Online money transfer company,Optimal Payments(LSE: OPAY)reported an impressive set of first-half results today, sending the companys shares up by as much as 7% in early trade.
The company reported a 78% jump in pre-tax profit for the period, with pre-tax profit rising to $27.5m for the six months ended 30th June, compared to $15.5m a year earlier. Revenue jumped 34% to $159m.
These impressive results were driven by the success of the companyshigh-margin Neteller e-wallet business. Management now expects Optimals full-year results to beat expectations.
Cash generation
Todays results really highlight Optimals potential. The company has built itself up to become a well-respected international payments processor over the past few years and todays results reflect that.
One of Optimals most attractive qualities is its profit margins. Indeed, for the six months to 30th June, Optimal reported a gross profit margin of 55%, up from 53% as reported during the first half of 2013.
As a result, Optimal is a highly cash-generative business. The companys cash conversion ratio,the proportion of profits that are converted to cash flow, sits above 100%.Whats more, Optimals capital spending requirements are low, which allowed the company to report a strong free cash flow of $29m for the first half of this year.
Growth through acquisitions
Optimals impressive free cash flow has given the company the ability to grow through acquisitions without having to build up large amounts of debt. For example, to boost growth Optimal acquiredUS online payment processing companies Meritus and GMA for $225m duringJuly.
Part of this acquisition ($150m) was funded with debt, the rest with cash, although even after this deal, Optimal still has a sizable cash balance. Further, with a free cash flow of around $30m every six months, the group should be able to pay off the above debt within a few years.
A reasonable price
Optimal is growing rapidly and for this reason, investors are prepared to pay a premium for the companys shares. Indeed, at present levels Optimal trades at a forward P/E of 24.2, although with management expecting to beat forecasts for this year, I wouldnt be surprised if City forecasts are adjusted later this week.
Nevertheless, even without the City adjusting forecasts higher, Optimal is expecting to report earnings per share growth of 44% this year, followed by growth of 26% next year. With growth surging, Optimal is trading at a PEG ratio of 0.6 for 2014, indicating that the shares offer growth at a reasonable price.
Still,Optimals lofty valuation may put some investors off, even after considering the companys rapid growth rate. Thats not a problem, every investor has their own way of doing things and there are plenty of other opportunities out there.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Optimal Payments. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
