@edgescape I saw your straw on noticing the Smartpay terminal at a Chatswood restaurant. It's funny that you've noticed that as I've noticed lots of small businesses and especially cafes adding a surcharge to any card transaction whether it be a tyro, westpac or commbank terminal. I'm not even talking about an automatic surcharge, they literally add up the order on the cash till and then manually input a higher value on the eftpos machine. I think because they do this already there is a good change the shop could even sneak in a slightly higher margin into the sale regardless of not having to directly pay SMP anything. How is a customer to notice an extra 1% but an extra 1% on $10k transactions, 7 days a week adds up over a year. ($36,000?!?)

Anyway...

Thought there was also a cool opportunity on the website to refer a business. Seems like a pretty easy process to sign up and refer businesses. Might buy some shares and start asking every business in my neighbourhood if they want to save some money on merchant fees and take my $100 referral bonus on each signup. Also cute that this payment is processed by $EML.

If I can personally get 100 businesses to sign up then there's $10k for me to invest back into SMP and a few hundred thousand in extra revenue for SMP to pay me back as a dividend. All tongue in cheek here but not the worst investment strategy.

After listening to the @Noicewon pitch the other day, I've slowly gone away and researched this stock. It's an interesting one, but I'm going to play devil's advocate a little and present some bearish questions I have about the business. If anyone can help (doesn't have to be Reece), I'd be glad to hear.

1. SMP is currently trading at ~6x trailing revenue. TYR is closer to 8x. This doesn't strike me as particularly cheap, especially considering TYR has gross margins of almost 50% compared to SMP 20-25%. Why are the gross margins so different? Is there any reason we expect these to converge in the future?

2.  @Noicewon noted in his comments on the ann report that they brought forward some depreciation expenses and this contributed to the annual loss. D&A has been fairly steady since 2018 at roughly $3M p.a. so is there any reason we expect this to be less going forward.

3. I'm not sure what a realistic net margin would be for SMP (it will likely increase as the number of terminals installed grows), but if they can continue top-line growth of 30%, in 5y they will have revenues of $120M. If we assume they manage to achieve EBIT of $12M (10% net margin), that puts them on a 15x FY2026 EBIT multiple, which seems in the range of "normal". Thus, the current valuation already prices in a fair bit of future growth. 

So, for those of you that think SMP is attractively priced, have I made any logical / valuation errors? Are my assumptions around growth and margins too conservative, and if, why? 

I am guessing as I am not a business owner using SMARTPAY that it would operate as other terminals do where they say (sign) this incurs a % surcharge when using just as one sees with VISA, MASTERCARD, AMEX etc. You then tap and the invoice includes the surcharge. Clearly SMARTPAY is resignating with businesses as they are growing market share. I am guessing that if businesses thought customers felt this was an issue, they would not be using SMARTPAY. I think the thing to remember is just because another companies terminal charges the business and not the customer it would be naive to think they are not passing this cost onto the consumer through their product pricing, as such, I actually see this as a more transparent option for the consumer. With such a small market share and impressive growth characteristics it definitely is not the worst Small Cap one could invest and I think its a nice short to medium term play as the realistic TAM might not dictate this to be a long term hold.

@Noicewon11 – sorry mate, I will make the rebuttal here and play devil’s advocate to your recent straw. Not only because I think that’s why we all love Strawman – to challenge existing ideas – but in this circumstance I think there are some issues labelling SMP 'disruptors'. 

“Smartpay have identified the Australian SME market as relatively unserved to a satisfactory level by the Australian banks. The rapid growth of the Australian acquiring revenues reflect this.”

Fair enough. Agreed with this point.

“Tyro is arguably SMP's biggest competitor other thank the banks with 63,000 terminals. Similarly, Tyro have a banking licence which means their main focus is associated with loans to SME's rather than the terminals side of the business. Tyro also had a technology 'bricking' issue a few months back which may have sapped the energy from their customers, whom lost their terminal access for a few days.”

Here is where I disagree. Tyro’s core offering has been to provide EFTPOS solutions to Australian businesses. After achieving impressive growth, they looked to address merchant issues – specifically lack of integration between the payment device and the point-of-sale (POS) software operated by the merchant. Tyro has since become the preferred POS partner in Australia and now integrates with over 200 POS software providers – more than another other bank. It also has a partnership with another top 10 bank (Bendigo) – which has resulted in Tyro exclusively providing merchant acquiring services to Bendigo Bank’s existing merchant acquiring customers.

Tyro has already disrupted the industry. They are the largest EFTPOS supplier outside the ‘big four’ and have first-mover advantage disrupting the industry. Their EFTPOS services (to rent) blow the big banks out of the ball park for price and customer service, and have resulted in significant market adoption for the company in recent years.  

The company’s recent H1 FY21 results showed a 13% increase in merchants – 36,720 up from 32,450. This is over the same period that Tyro experienced the technical issues – which were an awful look for the company and shareholders, don’t get me wrong, but one that the company can learn and recover from. In comparison, Smartpay’s increase was 400 in approx. a quarter.

As always, would love to hear the thoughts of others. And to be clear, I am not saying that SMP won’t have a good crack at stealing market share from Tyro (or Square – don’t forget they are also in the industry), but they aren’t the ‘disruptors’ in Australia. Tyro is!