although since October last year there has been higher highs and higher lows each time. Wouldn't be surprised to see that continue and with some profit taking. Pleasingly much of the buyside is now coming through institutions.

I don't particularly concern myself with the daily SP movements as I finished building my position last year and have conviction in where I see this business trading in 4-5 years, based on my assessment of where I see earnings and an appropriate multiple for the business at that time. How the business actually performs is what I watch.

None the less...Smartpay has just started the 2rd month to its now current year 2024 financial year. Consensus NPAT for FY24 is $13.3m and $20.9m for FY25...post today's run up that puts it on a current year PE of 29.4 and FY25 of 18.7. These are high multiples to be sure and reflect the company has to continue to grow to justify its SP, and also some of the fantastic underlying economics of its business. My own NPAT estimates are actually higher than consensus and the company is one of the few where brokers have been continuously upgrading their estimates QoQ.

With the SP where it is the business has to demonstrate growth in scale and profitability and its possible the market gets ahead of itself from time to time (where it has the potential to both be worth quite a bit more in the future than it is now but still be a tad over valued in the short term)

SPY's largest non bank competitor is Tyro, which is itself in talks with private equity to be taken over. It's current SP reflect silly PE multiples (315x FY24 and 78x FY25), and EV/EBITDA multiples of 17.8x and 14.3x those same years, again higher than smartpays. Smartpay is actually larger than Tyro at the EBIT and NPAT level, and growing much faster, but is smaller in terms of terminal deployments and revenue, and by mcap.

As an aside, SPY grew its AU acquiring terminal base by ~6k, ending at 15.7k, with average terminals during the year of 12.6k. Even if it didn't deploy any further terminals in FY24 (exceptionally unlikely and undesirable), I estimate it would still grow its FY24 acquiring revenue by 20-25% and its consolidated revenue by 15-20%, on the back of full year contributions from the acquiring fleet put in place through out the year in the year just finished.

The other cool thing is SPY's business model. It is pro-inflation, as its Australian acquiring business effectively clips the ticket on transactions, so as inflation rises, so to does Smartpay's revenue. But its Australian unit cogs actually go down as it grows. The deal Smartpay struck with its switching provider (Cuscal - and the largest direct cost for the business) is tiered, as as Smartpay processes more total transaction value (a function of # of terminals, # of transactions per terminal, and average ticket size), it gets charged less as a % of TTV. SPY is bringing in more TTV thanks to more terminals, a growing but plateauing# of transactions per terminal (and I'd imagine compresses in FY24 or FY25), but also the impact of inflation on purchases. The more TTV, the lower the switching cost per TTV, and as a % of revenue.

So inflation grows topline, lowers direct unit costs, grows gross profit dollars earnt, and expands % gross profit margins.

Pretty cool eh. A rare feature.

Then there is this whole strategic review and non binding heads of terms just announced with Cuscal to bring the acquiring solution to NZ. It's a bit cryptic, sounds like a big project that could take years, but very intriguing and potentially very significant. NZ has ~30,500 terminals - all on boring leases with no transaction acquiring services provided. But that's for a different post.

[Balance]

Plus, SPY has takeover appeal.

[Ggcc]

It's a fair question to ask of anything that has run this hard so fast.

Around announcements Smartpay's SP action has looked like taking an elevator up followed by taking an escalator down in between announcements, although since October last year there has been higher highs and higher lows each time. Wouldn't be surprised to see that continue and with some profit taking. Pleasingly much of the buyside is now coming through institutions.

I don't particularly concern myself with the daily SP movements as I finished building my position last year and have conviction in where I see this business trading in 4-5 years, based on my assessment of where I see earnings and an appropriate multiple for the business at that time. How the business actually performs is what I watch.

None the less...Smartpay has just started the 2rd month to its now current year 2024 financial year. Consensus NPAT for FY24 is $13.3m and $20.9m for FY25...post today's run up that puts it on a current year PE of 29.4 and FY25 of 18.7. These are high multiples to be sure and reflect the company has to continue to grow to justify its SP, and also some of the fantastic underlying economics of its business. My own NPAT estimates are actually higher than consensus and the company is one of the few where brokers have been continuously upgrading their estimates QoQ.

With the SP where it is the business has to demonstrate growth in scale and profitability and its possible the market gets ahead of itself from time to time (where it has the potential to both be worth quite a bit more in the future than it is now but still be a tad over valued in the short term)

SPY's largest non bank competitor is Tyro, which is itself in talks with private equity to be taken over. It's current SP reflect silly PE multiples (315x FY24 and 78x FY25), and EV/EBITDA multiples of 17.8x and 14.3x those same years, again higher than smartpays. Smartpay is actually larger than Tyro at the EBIT and NPAT level, and growing much faster, but is smaller in terms of terminal deployments and revenue, and by mcap.

As an aside, SPY grew its AU acquiring terminal base by ~6k, ending at 15.7k, with average terminals during the year of 12.6k. Even if it didn't deploy any further terminals in FY24 (exceptionally unlikely and undesirable), I estimate it would still grow its FY24 acquiring revenue by 20-25% and its consolidated revenue by 15-20%, on the back of full year contributions from the acquiring fleet put in place through out the year in the year just finished.

The other cool thing is SPY's business model. It is pro-inflation, as its Australian acquiring business effectively clips the ticket on transactions, so as inflation rises, so to does Smartpay's revenue. But its Australian unit cogs actually go down as it grows. The deal Smartpay struck with its switching provider (Cuscal - and the largest direct cost for the business) is tiered, as as Smartpay processes more total transaction value (a function of # of terminals, # of transactions per terminal, and average ticket size), it gets charged less as a % of TTV. SPY is bringing in more TTV thanks to more terminals, a growing but plateauing# of transactions per terminal (and I'd imagine compresses in FY24 or FY25), but also the impact of inflation on purchases. The more TTV, the lower the switching cost per TTV, and as a % of revenue.

So inflation grows topline, lowers direct unit costs, grows gross profit dollars earnt, and expands % gross profit margins.

Pretty cool eh. A rare feature.

Then there is this whole strategic review and non binding heads of terms just announced with Cuscal to bring the acquiring solution to NZ. It's a bit cryptic, sounds like a big project that could take years, but very intriguing and potentially very significant. NZ has ~30,500 terminals - all on boring leases with no transaction acquiring services provided. But that's for a different post.

Thanks for a great response. I’m not selling anytime soon.

[Mel]

It's a fair question to ask of anything that has run this hard so fast.

Around announcements Smartpay's SP action has looked like taking an elevator up followed by taking an escalator down in between announcements, although since October last year there has been higher highs and higher lows each time. Wouldn't be surprised to see that continue and with some profit taking. Pleasingly much of the buyside is now coming through institutions.

I don't particularly concern myself with the daily SP movements as I finished building my position last year and have conviction in where I see this business trading in 4-5 years, based on my assessment of where I see earnings and an appropriate multiple for the business at that time. How the business actually performs is what I watch.

None the less...Smartpay has just started the 2rd month to its now current year 2024 financial year. Consensus NPAT for FY24 is $13.3m and $20.9m for FY25...post today's run up that puts it on a current year PE of 29.4 and FY25 of 18.7. These are high multiples to be sure and reflect the company has to continue to grow to justify its SP, and also some of the fantastic underlying economics of its business. My own NPAT estimates are actually higher than consensus and the company is one of the few where brokers have been continuously upgrading their estimates QoQ.

With the SP where it is the business has to demonstrate growth in scale and profitability and its possible the market gets ahead of itself from time to time (where it has the potential to both be worth quite a bit more in the future than it is now but still be a tad over valued in the short term)

SPY's largest non bank competitor is Tyro, which is itself in talks with private equity to be taken over. It's current SP reflect silly PE multiples (315x FY24 and 78x FY25), and EV/EBITDA multiples of 17.8x and 14.3x those same years, again higher than smartpays. Smartpay is actually larger than Tyro at the EBIT and NPAT level, and growing much faster, but is smaller in terms of terminal deployments and revenue, and by mcap.

As an aside, SPY grew its AU acquiring terminal base by ~6k, ending at 15.7k, with average terminals during the year of 12.6k. Even if it didn't deploy any further terminals in FY24 (exceptionally unlikely and undesirable), I estimate it would still grow its FY24 acquiring revenue by 20-25% and its consolidated revenue by 15-20%, on the back of full year contributions from the acquiring fleet put in place through out the year in the year just finished.

The other cool thing is SPY's business model. It is pro-inflation, as its Australian acquiring business effectively clips the ticket on transactions, so as inflation rises, so to does Smartpay's revenue. But its Australian unit cogs actually go down as it grows. The deal Smartpay struck with its switching provider (Cuscal - and the largest direct cost for the business) is tiered, as as Smartpay processes more total transaction value (a function of # of terminals, # of transactions per terminal, and average ticket size), it gets charged less as a % of TTV. SPY is bringing in more TTV thanks to more terminals, a growing but plateauing# of transactions per terminal (and I'd imagine compresses in FY24 or FY25), but also the impact of inflation on purchases. The more TTV, the lower the switching cost per TTV, and as a % of revenue.

So inflation grows topline, lowers direct unit costs, grows gross profit dollars earnt, and expands % gross profit margins.

Pretty cool eh. A rare feature.

Then there is this whole strategic review and non binding heads of terms just announced with Cuscal to bring the acquiring solution to NZ. It's a bit cryptic, sounds like a big project that could take years, but very intriguing and potentially very significant. NZ has ~30,500 terminals - all on boring leases with no transaction acquiring services provided. But that's for a different post.

Appreciate the deep insights and comparison with Tyro, very helpful!

[zulu]

Fiordland Moose - Thank you for such a detailed, valuable insights.
Is it too late to buy SPY now ?
I have some but would like to add more ..not sure if it's too late though as SP is at it's all time high now.

[Muse]

Can't help you there Zulu...only you can make that call ...important to do your own research and come to your own view.

There's a really key catalyst coming at the end of the month (up or down)....the full year FY23 results! Revenue growth is great but still got to see the cost and profit side of things. I'm sort of amazed the SP has shot up so much based on only the revenue picture to be honest. It'll be interesting to see the full year financials and how the cost base is travelling, and understand the implications of that for future years. We only have an incomplete view on how the company tracked in FY23.

There are 3 analysts covering it: Shaw, Blue Ocean Equities, and CCZ - all out of Australia - you could try to get your hands on some of their research.

[winner69]

Media market close report

Eftpos provider Smartpay Holdings reached a 20-year high after rising 6c or 3.66% to $1.70. It reached $1.60 on March 1, 2003.

Well done current holders

[Muse]

Note from one fundy to clients post trading update:

"SMP, a leading independent EFTPOS provider to small to medium enterprises (SMEs) in Australia (AU) and New Zealand (NZ), announced plans to establish transaction acquiring operations in NZ. SMP has come full-circle, having launched an acquiring business in AU in late 2017, funded in part by the original NZ business. In NZ, SMP has long provided payment terminals under a rental model, managing a network of over 30,000 terminals, representing 25% market share.

Provided interchange charges are constrained, transaction acquiring can be far more profitable than simply renting terminals. The AU (acquiring) division currently generates four times the NZ (rental) division’s revenue from half the number of payment terminals, and is now SMP’s core earnings driver.

Changes to NZ retail payments regulations that came into effect in effect late in 2022 capped previously exorbitant interchange fees that had prevailed in NZ. The framework in NZ is now similar to what exists in AU. The new regulations mean non-bank acquirers like SMP can profitably enter the NZ market. A 2023 pilot is in the works, so it is only early days, but the potential is significant."


Video note from Milford on SMP from February
https://milfordasset.com/insights/stock-story-smartpay

[Muse]

Did this a week ago but too busy during the days to post much anymore.

An indicative BOE analysis on the impact of transitioning the NZ fleet from rentals to transaction acquiring.

AU margin per terminal (all NZD)

• FY23 Australian acquiring revenue: $60.5m (actual)
• Ave terminals throughout the year: 12.6k
• Revenue per terminal: $4,800
• Acquiring GP margin: 55 to 60% (lets call it 55%)
• Gross profit per terminal: ~$2,600

NZ margin per terminal (all NZD)

• FY23 NZ service income (rentals): $13.7m (my estimate)
• Ave terminals: 30,500
• Revenue per terminal: ~$450
• Rental GP margin: 85 to 90% (lets call it 90%)
• Gross profit per terminal: $400

Face value differential: $2,200 multiple that by the number of NZ terminal fleet (30,500) and you get an obscenely large uplift in incremental gross profit ($67.1m - yikes!)

Of course that may prove to be an implausible outcome....lower purchasing power NZ (ttv per terminal) together with the structure of the payments industry could mean margins might be structurally lower in NZ. And not all the NZ fleet maybe suitable for Smartpay's acquiring product. So in the absence of more detailed understanding, I calculate the likely maximum size of the prize based on like for like KPIs, and then run some downside / sensitivity scenarios.

Sensitivity analysis

• Assume a 50% discount to to the margin differential per terminal: $1,100
• Assume 50% of the NZ fleet is suitable
• Incremental GP uplift: $16.8m
• Or - assume 25% of the NZ fleet is suitable: $8.4m (half the above)

Those are very indicative and just to get a feel for the potential range of outcomes. The other thing to consider would be what the additional TTV pulled through from converting the NZ rental fleet to transaction acquiring would do to the switching fees paid to Cuscal. As SMP brings in more TTV it achieves lower switching fees. This has the potential to add a huge sum of TTV so its possible SMP's AU switching fees could fall further depending on how the letter of intent with Cuscal is structured. It's possible it is ringfenced to NZ with fees starting high and falling as as TTV grows as is the agreement in Australia.

Then incremental ongoing overheads, marketing and project costs, which ought to be relatively small given the customer base is already in place and captive. And of course the phasing of costs and eventual revenue.

Or it could all prove too hard and not come to anything.

Either way - exciting times as an existing holder. Flicking some of the existing NZ terminal fleet from rentals to an acquiring provider solution has the potential to make a material step change in SPY's profitability over the next few years.

[Ggcc]

2,500,000 share just exchanged hands. That's a good sign of a big investor