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The Business

In just over 14 years PayPoint has built itself up to be one of the world’s leading specialist payment companies. Now doing business in the UK, Ireland, Romania, France, the US and Canada the firm handled GBP9.7 billion worth of transactions in the last financial year for more than 6,000 clients and merchants. The company makes its money by processing consumer payments across a wide variety of markets such as energy, mobile phones, housing, water, transport, e-commerce, parking and gaming.

As it stands today PayPoint operates through three main channels:

At the core of the business is PayPoint’s Retail Network, which in the UK & Ireland numbers over 22,000 terminals. These are typically located in shops such as the Co-op, Spar, Sainsburys Local, and other convenience stores, thus allowing customers a convenient way to pay their bills. The company’s terminals are able to process energy meter pre-payments, cash bill payments, mobile phone top-ups, transport tickets, BBC TV licences and a number of other payment types for most leading utilities and many telecoms and consumer service companies.

PayPoint also provides a number of add on services, including a consumer parcel drop off and collection service through Collect+, a joint-venture with delivery business Yodel. In addition, in the UK PayPoint has over 2,000 LINK branded cash machines, mainly in the same sites as its terminals.

Elsewhere, the firm’s retail network in Romania amounts to over 5,000 terminals, again located in local shops, which process cash bill payments for utilities and mobile phone top-ups. In Ireland, PayPoint has over 500 outlets in shops and Credit Unions, processing mobile top-ups and bill payments.

The company’s Internet business, PayPoint.net, is a payment service provider linking into all major UK acquiring banks to deliver secure online credit and debit card payments for over 5,000 web merchants. Customers include the likes of Moneysupermarket.com, Severn Trent Water, Ann Summers and British Gas Home Vend. PayPoint offers products ranging from a transaction gateway, through to a bureau service, in which it takes the merchant credit risk and manages settlement for the merchants. The firm also offers real time reporting for merchant transactions and Fraudguard, a service to mitigate the risk of fraud for card not present transactions.

The third strand of the business is PayByPhone, a business which was acquired by Paypoint in March this year for an initial GBP25 million. PayByPhone is a leading international provider of services to parking authorities which allow consumers to use their mobile phones to pay parking fees by credit or debit card. The business has contracts in the UK, Canada, the US and France. PayPoint expects the deal to enhance earnings in the second year after acquisition and sees opportunities to extend the technology into other applications.

Current Trading

Paypoint’s results for the six months to 26th September showed a 6% increase in transactions compared to the same period a year earlier and an 8.7% increase in transaction values to GBP4,831 million. Overall revenues were down 3.6% at GBP92.9 million, mainly as a result of fewer mobile top-up transactions, particularly in Romania and Ireland. However, net revenues (those less commissions paid to retailers and the cost of certain mobile top-ups and SIM cards) increased 7.6% to GBP38.7 million. This came from growth in retail services and internet payments in the firm’s established business streams, as well as growth of over 100% in its developing business streams.

Operating profit at the established business streams was up 2% on the same period last year at GBP16.1 million, while the developing business streams made an operating loss of GBP1.5 million, an improvement on last year’s GBP2.1 million. Overall pre-tax profit at the group was up 5.4% at GBP14.6 million. Meanwhile, net cash at the period end (including client cash) was GBP12.9 million, down from GBP32.2 million a year earlier, partly as a result of a substantial dividend payment.

Opportunities and Risks

PayPoint has a proven business model which has consistently delivered good profits and cash generation. This provides an excellent basis on which to continue growing. For example, in the UK & Ireland the company is looking to add new content and services to attract consumers and clients. In Romania new services such as international money transfer are to be added to build on the strong position in the country.

The new developing businesses also provide exciting growth potential. In the near-term a continual roll out of the Collect+ service should benefit the UK business, while PayByPhone will be launched into new markets and applications. While bill payment in Romania, the parcels business and PayByPhone were loss making in the last financial year, they are growing strongly and are expected to generate profits and cash in the current year.

Elsewhere, a significant threat to the business is close to being removed, as in July the National Lottery Commission provisionally decided to reject operator Camelot’s plan to offer ancillary activities, including mobile top ups, bill payments and other services, through its terminals. Considering that the National Lottery has a huge network throughout the UK this would significantly increase competition in the company’s retail network business. While the final decision is pending we hear that the Commission is not going to change its mind.

Evaluation

PayPoint is a solid business both operationally and financially. The firm has built up its operations significantly since it began trading and has delivered good returns for shareholders along the way. While some shareholders will have had a rough ride, the shares being down from 2006 highs of 760p, the company has built up retained earnings of GBP67.6 million during its existence and also paid generous dividends along the way. On the financial side, the balance sheet is relatively clean, with minimal debt. And at just under GBP25 million in the last financial year the company enjoys strong net cash flow from operations.

The market is currently looking for earnings of around 36p for the financial year ended March 2011. On that basis the shares trade on a price to earnings multiple of just 9.6 times. We believe that represents very good value for a firm which has more than doubled earnings since 2005 and is expected to carry on growing steadily in the near future.

The shares also offer investors a significant income. PayPoint has consistently increased its dividend every year as a public company and should market forecasts be correct this year’s payment will be around 23.7p. At the current share price that equates to a base rate busting yield of 6.9%. With this in mind, we continue to rate PayPoint a BUY.