Have had a chance to read FBarr's recent initiation of coverage on PPH which had a target price of ~$12.40/share. Not sure who does or doesn't have access to the research but it's not my place to share it on this forum, however for context, the executive summary reads:
"We initiate coverage of Pushpay (PPH) with an OUTPERFORM rating and target price of NZ$12.42. PPH is the current market leader in providing customised, innovative giving technology for large US churches. This is confirmed by discussions with over 50 churches, industry experts and competitors. PPH is well placed to benefit from the ongoing consolidation of US churches and thematic shift towards digital giving, accentuated by COVID-19. For example, one PPH competitor we spoke to generated more sales in the first two months of COVID-19 than the whole of 2017 and 2018 combined. In recent months online 'pyjama church' has been a hit, with many US churches looking to continue online services longer-term. With 98% of customers in North America there is also optionality for expansion in new markets. We believe the risk to FY21 EBITDAF guidance is to the upside due to sustained church customer donation volumes and cost stability across the business"
Having read it, I'd be interested in others' perspectives, with my comments below:
It’s a bold initiation of coverage from an analyst who’s only been at FB for a couple of months… but taking the executive summary at face value, he appears to have dug quite deep and spoken to a number of useful parties. My key takeaways were:
- The blended valuation of ~$12.40 is a bit misleading for me. The DCF is $9.22 (assuming a WACC/CoE of ~9%) with the multiple valuation of around $14. I don't know about others on this forum, but I'd be expecting a higher return than 9% for every dollar invested in PPH at current prices, relative to the risk. Sure the multiples for comps are higher, but hard to find a strong comparable for PPH in my view. Maybe some validity to this?
- As I read through it, I felt like some of the assumptions were a bit stretched. I’m probably more naturally pessimistic, and I try moderate that where I can, but it suggested to me that there was a number of risks to the downside (particularly around suppressed economic conditions and declining church participation) TBD, but potentially not unrealistic.
- Regardless, I’ll probably hold for now as the one thing that is irrefutable with PPH is that their corporate communications and reputation for beating expectations is consistent – therefore, happy holder of my remaining PPH having recovered a reasonable profit already (this is quite important - I've made slightly more than my investment back already and it's a moderate amount of capital I'm willing to risk) This is what I did, and always easier to hold a residual shareholding when you've got your moola back, but I must admit the management/board changes and insider selling are now at a level which suggest to me that it's a peak more than a plateau.
Other comments as I read through:
- Market share of ~5% suggests plenty of growth left, but with them having 58 of the top 100 churches already, I do think that the forecast revenue growth (doubling in 2-3 years) could be slower and/or more expensive to obtain 58 of the top 100 seems relevant following the results announcement.
- The report talks about consolidation of churches. Any idea what drives the consolidation of churches? Seems an odd concept within the context of faith – I would’ve thought there’d be reasonable resistance to consolidation from parishioners looking to maintain their sense of a consistent community… I suppose churches are no different to any other “business” and there’s meaningful economies of scale from consolidation? I'm not sure there's ever going to be more than 100 top churches - i.e. I think the top 100 today are the top 100, and the likelihood of medium churches converting to large/mega is low
- Americans are a great god-fearing people – but will current numbers hold into the future with millennials etc? There's an interesting chart (on page 6 for those who have it) showing a considerable decline in the number of adults with a religious affiliation - near 95% back in 1916, dropping to ~87% in 1996 and something like ~75% in 2018... I worry that the declining trend is accelerating to the point where tithing / donations is a genuine uphill battle Big concern for me. I contrast this to retirement villages. Plenty of people getting older, so they're swimming with the tide. This is genuine headwind. Interesting side note, my Summerset returns are looking quite lucrative relative to PPH following the above post
- It sounds like Covid has really helped accelerate the transition to mobile/online giving – they note an expected resistance of parishioners reverting back to cash donations. Americans are a bit weird how they frequently use cash (and believe they don’t need to take virus precautions because God will save them from Covid) but I expect there could be some flattening or even a slight reduction to the proportion of electronic vs. cash donations. I also think the natural tension here is that those familiar/savvy with digital giving are one generation younger, and that younger generation appear to be attending church less/not-at-all Genuine concern remains. I'm starting to think we've got all we can get from the digital transition.
- The return on investment/cost for churches appears to be high. Suggests potential upside from those churches not yet using PPH
- Competition always worries me a bit with these tech companies as (1) I don’t fully understand how they work and what makes them better than others and (2) it’s always hard to know/see/find information about the others Easy looking back, but probably a real concern.
- That WACC and equity beta of 8.9% and 0.95, respectively look low. The WACC is actually the cost of equity as they have no debt. I don’t invest on the basis of a ~9% return in PPH. I’d say it’s pretty close to fair value with an equity beta of 1.0 - 1.1. That said, DCF valuation on something like this can be pretty uncertain/imprecise It's all theory, but not unhelpful guidance.
- Chart to the top left on page 4 (yes, I know, annoying I can't share) – but if you reduce the sales growth rate down from 16% to 13% (quite a small change), EV/sales multiple looks fairly valued. Very sensitive to sales growth. Appears quite relevant.
- Covid driven recession/unemployment has to be a concern to growth in the short-term. If that’s already priced, then there’s potentially upside... but my personal view is that there's more downside to come. TBD.
- Red herring which I'll throw out there. I don’t think they’ve identified, the risk of pastor fraud / largesse (particularly with big churches) – think Kenneth Copeland (https://www.youtube.com/watch?v=vColOxUf-8s). The guy owns multiple private jets and says flying commercial is like getting into a tube with demons. These guys are a bit like Teflon, but an expose could sink some of the big churches. Maybe a minor/marginal risk but not great for church reputation and somewhat taints all churches. Also, what happens when a key pastor dies/leaves/retires… I assume they are good at training up new pastors and having multiple people leading the services/church but I wonder if it has any effect? Like the colour of this text, still a herring.
- No non-US market growth – I expect when they start talking about other countries/markets, then it’s probably time to sell as that growth will be much slower and smaller and would suggest they’ve tapped the US. In some respects, that’s why I’m not sure this will ever be as big as Xero. Small business accounting is ubiquitous (consistent markets, languages, locations etc.). Xero has a much bigger market, but offset by more competition. Re-reading this is kind of interesting, not because they're talking about new markets (which I'd love to hear others' views on) but more that there's more talk of smaller customers.
Where I stand:
- Insider sell-downs all seem reasonable and rational
Revised my view to negative from positive/neutral
- Still more upside in share price, albeit I think it's flattening/slowing - I'm not a buyer at current prices, but easier to hold when my entry was down around $3's
Not a buyer. Heavily weighted to selling.
- PPH investor relations are exceptional
Starting to wonder - plenty of uncertainty, management/director changes and softer reporting
- Cost of equity / risk is quite a key input to any investor's assessment of the current share price (particularly any longer term holder) - without having replicated FBarr's modelling, a higher cost of equity probably suggests current share price of $7-9 is around fair value for me personally
If anything the theoretical cost of equity has reduced off the back of lower interest rates, but I think this is more than offset by a higher beta and/or lower growth.
- I'm not a trader (don't have the time or wherewithal to manage the info flow to "pick" the market), so I don't tend to enter and exit which may negate some of the points I make above for those more inclined to move in and out of the market
Open to the floor.