PayPoint: Pointing To A Brighter Future?

6th Mar by Mark Simpson

16 comments 2674 reads

PayPoint is a business in transition as it increasingly moves away from a reliance on the cash bill payment network from which it takes its name into processing payments, gift cards and parcel administration. This makes it an exciting time to take a look at the investment case here.

Summary

PayPoint built a successful nationwide cash-to-digital payment network for gas & electricity pre-payment meters, BBC licence fees and other bills. This network gave them a network effect moat, enabling them to generate high Returns on Capital and pay significant dividends from free cash flow.
However, this is in structural decline, and even before COVID hit, the company had slipped into negative organic revenue growth. The dividend was then cut during COVID. The market likely views PayPoint as this legacy business, not least since the company name remains linked to the terminals business.
However, a strategy of diversifying into complementary areas has started to generate growth again, with a 6-8% medium-term topline growth forecast translating into a 10% pa growth in EPS predicted.
The share price has never re-gained its pre-COVID levels despite 2024 forecast EPS being higher, and the shares languish on a very undemanding forward P/E of around 7.
The company has a net debt of around £70m when excluding customer deposits. However, this is less than 1xEBITDA, so it shouldn’t be a cause for concern going forward.
A recent acquisition of Appreciate group, internally rebranded as Love2Shop, further diversifies the business, although it came at the cost of 5% dilution for equity holders.
The company remains highly cash-generative despite a return to growth. The high Returns on Capital reflect the company’s network effect moat in many areas. Hence, shareholders currently receive a dividend yield of over 8% while waiting for any re-rating.

Profile

PayPoint (LON:PAY) was formed in 1996 to set up a network of payment terminals to allow customers to top up pre-paid gas and electricity meters at local convenience stores. The company operated in both the UK and Romania until the Romanian business was sold in 2020.

The company listed in 2006, at which point it added BBC license fee payments to its network. In the mid-2000s, the company began to diversify into online payments, buying Metacharge and SECPay and a pay-by-phone company at the end of the decade. In the same year, the company started Collect+ as a JV with Yodel before buying them out in 2020. Today,…

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Lincs

6th Mar

Great write up - thanks Mark. I bought a few (for the wife's ISA) after reading other positive views expressed here on Stocko. I'm up a little already and yesterday's divi raised that further. The BOD do seem to be on top of the game and providing a steady hand on the slow transition away from the legacy businesses. I see they even have a finger in the pie of Gov.t business - re recent DVLA tie in (very small fry at the moment but at least they are sitting at the table). I'll buy more should there be a dip to near / below my original buying price but as for now think they are fully priced - still too many question marks over just how well the new tactics will perform.

Tortoise investor

Good article, thanks Mark. Some additional points from me as a holder:

Pros

I think there is a chance of a re-rating once investors see the full year effect of the Appreciate acquisition. A few of us including me forgot that this is a seasonal business so there wasn't any benefit to the bottom line in the half year results.
Within its payments and banking division there are different strands to the business. It's the bills segment that was the drag at the half year probably due to tough comparatives last year, whereas 'digital' payments (which admittedly is a smaller overall part of this division) increased by 9%. So I don't think all of this division is moribund.
I've heard good things about the vinted partnership from work colleagues who say this has now made it much easier to sell products through vinted rather than Ebay or Facebook Marketplace. A bit anecdotal but that sounds promising (although same colleagues point out you can use Royal Mail's doorstop parcel collect service which might inhibit growth for Paypoint?).

Risks

Shareholders need to keep an eye on management's ability to juggle increasingly different parts of the business.
I have in my notes, but haven't checked more recently, debt cost is around Interest is payable at SONIA plus 1.75%. But this might come down over next couple of years and help margins further?
By my calculations the Love2Shop business' profitability fell at the half year point versus performance under previous owners Appreciate Group. So that's not a great start.

topvest

Great report - thanks. I have held after previously being an Appreciate shareholder. Took the cash and then reinvested in Paypoint after the inevitable post deal sell off as Appreciate shareholders with small holdings exited. There is good growth potential here, if they can evolve. Although not everyone agrees with this, in my view its very much a fintech business.

Mark Simpson

Thanks. Yes, I didn't mention recent contract wins for brevity. The other one is the recent deal with Royal Mail to offer postal services. As you say, in isolation, these sorts of deals don't immediately drive significant revenue, but they are signs of where these things are going. For example, I can see in the future the post office becoming much smaller and PayPoint offering many of the existing services more efficiently to local communities.

Yes, the initial sell-off due to Appreciate holders selling small positions was fairly predictable and provided a great opportunity. However, since then, the FY25 EPS forecast has increased around 15%, meaning the current price offers almost the same value as the price-insensitive selling in mid-2023 offered.

Boon

7th Mar

On Appreciate: didn't the Q3 Trading Update make it clear that it was a disappointing high season for Appreciate? Love2Shop gift vouchers volume went down in the important festive period?

I think once they ramp up their distribution across their PP One network, as well as revive the Park Christmas Savings, it will be a nice little earner (but not huge) for the overall group. Decent acquisition, but not transformative IMO.

One thing that was glossed over about their largest shareholder, Astericos:

It looks like it is a family office fund, for the founder of Disashop.

From my limited understanding, this company does exactly the same thing in Spain - technology for convenience stores.

Astericos has been building their stake steadily from 2020 to 2023 (when they reached 29%). I would guess that this is a strategic investment - to deter Paypoint from expanding into the Spain market. But maybe also to have a first say if there is any takeover/offer interest in Paypoint.

(I hold Paypoint in the Boon Fund)

jonno

Great spot Boon, I also hold PayPoint (LON:PAY) .

Thanks Boon, I had missed the link to Disashop. I'm not sure PayPoint have any great designs on an expansion into Spain. If anything, they have focussed in on the UK more in recent years. It may well just be the case of a sector that they know well and know to be undervalued but it could lead to more corporate action. At the moment though, I think the stake acts as a blocker. Private equity loves a steadily growing, highly cash-generative business, and I think without that stake, they would have received a standard 30% premium offer that institutions facing redemptions would have found hard to turn down.

I think this fairly innocuous titled RNS gives the answer: https://www.stockopedia.com/sh...

It seems that under the terms they agreed when acquiring Appreciate, they had to keep staff for a year. That time limit is now up, and they can restructure to take cost out. This is presumably what they were referring to in the Q3 trading statement.

So, the combination of wider distribution and much-reduced costs could certainly move the needle. But as you say, not transformative in itself.

Jeremy Rea

8th Mar

Mark,

Slight typo in the article.

"The long-term chart shows good share price performance from 201 to 2014"

I assume that's mean to be 2001. I don't think Stocko's charts go back 1800 years! Lol.

Although, if they do go back that far, and you regularly look at SP performance on a near two thousand year basis, kudos to Stocko and to you for such indepth research! ;-)

Jeremy

Martin VT

10th Mar

Paypoint appear to be creating a strong network effect for local independent shops…not a huge monopoly or anything, but still potentially valuable. They also seem to have a product that is useful for social payments, rent and rebates in the social housing world, social services, etc. Again not Earth shattering but perhaps quite useful niches.

I hold, and am interested to see where this company goes. As Mark says, this PayPoint (LON:PAY) is a bit reminiscent of Smiths News (LON:SNWS), but has growing business as well as its waining one.

carmensfella

11th Mar

That is an excellent feature article and very well covered but just to mention that Paypoint will be featured and the merits debated on the BASH tonight on the MelloMonday show Stockopedia | Mello Monday with Chris Boxall & four companies | By carmensfella

12th Mar

Sorry, that was meant to be 2011-2024, when the shares had a re-rating, but had been largely rangebound since.

TEIN

20th Mar

I'm very late reading this article but thank you, an excellent read. I like niche businesses like PayPoint (LON:PAY) that are embedded in third party businesses doing complex things no one else can do or wants to do - effectively a moat, which PayPoint need to show is worth defending! [I hold]

Pension Deficit

29th Apr

PayPoint's Collect+ services signed up Vinted in Q4 2023 - Vinted has now reported its first profit: https://www.bbc.co.uk/news/art...

PayPoint: pointing to a brighter future?

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Mark Simpson

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