Brokerage CCZ Statton Equities has initiated coverage of Smartpay Holdings Ltd (ASX: SMP) with a buy rating and a current valuation of 62 cents a share, which is 19% above its current market price. Smartpay shares are currently trading at 52 cents.
We take a look at the coverage, and the company.
What does Smartpay do?
Smartpay provides EFTPOS terminals to businesses to enable them to accept card payments. Smartpay currently services over 25,000 merchants with 35,000 EFTPOS terminals across Australia and New Zealand. Merchants are charged a flat rate (which is tailored by industry) across MasterCard, Visa, Alipay and WeChat Pay transactions. Shares in Smartpay, which had been trading at around 17–20 cents over the previous year, doubled in November when the company announced its half-year results and the sale of its New Zealand business.
The New Zealand transaction
Smartpay agreed to sell the New Zealand business and assets to Verifone Inc. for a cash purchase price of NZ$70 million. Smartpay is a leading provider of EFTPOS terminals in New Zealand and this has funded its expansion into Australia over the past several years. In New Zealand Smartpay has 31,000 terminals, for which the company receives around NZ$48 per annum for each terminal rented out. Due to structural differences in the market, more profitable acquirer terminal revenues (which are growing in Australia) are not available in New Zealand. CCZ does not see revenue growth originating in the New Zealand business.
CCZ views the sale of the New Zealand business as a positive, and increased its price target from 40 cents per share to 62 cents per share when the deal was announced. Proceeds from the sale will be used to capitalise the Australian business for accelerated growth, settle all banking facilities, and make a cash distribution to shareholders (predicted to be around NZ 20 cents per share).
The Australian market
The sale will provide additional funding to pursue expansion in the Australian market. According to CCZ's estimates, approximately $6.7 million from the transaction will be available to fund the growth of the Australian business. Increased focus and capital for Australian operations may allow Smartpay to increase its already high predicted rates of growth in Australia. CCZ estimates this will increase revenue from $21 million in 2021 to $28 million.
The Australian business drove revenue growth of 32% in the half year to 30 September, up to $13.4 million from $10.2 million in the prior period. Australian acquiring income grew to $3.8 million in the half year to 30 September, a 530% increase over the prior period. Earnings before interest tax depreciation and amortisation of $3.6 million was reported, marginally below the $3.7 million reported for the corresponding period last year. This was attributed to investment in additional capacity to support the Australian expansion.
The acquirer market
Smartpay's entry into the high profit Australian merchant acquirer market is predicted to drive significant growth – Australian terminals are being added at a rate of 200 a month, according to CCZ's estimates. Becoming an acquirer has increased revenue per terminal by over 350% (from $48 per terminal per month to over $200 per terminal per month).
As an acquirer, Smartpay acts as an interface and intermediary between the merchant and the various card issuers used by the merchant's customers. Acquiring terminal providers earn fees from merchants of either a percentage of the volume of transactions or a fixed fee per transaction. The acquirer then pays interchange fees to card issuers, scheme fees to Amex, MasterCard, or Visa, and, if applicable, a processing fee to the provider of transaction switching, routing, and settlement.
Smartpay's offering
Smartpay's latest offering, Smartcharge, is an EFTPOS terminal that costs merchants nothing. This makes it very difficult for a competitor to provide a more attractive system. The Smartcharge terminals work by automatically calculating an ACCC compliant surcharge based on the cost of the transaction. The surcharge is then passed on to the customer, leaving the merchant with no EFTPOS fees to pay. Smartpay's other offering is a flat rate product with no terminal rental fees if monthly turnover hurdles are met.
Smartpay is winning market share by offering merchants lower fees and new payment methods. An increasing number of payments are being made by card as society moves away from cash. This benefits Smartpay as greater spends on their EFTPOS terminals translate directly into increased revenues. CCZ forecasts revenue of the Smartpay's Australian business will increase 100% on a compound annual basis between FY19 and FY21.
What does the future hold?
According to CCZ, there were nearly 1 million point of sale devices in Australia at the end of FY19, an increase of 10.1% over 2015. Over the same period the number of ATMs declined 9.5% as we move to an increasingly cashless society. Smartpay estimates its addressable markets of small and medium enterprises consists of 30% of the nearly 1 million payment terminals operating.
Smartpay is now processing over $1 billion in EFTPOS transactions on an annualised basis. Revenue from the acquiring business is now over $1 million per month, compared to $2.4 million over the whole of FY19. CCZ believes the strong industry experience of the management team at Smartpay will allow them to take advantage of regulatory change to grab market share from incumbents in Australia. Major competitors are the banks and newcomer Tyro Payments Ltd (ASX: TYR). CCZ believes Tyro's recent listing will act as a catalyst for greater recognition of Smartpay's value by the market.
Foolish takeaway
By exiting the low growth New Zealand business, Smartpay is staking its future fortunes on the higher growth Australian market. Signs in Australia have been positive so far, with promising increases in revenue. The addressable market is large, however Smartpay has some formidable competitors in the incumbent banks and new player, Tyro.
