Given the recent IPO of Worldpay Group (LSE: WPG), the UK payments sector now has a king. Before this coronation, there were already few names in this very attractive sector:Optimal Payments purchase of Skrill to createPaysafe Group (LSE: PAYS) was a solid deal, and little-knownSafeCharge (LSE: SCH) has been silently winning the technology game in the sector. It now seems constructive to examine the investment case for each.
Before we sort the wheat from the chaff, lets outline what to look for when judging a payment business. First, bricks-and-mortar payment services are a good business. After all, we are all using less cash and more cards. However, processing e-commerce is better: the market is growing fast (at least 10% p.a.), it is fragmented, and penetration is still low (so the trend will continue). Second, though we hear that mobile payments are the future (and it is true by all accounts), definition of mobile payments is nebulous at best: ApplePay is a debit card in your phone, while Square allows you to use an iPad as a store checkout. Both solutions count as mobile payments, but are very different. Third, value-adding analytics are becoming more important. Customers not only want a 100% robust payment solution, but also an ability to analyse customer data and predict behaviour. Finally, if you are going to stick to the more mature bricks-and-mortar business, then scale is crucial for success.
Worldpay Group
Worldpay Group is solid in all areas of the payment world. In particular, it has a fantastic bricks-and-mortar platform and an e-commerce offering. In particular, it is a market leader in the UK and has a strong omni-channel offering in the US. It may be lagging some upstarts in mobile or data analytics, but offers more than hygiene level services in both (especially in the US). Also, services such as ApplePay will actually use its bricks-and-mortar system, and by accelerating substitution away from cash, ApplePay could bea positive. However, as I mentioned before, Worldpayis expensive. A trailing 2014 EV/EBITDA of more than18x cannot justify anything but sustained high-teens growth rate (at the EBITDA level). Although it is possible, past financials only hint at such an outcome and nothing more.
Paysafe Group
Full disclosure: this is my favourite of the pack, despite the recent news of a breach by hackers. Paysafe Group, which used to be calledOptimal Payments, is solely involved in online commerce. Its focus on the gambling sector provides a sense of security: online gambling is growing (despite facing some regulatory uncertainty) and it allows the firm to develop know-how and scale so it can becompetitive in its e-commerce offering outside of gambling. By the way, PayPal does not allow use of its wallet for online games.
Recentlyit become apparent that, due to a hack, data was stolen form the companys NETELLER and Moneybookers divisions. It may be true, and the hackmay have been damaging to Paysafes clients. There are few points to consider, however. 1) NETELLER and Moneybookers were competitors at the time of the alleged hack, and were both leading wallet providers for online games. If they were hacked, itis an industry problem, not a company-specific one. 2) Consequently, given the combination of the two leaders, there is actually very little competition for these wallets. Other providers are probably less secure. 3) Future for Paysafe lies mostly in e-commerce payments and expanding of thePaysafecard product. Even if the the hack did damage the gaming wallet business, the group is likely to enjoy solid growth going forward. The full recovery in the share price since the hack confirms this view.
Hence, despite its troubles and its lagging in offering of mobile and value-added products, the groupsvaluation at about 12.3x2016E EV/EBITDA is very attractive.
SafeCharge International
Just like Paysafe, SafeCharge provides an online gateway for payment processing. However, it is leading in the associated value-added services. For instance, its checkout page can minimise transaction abandon rates by learning from customer behaviour. Consequently, the company earns above-industry revenues per customer, while having high customer satisfaction. It had a zero customer churn in 2014. Although its 2016E EV/EBITDA of 14.7x looks rich, it is also enjoying growth of about 25%. I would also say it would be a good buy.
If you shy away from growth stocks, it would be understandable why these nameswould not be your cup of tea. But here at the Motley Fool, we aim for expertise in all sizes and styles. For instance, Mark Rogers — our small-cap expert — has just unearthed a company he believes has outstanding business prospects and super upside potential.
For a limited time only, you can read Mark’s exclusive research for FREE and with no obligation in his in-depth report — “1 Small-Cap Stock Flying ‘Under The Radar’“.
To read this free report while it’s still available — simply click here now!
Patrick Radecki has no position in any shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.