I am sure I have mentioned before that one of my favourite ways of picking great stocks is to look at ‘Big Themes’ that are changing the way we live and growing at very high rates.
2 such themes are Online / Mobile Banking and Payments, and the rise of Online / Mobile Commerce. The growth rates are extremely high - providing a superb Tailwind for good businesses in this space.
However, Mobile accounts for just 38% of total Online e-commerce sales which represents 13% of Total Retail Sales - so the scope to grow is obvious and we could see many years of strong growth. In fact, I would suggest that we are only in the Foothills of the Mountain that mobile will become in the next few decades - it will be unrecognisable I suspect.
My recent top-up of Optimal Payments (Epic: OPAY) at 419.78p on 11th November 2014 plays into both these themes.
OPAY is based on the Isle of Man (think TT bike racing, Joey Dunlop, Carl Fogarty, John McGuiness, Horizontal Rain and cats with 3 legs - probably got ran over by Foggy on his Yamaha !!) and started life in 1996, listing on AIM in 2004. In 2008 there was a name change to Neovia Financial PLC and in 2011 a ‘Reverse Takeover’ of Montreal, Canada, based Optimal Payments resulted in a Main Board purge and change of name to what we now know. I am not certain but I think it was called ‘Neteller’ at one time also but the Company Website does not specifically mention this although obviously one of its main products is eponymous (blimey WD, big word for you !!)
In July 2014 OPAY bought 2 US based industry peers in Meritus and GMA, for $225m, partly funding those deals with a new $150m debt facility.
OPAY has offices in Douglas (IOM), London, Cambridge, Sofia (Bulgaria), Calgary, Montreal, Gatineau (Canada), New York (US). Note, there is no mention of California in this list - despite the recent purchases of Meritus and GMA - this is the list from www.optimalpayments.com which is a superb website with some very interesting YouTube videos about the Future of Payments as well as various Interviews such as a great one with the CEO Joel Leonoff - well worth a look.
OPAY is AIM listed and the current Market Capitalisation is in the region of £700m.
OPAY has 3 main product groups which are all SaaS (Software as a Service) delivered and sit on ‘The OPAY Payments Cloud’ - which is a platform for all services via Online and Mobile and Location Independent - i.e. Merchants or Consumers can be based anywhere in the World - OPAY claim they offer services in over 200 countries.
OPAY also claim ‘Infinite Capacity’ which sounds like Marketing Fluff to me !! It may be true, but no doubt it can only be provided at a cost to OPAY - although this may be relatively low.
As I understand it, I may be wrong, OPAY charge on a ‘per transaction’ basis - meaning more transactions generates more Revenue and, hopefully, higher profits.
The product groups are as follows:
- NETBANX - this is a ‘Gateway’ for Credit and Debit card payments - VISA and MasterCard. Merchants (Retailers) use for Online Stores, Mail and Phone Orders, IVR (Interactive Voice Response) Phone Orders etc. From what I can tell, seems very similar to PayPal.
- NETELLER - this is an ‘e-wallet’ - Consumers stick money into this Online Wallet and can then send and receive money electronically via PC, Smartfone, Tablet etc. to other people / Merchants. OPAY also provide ‘White Label’ solutions where a Merchant can brand the NETELLER solution in their own style.
- Net+ - a Debit Card that gives NETELLER members 32 million online and offline places to pay using a MasterCard.
- Optimal Payments Card Services - Bespoke prepaid card issuance. Enabling companies to issue MasterCard branded cards to their Customers for any size organisation.
OPAY claim to move ‘billions’ of dollars worth of transactions around the World with ‘millions’ of consumers and merchants in multiple currencies. They also offer 100 different payment options, which the CEO claims is a major competitive advantage - much of this smells of Marketing Fluff so you can make your own mind up.
In addition, there are some other aspects which sit across the main product streams:
- Fraud and Risk Services - Merchants can know more about their customers and reduce Fraud.
- Apple IOS SDK - Software Develop Kit to enable App makers to integrate with Apple stuff. ‘Apple Pay’ is an accepted Payment Option.
- Mobile Point of Sale - aimed at Merchants with Real Stores and works with NETBANX and as a White Label option to be branded with Merchant’s style.
- Merchants use OPAY services to move money around various sites across the globe within their own companies.
- Competition - for instance, VISA and Google have their own e-wallets but they are limited in functionality and have not impressed the market (according to OPAY CEO).
- Online Betting still a big driver of transactions - although my experience of the company suggests this is declining over time, especially as they acquire other businesses. This is my biggest concern as I already have exposure to Online Gaming via the likes of TTR and NPT - not sure I want much more !!
- A General Economic slowdown would no doubt hurt OPAY - but you have same problem for pretty much all Stocks (except maybe Tobacco and Utilities) - so if you foresee such problems, you shouldn’t hold any stocks at all.
Mobile commerce especially presents huge opportunities. OPAY’s website has short videos on the following:
- ‘Frictionless Commerce’ - customers can buy stuff within a physical store using their Smartfone - you sort of wave it at the product and when you leave the store you wave your Fone at a sort of Scanner thing and it Checks you out automatically - no need to talk to shop staff and very quick and easy.
- Smartfone App to allow you to order products before you reach the Shop and they are ready for you when you get there. For instance, an example in OPAY’s video is of a Coffee Shop where you order a Coffee as you want it when you are still walking to the shop and when you get there the Coffee is ready and you pay by waving your Fone.
- Integration of e-wallet with your Online Bank Account to enable quick and easy money transfers.
- The most recent Trading Update was from 10th September 2014 in a Half Yearly Report. In summary:
- Revenues were up 34% with a one-off boost from the World Cup.
- 71 per cent rise in first-half operating profit. Net Profit was up 91%. Gross Margin up to 55% from 53%.
- For NETELLER, accelerating sign-ups and higher user spending boosted sales by 46%. NETELLER and Net+ pre-paid card service launched in the US, receiving strong interest from gaming merchants in Nevada, New Jersey and Delaware - the first three states to legalise online gambling.
- NETBANX grew sales by 31% to $117m.
- Strong cash generation allowed OPAY to grow its cash pile by a quarter - prior to the two US acquisitions, it was Cash Positive.
- EBITDA was up 54% in the Half Year to $39m
- CEO in interview with CNBC (you can see on OPAY website) talks about $110m EBITDA next year.
The best bit (save best to last and all that) was that the CEO said “the Board believes that Full Year results will now come in ahead of its expectations…”
As ever, I am relying on the Consensus Broker Forecasts provided by ShareScope. For this year, 2014, EPS (Earnings Per Share) is forecast at 24p - at my Buying Share Price of 419.78p, that gives a Current P/E ratio of just over 17 - not bad I suggest for a Hot Tech Stock in a Hot Sector.
Looking out a bit to 2015 and the EPS forecast is 27.49p (which appears possibly conservative and on the low side for such a high growth business - especially if they do some acquisitions) which gives a Forward P/E 2015 of 15.
Out another year to 2016 and we get EPS forecast at 31.72p - this drops the Forward P/E 2016 to 13.
In terms of a PEG Ratio (Price Earnings Ratio divided by Growth) based on the Forward P/E 2015 you get a PEG of 1.0 (EPS growing about 14%). Not especially a bargain but not bad either - especially if, like me, you think the Forecasts look a bit low. A PEG below 1.0 is usually regarded as Cheap.
I am not 100% clear on what the Balance Sheet is like - but it is clearly not a problem. As at 30th June, OPAY had $121m of Cash but since that it did the US acquisitions - so for Valuation Purposes I am just assuming there is no debt and no cash (in fact, I think they have a tiny bit of cash lying around - the really careful among you can dig into this on a Cash Flow basis and work it out properly but I am not overly concerned). Sometimes if you dig too much into the Weeds and spend time being very thorough, you will miss the boat and the share price will have rocketed before you get in - I intend to blog on this very soon - I have a draft half written.
Unfortunately there is no Dividend Payment but it is probably best at this stage of fast growth that money is ploughed into developing the business.
For a High Growth stock in a Hot Sector I think a Forward p/e for 2015 of 20 would be easily justified - in fact, it would be low. On this basis, my Lowside Target would be 550p (27.49p x 20).
However, the Targets would be far higher (obviously) if I am more generous with P/E ratios - 25 would give a Medium Target of 685p.
A P/E of 30 would give a Stretch Target of 825p. This may seem excessive but I see many, many Tech stocks on such silly valuations - remember, I will not be buying at a P/E of 30 - that would be madness in my book - but I will be very happy to see other excited Punters piling in at these daft levels - and I will probably be offloading some stock to them !!
If these Targets can be met, the upside from my buy price of 419.78p would be:
Lowside Target - 32%
Medium Target - 65%
Stretch Target - 98%.
Remember, I am a Long Term Investor and will be patient with an expectation that some of these Targets can be met in a few years. Seems well worth a punt, especially as the CEO suggests the could be a Takeover Target and I think that is a plausible argument.
I have driven my Targets here by p/e multiple expansion in the main. However, if they continue to beat expectations, then higher EPS results and forecasts will also drive stock up - WIN WIN.
As I said right at the start of this scroll, I love investing in Big Themes and Mobile Banking / Payments is clearly hot. Apart from OPAY, how else could I play this theme?
The obvious alternatives are as follows - this is off the top of my head and no way extensive:
- Monitise (MONI) - well, this just seems like a busted flush. The wheels have truly come off - not a situation the WheelieDealer likes…..VISA pulling out seems catastrophic and when on earth is this ever going to make money? it’s the WheelieBin for me.
- Ebay (EBAY on Nasdaq) - you may not realise but eBay owns PayPal - and the growth is spectacular. I already have this covered - I have a stake in eBay via a Spreadbet - the beauty is that even though it is listed in US$, because I bet in ‘£s per point’, I have no currency risk. Long term hold for me - although it is a bit of a Range Trader stock between $50 and $57. A breakout over $60 would be very bullish and a great buy signal. High likelihood of a spin out of Paypoint into a separate company also listed on NASDAQ - this would create a lot of additional Shareholder Value I suspect.
- Paypoint (PAY) - a possible stock to buy but I don’t think it is so directly involved in e-banking and e-commerce. It has a legacy business as far as I understand. I have not dug into this in any detail.
I think this is a pretty decent way to play some strong high growth Themes. I have been tracking the price action on the chart for several days (easy as I already hold a few OPAY shares) and the Technicals have started looking promising for a move up - I will do a separate Blog in next few days on the Technicals and how I decided to time my move and buy more this morning at 419.78p.
OPAY is a very niche operation according to the CEO and I think he is right - this protects from competition to an extent by the Big Boys like Apple, Google, etc. - he also suggests they are an acquisition target and I think that is a sensible assertion.
Please note Investors Chronicle said ‘Sell’ to lock in some profits on Sept 11th 2014 - that might have been good advice for the time for people sat on a big Profit but I think it is a buy now, not a sell by any means.
Remember - this is a not a Tip. I am not a Tipster. Do Your Own Research (DYOR).
Long may we Wheel !!