Winning Big on SMP Shares Analysis Highlight
Today we take a look at SMP shares and see what’s in store next.
Smartpay Share Price
Smartpay closed off the week with a share price of $0.76. Up a decent 43.4% from our BUY recommendation. At it’s current share price SMP shares are up 60% over the course of a year, and an amazing 360% over a 5-year period. Smartpay ASX has a current market capitalization of $182.2 million. In January SMP shares set an all-time high of 0.985.
About Smartpay ASX
SMP Holdings are a payments terminal business based out of Auckland, New Zealand. Smartpay is Australia and New Zealand’s largest independent full-service EFTPOS provider. They service over 25,000 merchants with approximately 35,000 secure and feature-rich EFTPOS terminals.
Preliminary Final Report
On the 27th of May, Smartpay ASX released its preliminary final report. In this report we saw excellent results from SMP shares. Overall revenues were $33.8m, up 19.7% from the prior year $28.3m with strong growth from Australian Revenues.
Smartpay have mentioned that they expect the Australian side of the business to be running at breakeven when EBITDA rises to between $10-12m.
What Can We Expect As Revenue Going Forwards?
We expected AU revenue to surpass that of NZ revenue in less than a year. As promised in Q4FY21 SMP shares reached our expectation. The business also boasts a large Gross Margin of ~30%, with no debt, growing revenues and a large margin we expect SMP to continue to perform well.
Full analysis: https://prophet-invest.com/smartpay-share-price-2021
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.
Moelis increases it's holding in SMP to 6.33% from 5.33%.
22 May 21: Moelis 6.33% from 5.33%
29 Dec 20: Anacacia Pty Ltd 9.76% [22.66m] from 0.96%. Conversion of CNs
29 Dec 20: Microquities 14.91% [34.61m] from 16.76% [34.32m] dilution
11 Dec 20: Moelis 5.33% initial
26 Nov 20: Milford 11.08% from 9.92%
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.
I have taken a position in SMP as it looks very undervalued to me based on their growth. They are adding around 1000 customers per quarter, which equates to $15m in revenue per annum. I have them earing 4.5 cents per share by year end 2022 or a 17x multiple. For a company with this sort of growth it looks pretty cheap.
Their main competitive advantage is the technology related to their payment terminals. In particular the ability to pass on the charges to consumers which means that the businesses (SMP's customers) end up getting the service for free. For a small business turning over say $1m per annum that could save them as much as $15000, which is basically profit to their bottom line. This is a very compelling product in my opinion.
There could be further upside with the divestment of thier NZ business which they almost sold prior to covid.
I value SMP at $1.50 over the next year.
Big brother Tyro had some negative news. It has had an outage of its terminals.
SMEs fume: Tyro outages stretch into second week: https://www.afr.com/companies/financial-services/smes-fume-over-tyro-outages-20210111-p56t3f
Viceroy have put out a short report: https://viceroyresearch.org/wp-content/uploads/2021/01/Viceroy-Research-Tyro-15-Jan-2021.pdf
Could be an opportunity for smartpay to pick up customers.
Smartpay is a profitable and fast growing company executing the plan they first detailed in 2017.
Every terminal added in Australia is paid off quickly and then adds to earnings (around 6 months or less).
They are growing fast and helped by trend towards contactless payments. They added ~500 terminals in October 2020. They expect to see record revenue in H2 FY21.
Only recently were non-banks allowed to offer terminals in Australia. The major providers are banks who see the space as small potatoes.
Smartpay has advantages over the competitions:
- They are a specialised terminal provider with customer service.
- Smartpay terminals have more features
- They are going after the small business market where the Banks don’t bother competing
- Experience in NZ market with similar approach
In order to grow SMP must take market share from incumbents - mainly from banks, who are non-specialist and see the small business end of market as not worth their time. The marginal acquiring cost will increase over time. Banks also have the ability to subsidise via interchange fees.
Other non-bank competitors - the likes of Tyro and Square have larger asset bases and could exert market power to reduce Smartpay growth. New competitors will also go through the regulation process to get acquiring capability.
Limited moat - although SMP interfaces with various providers, terminals are relatively commoditised. It's point of difference is customer service and pricing.
The company relies on fixed assets - terminals - in order to generate revenue. These require reinvestment to keep current and could cause earning lumpiness.
Existential - these terminals interface with the current EFTPOS system. The EFTPOS system is around due to government regulation. EFTPOS share of card payments is declining. It doesn't do online payment at scale and this has allowed the Visa/Mastercard duopoly and other alternatives to gain share. Arguably, banks, the major provider, are not incentivised to lobby to retain EFTPOS as it is not a major revenue driver. They are also clearly not incentivised to support online EFTPOS.
New technology – simpler terminal systems that interface via phone could cut Smartpay out of the loop. The New payments platform (NPP) allows real time payment (part-owned by banks). App-to-app based payment using the NPP or otherwise could do away with cards altogether.
Underinvestment in NZ business.
Where does SMP go after market saturation in Australia?
Multiple contraction likely once this plays out. Like in NZ, it seems the exit plan relies on takeover by a larger player. However, the number of potential purchasers is quite small.
So here's a business that's not so hard to understand.
They provide (rent) ETPOS terminals to small businesses and they charge monthly fees/ a cut.
The company chugged along for 8 years with almost no profile until late last year they announced the sale of the NZ business for $70 m (NZD), at that time more than the market cap. However, the government decision for the sale was extended into May and the purchasers pulled out. The purchase was eventually approved so a deal is still possible. All a bit of a sidetrack, the main growth will come from the AU business.
The AU business had 4148 terminals at end of December 2019 and had 4,600 terminals at the end of March. That's likely revenue of about $1.1 m or $13 m annualised in a normal environment (conservative). The key question is how fast they can grow market share in the Australian market.
At end of October 2020 they are at 5,098 terminals giving ~$19m annualised. NZ revenue is slowing but that is understandable.
H/T Mal85 and egpTony.
Has anyone used or had a quote from Tyro? I am just wondering if they offer the free efpos machine for higher turnover businesses? They don't advertises doing so.
A quick look at Smartpay site. They add an automatic surcharge to the customers bill to cover card fees. On their example they have a 1.65% charge on a $29 meal. That's high. If that's a fixed fee of 0.48c as suggested on their site, my $5 coffee becomes $5.48. It's like being quoted a before gst price. Feels like a rip off I'm going next door for my favourite tipple from now on.
A meal for 2 at $70. 0.48c isn't going to be noticed by me (and I'm tight !!!) especially if the food was good. This is still 0.68% card fee. What do banks charge?
Small transactions but high customer turnover then smartpay is good for the business but maybe only short term or where local custom is not a priority!? Low customer turnover but high invoice charge, smartpay is very cheap. I doubt they will be interested in these businesses though.
Tyro is looking to reduce those fees for the business. They have lots of cash. Experience directors and bank facilities. I would think Tyro have the ability to offer free machines if needed!?
Just had a beautiful walk on the caloundra boardwalk. Stopped for a coffee and paid using their Square efpos app. On the website they also charge 1.6% transaction fee. Bought other stuff so not sure if they passed on the fee. Competition is high!?
See also: 01-May-2020: Update On Proposed Sale of NZ Business and Assets
CCZ has a "Buy" call on SMP and a TP of 56 cps (previously 62 cps).
SMP closed up +10% at 44 cps today (08-May-2020), possibly partly due to CCZ distributing their "Buy" note this morning.