UMT — Update 10 May 2016

UMT is at an exciting point in its history. In June, the international loyalty scheme Payback will launch its UMT-powered mPay service in Germany. Over the last year UMT has been installing and beta testing its mPay-enabling upgrade of the point of sale (POS) systems of the largest retailers in the German part of the scheme, such as Galeria Kaufhof (a department store), dm-drogerie markt (Germany’s largest drugstore/retail chain), REWE, BP and the hypermarket chain real. With the launch, which will signal the start of the multi-year platform contract with Payback, mPay should go live in these outlets. By end-2017 we see good prospects for UMT to have extended the system to cover the whole scheme, representing a 45% share of the German retail market.

We also understand that UMT’s platform will be allowed to bundle, resell and undertake analytics on the anonymised data passed across the platform, without charge, enabling the potential addition of a major new revenue stream. We expect the launch of Payback’s mPay system to help UMT to seal further white-label mPay contracts with other B2B and B2C operators, which should boost the group valuation.

In the absence of published consolidated accounts, we have not been able to undertake a valuation of UMT. Were we to, we believe at this early stage the best form of valuation method would be DCF. From this perspective, the key valuation drivers will be the roll-out of the Payback contract in Germany, the planned expansion into big data analytics, winning new clients helped by the company’s existing pipeline of prospects and expansion in other Payback geographies. We also see the potential for UMT to attract takeover interest as the FinTech sector consolidates. Also the company may come to the market for equity funding over the next 12-18 months.

UMT reports in German GAAP in unconsolidated form. In the absence of consolidated accounts, we have not published forecasts for the group. Since 2012 the parent company has been profit-making but the most recent data for FY14 show that at least one associate was in loss. UMT AG raised €1.4m from an equity issue in May 2015 to fund working capital. As of end-2015 the company had €1.7m in cash and €2.2m debt on its balance sheet (we understand €1.5m of that is a shareholder loan), resulting in a net debt balance of €0.5m. We understand that UMT’s revenues for the last year have been dominated by consulting and set-up fees relating to the Payback contract. Over the life of the first Payback revenue cycle, which began in 2014 and should extend several years from launch of the platform, management expects revenues from set-up fees, maintenance/other platform fees and volume based commissions to comprise around one-third of the total.

Key sensitivities for UMT include the potential risks of its white-label strategy (ie lower share of merchant fees, contract non-renewal risk vs branded) and UMT’s high customer concentration with regards to major client, Payback. Nevertheless, the white-label strategy gives rise to the potential to leverage the data crossing UMT’s mPay platform into a big-data business. mPay businesses such as UMT’s are sensitive to ongoing pressure on interchange fees for credit and debit cards. The mPay market is also highly dynamic with tech majors such as Apple, Google and Facebook jostling for dominance. We see the possibility for the market to misunderstand the group’s financial position given the lack of published consolidated accounts. We also believe there is potential for the company to come to the equity market for more funding to maintain a safe cash cushion.

UMT is the operator of a proprietary mobile payments and loyalty platform. It took its current form in 2011 and listed on the Deutsche Boerse’s Entry Standard segment in July 2012. The business started out on its current path in 2010 when software developer Robert Schmiedler approached Albert Wahl, the CEO and founder of Munich-based venture capital company GCI Management, with an idea to build a better mobile payment system. One year later the company launched iPAYst, an easy-to-use mPay and loyalty rewards platform. In 2014, PwC awarded UMT’s mobile payment platform “best mobile payment product” in a review of the German mPay market.

In November 2014 UMT won a tender against global giants PayPal and Apple Pay to provide a white-label mobile payments platform in Germany for Payback, the Amex-owned loyalty scheme with 28 million members. It also won preferred partner status for later roll-out to Payback’s other loyalty schemes with 47 million more customers worldwide. With the launch of the Payback scheme the company should generate start-up, platform maintenance and volume-based commission revenues. UMT is also tendering to create B2C and B2B mPay platforms for businesses and associations across Europe as well as preparing to launch data products based on data crossing its platform. The group has five key subsidiaries/affiliates: UMS United Mobile Services GmbH (100%), the group’s tech innovator and developer of its mPay platform; Mobile Payment Systems Espana SL (70%), iPAYst Riga (100%) and UMT Turkey (26%), founded to sell the group’s mPay platforms in Spain, Italy, Central Europe and Turkey, respectively; and a 20% stake in the Spanish data-analytics company SEKS, with the right to increase this shareholding to 100%.

UMT’s key strategic objectives are:

CEO Dr Albert Wahl has extensive experience in engineering, banking and start-ups. Before founding the consulting and venture capital firm GCI Management in 1997, he was employed at BMW, IBM and Deutsche Bank. CIO, Erik Nagel has extensive banking experience. CTO Robert Schmiedler joined UMT in 2010 and developed the iPAYst concept. Previously, he worked at gaming and travel websites, bwin and HitchHiker. CBDO Alexander Franckenstein has experience and understanding of tech investments and financial markets via the fund management industry.

We define the mobile payments market in the discussion below as the payments for goods or services with a mobile device, either online or in-store, excluding the money transfer segment.

Payment by mobile device has taken off in the US over the last year, growing from $11.4bn in Q315 to $15.6bn in Q415. Business Insider forecasts in-store mobile payments in the US to grow from $37bn in 2015 to $808bn in 2019, representing an increase from 0.2% to 4.5% of 2015 GDP. It forecasts the proportion of the population making mobile payments to rise from 8% in 2014 to 65% by 2019 driven by the vast expansion of mobile wallet payment systems, such as Apple Pay, Samsung Pay and Google Wallet. Looking at mPay within e-commerce (rather than in-store transactions) Forrester projects revenues in the US to grow from $15bn in 2015 to $252bn by 2020.

We think it likely that Germany, and to a lesser extent the EU, will maintain pace with the US in mobile payments adoption given similarities to date in the m-commerce share of e-commerce (c 29% in the US and Germany, and >25% in all major EU countries (source Criteo)) and the efforts being taken by the EU to create a more level playing field for payment service providers (PSPs). On this basis, assuming that in-store mobile payments grow to 4.5% of current GDP, as indicated by Business Insider for the US, German and European mobile payments could rise to €136bn and €658bn, respectively in 2019. A similar treatment of Forrester’s mPay forecast implies a mobile payments market of €178bn in Germany and €863bn in the EU in 2019/20.

Helped by the enormous boost provided by the Payback program (our forecast of €8.9bn mPay transactions in 2019/20 = 5.0% of the above German market forecast), we believe that UMT has the potential to power an 8% share of the German mPay market by 2019. Added to the planned roll-out of Payback in Italy and Poland we believe it has the potential to power c 3% share of the EU market, or €26bn, in 2019/20 helped by growth at its existing operations Spain and Central Europe.

According to PwC research a key barrier in the uptake of mPay has been the difficulty in convincing consumers that it is more convenient than a cash or card payment. As a result, successful platforms such as Starbucks, have had to, in some way, incentivise customers to use them. According to Deloitte, consumers have also been deterred by multiple fragmented technology and a focus on features versus benefits. UMT’s platform has been designed to address these concerns with the following features:

It also has significant advantages for merchants:

A key part of UMT’s success in achieving the above has been its decision to undertake native integration of its software into the merchant’s IT infrastructure. By undertaking all the “heavy lifting” at the merchant end, it has enabled quicker processing times, a simpler staff and customer interface and uniform functionality across stores.

Before switching to its white-label strategy UMT honed its mPay product with merchant deals in the DACH region (Germany, Austria, Switzerland) as well as Spain, Turkey, Italy and Latvia. Customers included luxury restaurant chain, Kuffler Group, Loden-Frey, a Munich department store and the Four Seasons Hotel, Munich. As mentioned above, Ernst and Young rated iPAYst in the top three “best in class” mobile payments operators in June 2014 with iPAYst rated highest in terms of overall B2B and B2C functionality. The move to a white-label strategy reflected the realisation that creating a branded product would mean loss of control to a partner to fund heavy marketing spend.

The Payback loyalty scheme came into being in Germany in 2000 and was later rolled out in Poland (2009), India (2011), Mexico (2012) and Italy (2014). Amex acquired Payback’s parent company Loyalty Partners in 2011 and in 2015 it launched a similar loyalty scheme in the US owned directly by Amex, branded Plenti.

In November 2014 UMT won a tender to operate the mPay platform for Payback Germany as well as Preferred Partner status for expanding coverage to the rest of the Payback programme with its total 75 million active users. The platform is set for launch in Germany before the end of H116 where Payback has 28 million active users, or 41% of the adult population. Payback’s scheme is by far the largest loyalty programme in Germany (bigger than Nectar in the UK), dwarfing the second-largest player with eight million subscribers, DeutschlandCard run by Bertelsmann.

Payback Germany has over 650 online and offline partners, representing c 45% of the retail market share. They include giants Galeria Kaufhof, ARAL, REWE, dm, real, Lufthansa and Burger King. Online stores include ePay, ToysRUs and Bonprix. In 2015 the scheme generated 20bn coupons, its cards were swiped for sales of €27bn and points were collected worth €338m, of which 95% were redeemed.

Currently, prior to the launch of mPay, customers register online for the Payback loyalty card and either collect paper coupons or activate e-coupons online or with the Payback app for use in stores. The loyalty card and paper coupons, if applicable, are presented at the POS to have the points credited to the customer’s account or to redeem points.

The system has already been heavily digitised, with 18bn of the 20bn coupons issued in 2015 in electronic form. Being able to activate coupons while out shopping has also made the Payback app a popular service and it has already been downloaded by 8.5 million (29%) of scheme members.

With the move to mobile pay, powered by UMT, customers will not need to download a new app. Instead, they will see a new button appear on their existing loyalty app, which they can use to pay at Payback partners after registering for their preferred payment method. This can be via debit or credit card or from their bank account by SEPA mandate. UMT’s software will also enable payment by vouchers and promotion redemptions as well as cash withdrawals. It will also allow users to keep track of their points on the Payback app for the first time, rather than via in-store terminals.

We think the features of the Payback/UMT mPay system bode well for the rapid adoption of mPay by a sizeable proportion of scheme members. We forecast Payback to have 2.6 million mPay users by the end of 2016 rising to 5.2 million by end 2017 based on the following:

We also see good prospects for UMT to continue as Payback’s platform operator after the end of its current contract term. This is because in addition to the merits of its system, UMT is likely by then to have embedded its mPay technology into the POS systems of Payback’s partners worldwide.

UMT is actively tendering for mobile payment contracts across the B2C and B2B spheres. We understand that the group has six companies in workshops and 13 with which it has letters of intents and non-disclosure agreements. UMT has been helped in this by a new partnership from January 2016 with Spanish IT solutions house GTD, which has strong links in the airlines, maritime and infrastructure industries. Prospects include:

Using data flowing across its platforms UMT hopes to generate significant revenues from providing retailers with insights into the payment habits of their target markets, including retail type, location and time of transaction.

In preparation for this, in September 2015 UMT acquired a 20% stake (with a right to increase this to 100%) of SEKS – Serial Entrepreneurship Knowledge Society, a private data analytics operation in Spain. The company is headed by a team of three big data veterans with experience at the European Space Agency and EADS. To give an idea of the potential ballpark revenues of the business we have applied a current rule of thumb in the market for third-party data of c $3 per 1,000 data impressions. So, for example, if a retailer wanted to look at data relating to men between the ages of 25 and 50 and this applied to 15% of UMT’s overall 2.6 million mPay user points, the fee at $3 per 1,000 impressions would be $1,170. By 2019 with an assumed 11.5 million users the company could attain over $5,000 for the same search request, assuming the current price metrics still apply, leading to $500k revenue for 100 such searches.

One potential headwind facing big data companies in Europe is the intention of the EU to pass new EU-wide legislation reforming data protection rules in 2018. The agreed text states that “in assessing whether consent has been freely given, account shall be taken, for example, of whether the performance of a contract is made conditional on the consent to processing data that is not necessary to perform that contract” (source: Allen & Overy, January 2016). It is conceivable that this could be used to allow consumers to opt out of allowing app providers to process their data for any other purpose than executing their transactions. If passed in this form, the legislation could potentially substantially reduce the availability of usable customer data from the UMT platform.

The key sensitivities for UMT are as follows:

As discussed above, in the absence of consolidated accounts we have not attempted a valuation of UMT. Nevertheless, we believe there are a number of value-driver milestones that we expect to impact valuation over the next two to three years.

UMT reports its accounts according to German GAAP in unconsolidated form. We understand the parent company, UMT AG, reports the bulk of group revenues, with a large proportion of expenses reported within subsidiary UMS United Mobile Services. Helped by this, UMT AG has consistently reported net profits over the last two and a half years, with net income in 2014 and H115 of €121k and €605k, respectively, principally from consulting work and set-up fees. The most recent data for UMT’s five associates shows that 100%-owned UMS United Mobile Services reported a FY14 loss of €2.2m. The three other associates with operations in 2014 made losses of less than €100k each in 2014.

We understand that the bulk of UMT AG’s revenues over 2014 and 2015 have been derived from set-up fees and consulting work, the bulk of which has related to the Payback contract. Set-up fees are set to drop in 2016 with the completion of much of the work. For the life of the multi-year Payback contract (starting from payment launch) but including these prior year set-up fees UMT expects to generate c 70% of revenues from set-up, maintenance and platform charges (which are likely to be €0.5-1.0m pa), and c 30% from transaction fees. We expect the latter to grow to over €1m per year from 2019 (see table below) reflecting strong growth in mPay user numbers. We also see it as likely that UMT’s set-up revenues will be augmented over the next 12-18 months with new client wins. UMT looks to derive c €1-5m set-up fees for larger retail chains and €0.25-1m for SMEs. Helped by this the company targets €4-5m revenues for 2016 rising to €7-8m in 2017.

We understand that management tendered very competitively for the Payback contract because of the potential for it to further its winning of new business and big data revenues. The high degree of scalability of UMT’s platform nevertheless leads us to expect margins on the commission stream to grow strongly from a low base over the course of the contract, leading to a gradual increase in the margins of the overall contract. We also expect the work already done for the Payback contract (eg placing software in different branded POS systems) to enable the group to generate higher margins on new mPay contracts. UMT targets EBIT margins of 30-35%.

Under the Payback contract, UMT will be paid an undisclosed fixed annual fee for processing mPay transactions, and then tiered commissions of 1-2bps above an agreed commission free level.

We have modelled potential transaction volumes for the German Payback scheme for the 2015-2021 period in Exhibit 2. We have assumed a 6% increase in Payback’s active card users (ACUs) this year and 4% next year and a 1% CAGR thereafter. We assume that the proportion of Payback customers who have downloaded the loyalty app increases from the end-2015 29% to 70% in 2021, driven by increased migration of internet traffic to smartphones and the convenience of e-coupons on mobile devices. We assume the proportion of these customers using Payback’s mPay rises from 25% at end-2016 to 80% by end-2021, equivalent to 56% of total ACUs (conservatively below Business Insider expectations of mPay use in the US at 65% of the population in 2019), with early adopters giving way to the ‘late majority’ as the technology becomes better known and near field communication (NFC) use become ubiquitous.

We assume 1% CAGR in annual purchases per ACU over 2016-2021 from €993 in 2015. Payback recently reported that users downloading the app have increased purchasing activity by 7% and redeem 50% more coupons than the reference group. We have therefore assumed that mPay users will spend 10% more than cash/credit card customers, as we expect them to be slightly more active than standard app users. We also assume that in 2016 only 40% of the user spend is executed using mPay, reflecting the staggered roll-out across all of the stores in the programme, but this rises to 70% the following year and 80% thereafter. This gives rise to our forecast €0.3bn in transaction revenues on the platform in 2016, rising to €3.0bn in 2017 and €12.1bn in 2020.

On this basis, we estimate potential commission revenues for UMT up to €0.6m in 2017 and €1.2m in 2018, applying the maximum 2bp commission fee to our estimate of platform transaction volumes. This assumes that UMT’s contract with Payback spans this period and has a zero commission-free base revenue. An assumption of a higher base would reduce this total.

As of 31 December 2015, UMT AG had unconsolidated net debt of €0.5m, comprising total cash reserves of €1.7m and debt of €2.2m, which we understand includes a €1.5m shareholders’ loan from SWM Treuhand AG, the vehicle of CEO Albert Wahl. With shareholders’ funds of €16.1m, this represents a 3% debt to equity ratio.

At the parent company, cash flow absorbed by operations improved from €2.5m to €1.3m in 2015. Cash reserves nevertheless rose €0.4m to €1.7m helped by a €1.4m share issue in Q215 and sales of treasury shares. Management has guided for investment at the parent level in 2016 and 2017 of €1m and €2m and across the group at €2m and €3m, respectively, for R&D, expansion of the salesforce and pipeline pre-financing. This leads us to believe UMT may need to increase its cash reserves over the next 12-18 months to finance the ongoing expansion of its business and maintain a safe cash cushion.