Disclosure - Held.

Initial note - SMP report on the NZ reporting calendar, hence the DQ is their Q3FY22.

Unit = Payment terminal

Smartpay has reported a very strong result in the wake of eased lockdown restrictions across the country.

In fairness, the business's financials showed resilience that I didn't personally expect over the Q2 period (where nearly all of the countries population were locked away) and thusly it was foreseeable to anticipate SMP cycling out weak sequential financials.

Smartpay's growth is a unique contribution of two vital factors at play. Namely:

Growth in the number of terminals deployed:

(see the blue line)

But arguably a bigger contributor, the average revenue per unit (on deployed units):

When I first invested in the company my investment thesis played strikingly on the number of terminals that were able to be deployed across the country.

At the time, the average RPU didn't seem such an important metric and was around $3,000 RPU at the time.

Now the emergence of the growth in average RPU has been the bigger underlying story that has contributed to SMP's overall success in Australia as shown above.

Average RPU has grown 42% over the time frame below to a quarterly figure of $1,104 (annualised = $4,416).

*The data suggests that annualising the quarterly RPU isn't necessarily the most intuitive solution for the sake of forecasting due to seasonality in consumer spending. (I.e December quarter is usually the highest due to Christmas). Hence below is just the quarterly data.

The graph below is a result of the combined two growth avenues.

In conclusion, the intuition is pretty simple.

I invested with the notion that overall sales (denoted by X) would improve. (Y the subset,= RPU, T= no. terminals deployed).

The anticipation that X would increase based on the formula: X = Y * T. whereby T was increasing rapidly over time.

Now we have a situation where both Y and T are increasing and subsequently producing a higher X.

September Half, 2021 - (Note, SMP releases results as per the New Zealand calendar)

Disclosure - Held, >12 months.

I will hopefully try and produce a more detailed analysis of this result when time allows, but for now:

The much more economically-attractive, Australian business has continued it's growth at close to 100% on Pcp (even though we spent >3 /6 months in lockdown).

The ugly -- the initial thought is that costs have been blown out of the water.

However, a check of the notes to the financial statements shows the following:

In essence, the NZ revenues are overstated by $1.4m and the group costs are also overstated by $1.4m and hence EBITDA is being understated.

Adjusting for this shows a increase from a measly $3.7m of EBITDA to $5.2m (which represents a 40% change).

Considering the business, like most, has been severely affected by the covid-enforced lockdown(s), it's hard to fully analyse the financial statements. The Aus business still managed to grow at >90% on pcp, impressive.

The next result will be telling.

Q2 FY22 Trading Update.pdf

Attached is my write-up on SMP's SQ.

21/09 - Interim Update to Market.

The following notes are taken from a HC post I made here.

(These notes will only be of use if the reader has a decent knowledge of the Smartpay financials)

So the best capture for my investment thesis in this company is based around the $ revenue per terminal. Secondly the focus is on growing the number of deployed terminals.


We can see on the bottom right graph -- Revenue per terminal was $3,100 over FY21.

As per the July Q1 update, the July run rate was $2.32m and given the 7,306 terminals implied a revenue per terminal of $3,811 on an annualised 12 month view. (Keep in mind that I expect Dec, January to be the "busy" period).

July saw the RPTa (Revenue Per Terminal, annualised) come in at $3,608 and August with $3,290.

This implies that even given the lockdowns, SMP is still generating more $ per terminal than it was for the period that was FY21.




Oh, and we should probably be cognisant of the ~850 terminal additions added for the months of August and July.

If SMP can deploy 1,000 units a quarter this implies ~4,000 a year. For the sake of conservatism lets say they achieve 3,500 new terminals.

3,500 terminals at a conservative RPTa of $3,500 creates ~$12.25m in revenue simply from additions. (This is my aspiration for the company for FY22 in additions alone).
 

For a company valued at $175m NZD:
 

Smartpay are trading on a trailing EV/EBITDA multiple of 23x which is reflective of a mature company, not one growing revenues at >60% P.a.

If Smartpay can continue to grow terminals at 3,500 p.a they will reach ~14,000 by the end of FY23.

14,000 terminals multipled by an average revenue per unit of $3,500 results in $49m in Australian revenues.

Add in ~$12m of NZ revenues (allows for a decline from the current $15m) equals revenue of $61m.

Allow for a cost base of $35m (FY21 was $26.3m).

This results in an EBITDA of ~$26m implying that the stock will be trading on an MC/EBITDA of a mere 6.7x

I truly think all the impacts of Covid are short term and that the market is overlooking Smartpay.

DISC - HELD.

Highlights – Australia

Phenomenal growth really, up 158% from Q1 FY21 and 10% QoQ.

 Australian terminal numbers have grown from 6,754 at Q4 end to 7,306 by Q1. This represents the addition of 552 terminals in the quarter, equating to growth of 8% and 184 new terminals per month. (*Keep in mind the lockdown for June).

Monthly Acquiring revenues have grown from $2.2m to $2.32m, 8% shy of the management expectations. This implicitly states that without lockdown’s, current monthly acquiring rates are probably close to ~$2.51m.

We can extrapolate this information into forecasting a future monthly acquiring revenue and consequently an annualised revenue figure, see below (PDF).

PLEASE SEE THE ATTACHED PDF FOR FULL REPORT.

DISC - HELD.

Coffee Microcaps Presentation

Link found here - https://www.youtube.com/watch?v=uA36d-fb6Tw

Some key take-aways;

• SMP are 'market disruptors' and here's why;

The payment's (or payment terminal) industry is one that has traditionally been dominated by the major banks.

The issue with the bank's providing these services is that they are geared towards instituional/medium size businesses and much less to SME's.

The banks (predominately the big 4) have their gaze across other aspects of their business, primarily mortgage & other loans. They do not remain actively competitive in the EFTPOS terminals market, particularly for SME's.

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.

Marty & the management team further work to differentiate SMP from competitors by having such a customer focus. They actively work to solve the problems SME owners face, rather than deploying a terminal and that being the means of business. They have identified a market of 1 million terminals in Australia, with SME's representing 25% & thus a target market of 250,000 terminals. SMP currently has ~7100. 

Tyro is arguably SMP's biggest competitor other thank the banks with 63,000 terminals. Similarly, Tyro have a banking lience 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.

• The Australian business continues to be the 'shining light'

As of March 21, the Australian business revenues become the majority of the group revenues. 

This business uses a 'SmartCharge' product, where the charge for using the EFTPOS machine is charged to the customer of the SME, which is better for business owners. This product is much higher margin than past products offered.

The terminals number I believe has grown from ~6700 to ~7100 (as shown in the presentation) in a matter of a few months.

Acquiring revenues run rate equates to $2.2m per month, which annualised reaches $26m. For context, FY21 revenues totalled $33.8m. So the Australian business will total nearly the whole of FY21 on the current run rate.  This excludes any new terminal contribution & the whole of the NZ business (which contributed $15m in FY21). Growth is coming.

• Headline results are misleading

According to the financial notes, the business incurred a FY21 loss of $15m. This is a reflection of the convertible note(s) being exercised in Dec, 2020. The share price climb contributes to this conversion & subsequent loss. The rest of the convertible note is due by October 21.

Multiple software assets were amortised in this period and brought forward. Roughly $0.5m.

Concluding thoughts on the result.

1.      Investment thesis is continuing to play out.

As flagged in the most recent trading update, the real driver of underlying business is the deployment of terminals in the Australian business. In a covid affected year, SMP still managed to add on ~2200 new terminals.

The run rate of the terminals from this business equates to $2.2m per month, annualising to $26m just for the Australian business. (with no new terminals).

The only issue with the update in terms of said investment thesis is the growth of the cost base.

The new costs are associated with a rapid increase in marketing costs and the marketing headcount rising from 10 to 17. (80% increase in overall costs).

This isn’t much of a problem if you believe the marketing costs will be reflected in the growing terminal numbers. We will see this in the next trading update.

2.      The convertible notes and other one-off items distort the result to the market.

The excision of the notes was to be expected, but apparently not according to the market reaction to the results. The NPAT loss of $15.2m is a result of $12.7m of adjustment for the fair value of the notes.

In the small end of the market, they cannot look past the headline result for NPAT and thus is why I believe the market still has not caught onto the underlying value of this business.

Some D&A costs were also brought forward and have further contributed to a bigger loss in this result.

3.      The more attractive Aus. business is now a greater proportion of revenues.

The Australian acquiring business has such better economics and margins, and thus from a shareholder perspective its positive to see that the resources allocated to this side are paying off.

I would not expect the NZ to contribute much growth going forward to due capital allocation and the nature of the business model. Perhaps to be conservative one could expect it to slightly decay with time.

DISC - I hold SMP shares.

Trading update - results of MQ21. 

Overall, a good update, nothing ‘shoot the lights out’ good, but just above expectations.

Now, Australian revenue  > NZ revenue

Australian business very close to break even.

See my notes attached.

Disc - I own SMP shares (a big % of my portfolio also).

Attached is my full research report for Smartpay.