As covered by @mikebrisky the results were unsurprising and outlook uninspiring. On the basis of this I have updated my valuation to pull back revenue growth expectations (to around 2x from 3x by 2030) and long run EBITDA% down from just under 50% to just over 40% to reflect reduced operating leverage and some stalled growth.

Value: $1.55 (down from $2.33 12/10/21) details: PPH Valuation 110522.pdf

Like @mikebrisky I will continue to hold as reasonably valued, comfortable that strong free cash flows protect the downside and hopeful that they find the magic to make it work in the Catholic sector, but I am no longer looking for high growth, looking at it now from more a value perspective.

Regarding the move of IP ownership to the US, I welcome the tax benefit and reflect that it is a recognition that this is now a US company not an NZ company. You have to ask how much longer will it be listed in Australia?

Disc: I hold in RL

Key Notes on Half Year Result (to complement @shivrak & @Slats notes):

The Good:

·       Gross Margin improved from 68.2% to 68.7% (PcP) - small but powerful change. Due to subscription revenue (92% margin) increasing from 27.9% to 29.2% of revenue and a small tick up in Processing margin.

·       Annual Revenue Retention Rate over 110% average for last 5 years maintained.

·       Free Cash Flow of US$30.6m is 32.7% of sales, the highest it’s been, up from 31.6% FY21 and 30.8% PcP. Debt of US$90m was added for the Resi acquisition of which US$7m was paid back in the period and net cash position was -US$75.3m debt, but the business is producing cash at an increasingly fast rate so this should easily be paid back in 2 years.

·       Customers grew 29% and products 43% but mostly due to addition of Resi. Without Resi products were up 10%, I couldn’t see how many unique customers Resi added. ARPC increased 7% if you exclude Resi, but down 8% in total due to lower ARPC for Resi customers

The Ok:

·       Revenue up 9% to US$93.5, up 7% if you exclude the Resi Media addition.

·       NPAT of US$19.1m up US$5.7m or 43% PcP. Note FX gains/loss favourable variance of US$5.6m is the key difference.

·       Total Processing Volume of US$3.5b was up 9% PcP of US$3.2b, but down on prior half of US$3.7b. Due to the seasonal nature of giving, the drop on the prior quarter is fine. Note Q1 volume was disappointing but Q2 recovered strongly. Margin on Processing up fractionally from 58.6% to 58.8% and Revenue as a % of TPV was also constant at 1.9%.

·       EBITDAFI US$26.9m up 12%, but EBITDAFI% down to 29% from 31% PcP and 34% for FY21 (for some reason this was not highlighted in the announcement… but note “Underlying EBITDAFI” was 32% up from 31% PcP – due to Resi acquisition costs and government grant variances).

The Bad:

·       Outlook downgrade to EBITDAFI of US$60-65m down from US$64-69m with commentary highlighting continued uncertainty from Covid impacts – market no like!

·       Operating expenses increased to 40% up from 34% H2 FY21 and 38% H1 FY21. Excluding Resi transaction costs it was consistent with PcP at 38%.

·       Months to recover CAC of 24.3 is up massively from 15.4 (PcP) reflecting the higher marketing spend as well as a higher proportion of sales to smaller customers in the period.

·       staff costs have increased higher than originally anticipated, as we respond to the competitive environment. Headcount up 24% to 547 but would have been down 17 without Resi additions.

Quotes on COVID impact:

Despite pressures that have been felt globally from the COVID-19 environment, Pushpay has not seen any material change in digital giving reverting to non-digital means, indicating that our Customers in the US faith sector may have undergone a fundamental technological shift as a result of the current environment.

We have also seen ongoing impacts from the COVID-19 environment, with consolidation of some churches, particularly in the small segment, and slower decision making on new subscriptions, particularly over the US summer holiday period

Conclusion: The market has punished the share price due to the earning downgrade and a lack of conviction in management commentary about even reaching the downgraded figure.  I had hoped for stronger growth and will have to pull back my valuation forecast which is clearly overly optimistic with a back of the envelop adjustment to $2.33 down from $2.72 due to FY22 sales variances. 

It’s still a great long-term hold in my view, the cash generation and long-term growth focus of the business underpins its value but on a PE of 52 on the H1 result (yesterday’s price) you have to have a lot of faith in it’s growth to see the value.

Disc: I own PPH (RL)

Commentary on the company is in the valuation, below is a walk-through key assumptions and reasoning for the attached valuation. Note the DCF is done in US$ and converted to A$ IV at 0.75.

IV = A$2.72 (base case)

Assumptions:

·        Sales Growth: I expect the 40% sales growth of FY21 to be repeated in FY22, mainly due to the addition of Resi before dropping back to 20% in FY23 and trailing down to 3% over the coming 10 years. Subscription income I expect to remain in the mid to low 20% of total income, with Processing income providing 70%+ of income going forward and Resi based products only a modest part of the business but a key part of the package.  To reach the US$695m revenue I forecast by 2030 (almost 3x current) they will have to dominate the TAM for Church and Catholic sectors as well as expand into other areas like schools as they suggest.

·        Margins: I expect the addition of the Resi business brings average margins down due to higher cost of delivery than platform and payment services. However, I see improved margins in payment processing which dominate revenue as mitigating.  Payment Processing margins have improved from 42% in FY18 to 59% in FY21 and I expect they will creep slowly higher to 63% by 2030 with volume efficiencies.  Revenue as a % of TPV has improved from 1.6% in FY18 to 1.9% in FY21, I expect this to lift to 2.0% and stay around that due to competitive pressure.  The combined total margin for the business from these expectations remains in the 67-68% range, slightly down on the 68.1% in FY21 (ignoring grant income).  

·        Opex:  The company intends on balancing growth and cash generation going forward, so I expect to see operating leverage improve with scale. Hence, I have forecasted operating costs to grow at around half the rate of sale with a 4% minimum.  This improves the EBITDA% from 32.5% in FY21 to 48.8% by FY30.

·        Capex & Cash: This is a capital light business, very little (386k in FY21) of cash is needed for fixed assets or capitalised development costs, making for very strong cash flows.  Debt of 110m has been taken up for the acquisition of Resi, but like the debt raised for the purchase of Church Community Builder in 2019 this will be paid off in two years from free cash flows.

·        Share count: In addition to the 35m shares issued for the Resi purchase I am allowing an increase of 1% in share count for ESOP.  This assumes future share issues for purchases will be value accretive on a per share basis.

·        TV & Discount: A CAPM calculation gives discount rates moving from 7.42% in FY22 to 8.68% in FY31 increasing the risk-free rate from 1.8% to 3.5% over the period. However, I will revert to my standard approach of applying a 10% discount rate which reflects general market return rate expectation over the long term and my minimum required rate of return.  Terminal EV/EBITDA used is 10, which equates to a PE of 13.8 and a perpetual growth rate of just under 3%, which should not be demanding for a mature profitable business.

·        Risk & Opportunity: I am discounting by 5% for risk of failure which I see as very low given the maturity of the business, strong positive cash flows and support from the capital markets. In terms of opportunities, I have added a 20% premium for the opportunities that exist in both bolt on acquisitions but mostly due to market expansion such as into schools and international opportunities.

This is not a 10-bagger opportunity from here, but assuming the IV is correct it will produce a 16% return, so a market beater.  I see it as under valued for the quality of earnings and opportunity it has ahead of it, but value will not be reflected in the share price until the business proves to the market that it can grow beyond Mega Churches that have driven growth to date but now represent an exhausted opportunity.

PPH is my second largest holding, I may trim for portfolio balance at a price spike above $2 without additional value accretive news but am otherwise a contented long-term holder