NOTE: THIS IS NOT A TIP. I AM NOT A TIPSTER. I AM NOT FCA REGULATED. DO YOUR OWN RESEARCH (DYOR)
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.
For instance, Mobile sales growth is far outstripping wider sales growth in the retail world: total retail sales in the UK will rise just 3.6% this year (2014), whereas e-commerce (online) sales are expected to rise 16% and m-commerce (mobile) is due to grow a stunning 64.8%, according to data from eMarketer in the Investor’s Chronicle.
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:
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:
Mobile commerce especially presents huge opportunities. OPAY’s website has short videos on the following:
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:
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 !!
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