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Paysafe Group — Growth normalises

Paysafe Group — Growth normalises

Paysafe’s H117 results show that organic constant currency growth is moderating to low double-digit rates, after an exceptional period of growth in 2016. Profitability was strong during the period, helped by the strong growth and margins of the Asia Gateway business. The sale of Asia Gateway and the acquisition of MCPS will both help reduce the group’s exposure to online gambling, and MCPS will strengthen the group’s position in bricks and mortar payment processing.

Katherine Thompson

Written by

Katherine Thompson

Director

Paysafe Group

Growth normalises

H117 results

Software & comp services

11 August 2017

Price

583.50p

Market cap

£2,830m

€1.1/US$1.3/£

Net debt ($m) at end H117, including deferred financing fees

259.9

Shares in issue

484.9m

Free float

98.7

Code

PAYS

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.46

23.28

40.53

Rel (local)

10.82

23.35

29.48

52-week high/low

595.0p

305.7p

Business description

Paysafe Group is a global payment solutions specialist operating in three areas: payment processing, digital wallets and prepaid services.

Next events

Scheme document published

By 1 September

Analysts

Katherine Thompson

+44 (0)20 3077 5730

Dan Ridsdale

+44 (0)20 3077 5729

For the purposes of the Takeover Code, Edison Investment Research is deemed to be connected with Paysafe. Paysafe Group is a research client of Edison Investment Research Limited

Paysafe’s H117 results show that organic constant currency growth is moderating to low double-digit rates, after an exceptional period of growth in 2016. Profitability was strong during the period, helped by the strong growth and margins of the Asia Gateway business. The sale of Asia Gateway and the acquisition of MCPS will both help reduce the group’s exposure to online gambling, and MCPS will strengthen the group’s position in bricks and mortar payment processing.

Year end

Revenue ($m)

EBITDA*
($m)

EPS*
(c)

DPS
(c)

P/E
(x)

EV/EBITDA
(x)

12/13

253.4

53.1

15.1

0.0

50.2

74.2

12/14

365.0

82.9

22.0

0.0

34.5

47.5

12/15

613.4

152.6

25.6

0.0

29.7

25.8

12/16

1,000.3

300.8

42.1

0.0

18.0

13.1

Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments

Growth moderates in H117

Paysafe saw growth moderating across all divisions, with reported revenue growth of 11% and organic constant currency growth of 12% (H116: 20%, H216: 21%). Once the major merchant is excluded, this moderated to 10%. The company achieved an EBITDA margin of 31.4%, better than the company’s (pre-bid) guidance for a margin of at least 30.1%. The tax rate has trended up, as expected, as more revenues were generated in higher tax regions. Adjusted EPS increased 23% y-o-y to 25c. The company ended H117 with net debt (including deferred financing fees) of $259.9m.

Pro forma financials show potential impact of deals

Paysafe has provided pro-forma financials to show the financial performance of the Asia Gateway business (due to be sold when the takeover of Paysafe completes) and Merchants’ Choice Payment Solutions (MCPS - in the process of being acquired by Paysafe) during H117. The Asia Gateway business grew faster than the rest of the Payment Processing division, achieved a higher EBITDA margin (39.5%) and net margin (38.2%) than the Paysafe group and contributed 23% of group earnings in H117. MCPS showed 3% revenue growth, achieved a 15.0% EBITDA margin and 3.6% net margin, and if owned for the whole of H117, would have added 5% to H1 earnings before synergies.

Valuation: Reflects active payments M&A market

The formal offer of 590p is at a 9% premium to the closing price on 20 July but at a 34% premium to the volume weighted average price over the six months to 30 June, just prior to the start of sector M&A activity. Prior to 21 July (when the potential bid was announced), the stock had gained 46% year to date.

Review of H117 results

Exhibit 1: Financial highlights

$000

H117

H116

y-o-y

Revenues

538,656

486,739

10.7%

Gross margin

56.0%

53.5%

2.4pp

Adjusted EBITDA

169,242

144,180

17.4%

EBITDA margin

31.4%

29.6%

1.8pp

Adjusted EBIT

152,048

129,244

17.6%

EBIT

99,601

89,702

11.0%

Net interest expense

(10,554)

(15,151)

-30.3%

Adjusted PBT

141,494

114,093

24.0%

PBT

89,047

74,551

19.4%

Tax

(15,340)

(10,012)

53.2%

Adjusted net income

124,054

101,381

22.4%

Net income

73,707

64,539

14.2%

Normalised EPS (c)

24.7

20.1

23.0%

EPS (c)

15.2

13.4

13.2%

Source: Paysafe

Paysafe reported H117 revenue growth of 10.7% y-o-y (+12% organic, constant currency) and an increase in gross margin of 2.4pp. Adjusted EBITDA increased by 17.4% generating an EBITDA margin of 31.4%, up 1.8pp from a year ago and 1.3pp from FY16.

Exceptional items totalled $21.9m in H117, including acquisition-related costs of $1.4m, foreign exchange losses totalling $7.0m and adjustments related to contingent consideration. In H117, the share-based contingent consideration owing to Meritus resulted in a fair value loss of $12.8m. During the period, the FANS consideration was renegotiated for certain vendors, with a cash payment of $3.3m agreed in place of share-based consideration that would have resulted in the issue of 790,908 shares over a three-year period. This resulted in an exceptional loss of $1.2m. Paysafe also recognised an exceptional gain of $0.7m due to MeritCard not hitting all of its post- acquisition targets.

The reported tax rate was 17.2% for the period, up from 13.4% in H116 but essentially flat compared to H216. The adjusted tax rate of 12.3% was higher than the 11.1% in H116 but lower than H216’s 12.7% rate. Intellectual property was transferred from the Isle of Man to the UK during H117 and this had a one-off positive impact on the rate – without that the rate would have been c 14%. The company switched its tax residence from the Isle of Man to the UK on 1 August 2017.

The company ended H117 with a net debt position (including deferred financing fees) of $259.9m, down from $279.8m at the end of FY16. This resulted in a net debt/LTM adjusted EBITDA ratio of 0.8x at the end of H117, down from 0.9x at the end of FY16. Adjusted cash conversion (adjusted free cash flow as a percentage of adjusted EBIT) was 98% in H117 (H116: 74%). Before payments working capital, cash conversion was 77% (H116: 78%).

The largest customer made up 19% of group revenues, down from 20% in H116 and FY16. Excluding Asia Gateway revenues, the group grew revenues 10% on an organic, constant currency basis.

Exhibit 2: Divisional performance

H115

H215

H116

H216

H117

Payment processing

Reported revenue growth

47%

28%

34%

17%

14%

Pro forma constant currency revenue growth

7%

25%

28%

15%

16%

Pro forma constant currency revenue growth excl. major merchant

24%

33%

32%

10%

11%

Reported gross margin

37%

37%

39%

42%

42%

Digital Wallet

Reported revenue growth

20%

127%

195%

50%

8%

Pro forma constant currency revenue growth

20%

14%

28%

33%

9%

Reported gross margin

73%

73%

76%

74%

81%

Prepaid

Reported revenue growth

N/A

N/A

N/A

42%

5%

Pro forma constant currency revenue growth

12%

10%

11%

19%

9%

Pro-forma/reported gross margin

50%

51%

52%

53%

52%

Group

Reported revenue growth

40%

90%

118%

32%

11%

Pro forma constant currency revenue growth

12%

14%

20%

21%

12%

Reported gross margin

45%

50%

54%

55%

56%

Source: Paysafe

Payment Processing

Payment Processing showed strong constant currency organic growth of 16% in H117. Excluding the major merchant, growth was 11%, moderating from the 32% achieved in H116 but similar to the 10% reported in H216. Volumes processed of $12.4bn were 10.7% higher than a year ago; the take rate of 2.1% was flat year-on-year. Gross margin increased year-on-year but was flat versus H216.

Digital Wallets

Digital Wallets also saw a moderating growth rate: in H117 constant currency organic growth fell to 9% from 28% in H116 and 33% in H216. Several factors reduced the growth rate: a) the company withdrew from servicing online gambling in Japan for regulatory reasons; b) the issuance of pre-paid cards was restricted in non-SEPA countries; and c) more rigorous KYC measures were enforced. In addition, 2016 saw the benefit of the UEFA championships and volume growth from the addition of new territories and payment methods. Volumes processed in H117 of $10.7bn were 6% lower than a year ago, although the take rate increased to 1.5% from 1.3% as a result of fee increases enacted over the last 12 months. Additionally, revenues from Income Access (acquired September 2016) and card issuing do not generate transaction volumes. Gross margin saw a significant uptick (81% vs 76% in H116 and 74% in H216), helped by the termination of lower-margin business and lower bad debts.

Prepaid

The Prepaid division achieved organic constant currency revenue growth of 9% in H117, down from 11% in H116 (once the impact of discontinued Ukash business is excluded). Volumes transacted were flat year-on-year at $1.4bn, with the take rate increasing marginally to 7.7% from 7.6% a year ago. Gross margin was substantially unchanged compared to H116 and H216.

Pro-forma financials

The company also provided pro-forma financials for H117 for the Asia Gateway (due to be sold at the same time as the takeover) and Merchants’ Choice Payment Solutions (MCPS – agreement to acquire announced 21 July).

Exhibit 3: Pro-forma financials for H117

$m

Paysafe

Asia Gateway

MCPS

Pro-forma group*

Revenues

538.7

76

167

629.7

Adjusted EBITDA

169.2

30

25

164.2

Adjusted EBITDA margin

31.4%

39.5%

15.0%

26.1%

Adjusted EBIT

152.0

29

18

141

Adjusted EBIT margin

28.2%

38.2%

10.8%

22.4%

Adjusted net income

124.1

29

6

101.1

Adjusted net margin

23.0%

38.2%

3.6%

16.1%

Source: Paysafe. Note: *Paysafe plus MCPS minus Asia Gateway.

The Asia Gateway grew revenues 20% y-o-y in H117 and generated an EBITDA margin of 39.5%, which implies that the remaining Paysafe business generated an EBITDA margin of 30.0% in H117. The Asia Gateway business paid no tax so generated a strong net margin of 38.2% compared to the group net margin of 23.0%.

MCPS saw growth in pro-forma revenues of 3% y-o-y in H117 and generated an EBITDA margin of 15%. MCPS incurs a higher tax charge than Paysafe as it is US-based. As previously stated, Paysafe is targeting annualised cost synergies of $7.5m by the end of FY18. This acquisition will substantially increase the proportion of Payment Processing revenues from bricks and mortar stores.

Exhibit 4: Financial summary

$'000s

2013

2014

2015

2016

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

253,367

364,954

613,392

1,000,282

Cost of Sales

(121,484)

(187,298)

(316,922)

(457,420)

Gross Profit

131,883

177,656

296,470

542,862

EBITDA

 

 

53,106

82,946

152,620

300,825

Company EBITDA

 

 

52,213

85,965

152,563

300,825

Operating Profit (before amort acq intang, SBP and except.)

42,888

71,257

133,201

268,251

Amortisation of acquired intangibles

(3,300)

(9,200)

(31,900)

(51,900)

Exceptionals

(1,368)

7,219

(60,986)

(8,249)

Share-based payments

(4,512)

(8,274)

(14,089)

(13,726)

Operating Profit

33,708

61,002

26,226

194,376

Net Interest

(995)

(2,024)

(14,418)

(26,383)

Profit Before Tax (norm)

 

 

41,893

69,233

118,783

241,868

Profit Before Tax (FRS 3)

 

 

32,713

58,978

11,808

167,993

Tax

(1,235)

(1,303)

(4,405)

(25,972)

Profit After Tax (norm)

40,311

67,703

108,686

212,968

Profit After Tax (FRS3)

31,478

57,675

7,403

142,021

Average Number of Shares Outstanding (m)

252.2

277.7

399.8

483.6

EPS - normalised (c)

 

 

15.1

22.0

25.6

42.1

EPS - FRS 3 (c)

 

 

12.5

20.8

1.9

29.4

DPS (c)

0.00

0.00

0.00

0.00

Gross Margin (%)

52.1%

48.7%

48.3%

54.3%

EBITDA Margin (%)

21.0%

22.7%

24.9%

30.1%

Company EBITDA Margin (%)

20.6%

23.6%

24.9%

30.1%

Operating Margin (before am and except.) (%)

16.9%

19.5%

21.7%

26.8%

BALANCE SHEET

Fixed Assets

 

 

65,551

295,955

1,569,269

1,552,326

Intangible Assets

53,231

284,723

1,548,253

1,518,445

Tangible Assets

12,320

10,114

18,492

23,452

Other Fixed Assets

0

1,118

2,524

10,429

Current Assets

 

 

184,490

177,275

259,045

420,313

Cash & cash equivalents

 

 

164,379

109,893

117,875

231,157

Restricted NETELLER cash

 

 

6,198

8,777

29,070

31,854

Cash held as reserves & settlement assets

 

 

0

38,607

66,341

100,459

Receivable from Members & Merchants

 

 

0

0

0

0

Trade and other debtors

 

 

13,913

19,998

45,759

56,843

Current Liabilities

 

 

117,634

114,410

170,943

232,617

Creditors

107,524

58,240

121,070

175,464

Payable to Members/Merchant liability

0

30,591

16,758

18,547

Short term borrowings

10,110

25,579

33,115

38,606

Long Term Liabilities

 

 

801

150,498

582,804

521,788

Long term borrowings

801

107,205

494,410

456,570

Other long term liabilities

0

43,293

88,394

65,218

Net Assets

 

 

131,606

208,322

1,074,567

1,218,234

CASH FLOW

Operating Cash Flow

 

 

94,542

42,699

91,711

278,487

Net Interest

(158)

(1,873)

(8,403)

(12,459)

Tax

(1,191)

(1,564)

(4,929)

(10,186)

Capex

(13,567)

(11,094)

(23,721)

(53,698)

Acquisitions/disposals

(5,281)

(169,192)

(1,102,070)

(43,827)

Financing

1,188

(4,939)

670,173

(13,482)

Dividends

0

0

0

0

Net Cash Flow

75,533

(145,963)

(377,239)

144,835

Opening net (debt)/cash

 

 

85,829

118,389*

(22,891)

(409,650)

HP finance leases initiated

0

0

0

0

Other

(1,697)

4,683

(9,520)

796

Closing net (debt)/cash

 

 

159,665*

(22,891)

(409,650)

(264,019)

Source: Paysafe. Note: *Does not match as method of reporting was changed.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Paysafe Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Paysafe Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Investment Companies

Schroder AsiaPacific Fund — Strong returns from established Asia specialist

Schroder AsiaPacific Fund (SDP) invests in markets across the Asia Pacific region (excluding Japan) with the aim of achieving capital growth. Managed by Matthew Dobbs since launch in 1995, the trust is the largest and among the most liquid in its peer group. It has produced top-quartile NAV total returns over one, three and five years, also beating its benchmark MSCI AC Asia ex-Japan index over one, three, five and 10 years in both NAV and share price terms. In spite of this, it trades at a wider discount than the peer group average. The manager focuses on companies with visible earnings growth, strong management, sustainable cash flows and valuation support. While sector and geographical weightings are an output of stock selection, there is a significant allocation towards Greater China and the information technology sector. Reflecting the growing level of dividends from Asian companies, SDP has a yield of just over 1%.

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