SPY - Smartpay Holdings

[Muse]

Great stock, but at what stage does it become overvalued?

It's a fair question to ask of anything that has run this hard so fast.

Around announcements Smartpay's SP action has looked like taking an elevator up followed by taking an escalator down in between announcements, although since October last year there has been higher highs and higher lows each time. Wouldn't be surprised to see that continue and with some profit taking. Pleasingly much of the buyside is now coming through institutions.

I don't particularly concern myself with the daily SP movements as I finished building my position last year and have conviction in where I see this business trading in 4-5 years, based on my assessment of where I see earnings and an appropriate multiple for the business at that time. How the business actually performs is what I watch.

None the less...Smartpay has just started the 2rd month to its now current year 2024 financial year. Consensus NPAT for FY24 is $13.3m and $20.9m for FY25...post today's run up that puts it on a current year PE of 29.4 and FY25 of 18.7. These are high multiples to be sure and reflect the company has to continue to grow to justify its SP, and also some of the fantastic underlying economics of its business. My own NPAT estimates are actually higher than consensus and the company is one of the few where brokers have been continuously upgrading their estimates QoQ.

With the SP where it is the business has to demonstrate growth in scale and profitability and its possible the market gets ahead of itself from time to time (where it has the potential to both be worth quite a bit more in the future than it is now but still be a tad over valued in the short term)

SPY's largest non bank competitor is Tyro, which is itself in talks with private equity to be taken over. It's current SP reflect silly PE multiples (315x FY24 and 78x FY25), and EV/EBITDA multiples of 17.8x and 14.3x those same years, again higher than smartpays. Smartpay is actually larger than Tyro at the EBIT and NPAT level, and growing much faster, but is smaller in terms of terminal deployments and revenue, and by mcap.

As an aside, SPY grew its AU acquiring terminal base by ~6k, ending at 15.7k, with average terminals during the year of 12.6k. Even if it didn't deploy any further terminals in FY24 (exceptionally unlikely and undesirable), I estimate it would still grow its FY24 acquiring revenue by 20-25% and its consolidated revenue by 15-20%, on the back of full year contributions from the acquiring fleet put in place through out the year in the year just finished.

The other cool thing is SPY's business model. It is pro-inflation, as its Australian acquiring business effectively clips the ticket on transactions, so as inflation rises, so to does Smartpay's revenue. But its Australian unit cogs actually go down as it grows. The deal Smartpay struck with its switching provider (Cuscal - and the largest direct cost for the business) is tiered, as as Smartpay processes more total transaction value (a function of # of terminals, # of transactions per terminal, and average ticket size), it gets charged less as a % of TTV. SPY is bringing in more TTV thanks to more terminals, a growing but plateauing# of transactions per terminal (and I'd imagine compresses in FY24 or FY25), but also the impact of inflation on purchases. The more TTV, the lower the switching cost per TTV, and as a % of revenue.

So inflation grows topline, lowers direct unit costs, grows gross profit dollars earnt, and expands % gross profit margins.

Pretty cool eh. A rare feature.

Then there is this whole strategic review and non binding heads of terms just announced with Cuscal to bring the acquiring solution to NZ. It's a bit cryptic, sounds like a big project that could take years, but very intriguing and potentially very significant. NZ has ~30,500 terminals - all on boring leases with no transaction acquiring services provided. But that's for a different post.