Paypoint finals

Provides clients with specialist consumer payment transaction processing and settlement across a wide variety of markets: (energy pre and post-payment, telecoms, housing, water, transport, e-commerce, parking and gaming) through its retail networks, internet and mobile phone channels. I have a holding in my income portfolio (epic code: PAY).

Paypoint announced their final results today with sales up 3% to £218.5m and operating profits increasing by 8.8% to £48.2m. 

 

Total transactions for the group were up 5.9% to 812.7m.  The highest increase in volume was for the Collect+ joint venture with an increase of 38.7%, although price competition and increased logistics costs reduced their margins, the growth in revenue offset this and helped deliver profit ahead of last year.

 

EPS was up 9.1% to 57.4p and a final dividend was recommended of 26.1p, making 38.5p for the full year, an increase of 9.1% and covered 1.49x by earnings and 1.3x by free cash flow (FCF).

 

FCF was strong again at £34.8m, marginally above last year's £34.3m.  After dividend payments of £24.7m and a translation loss on cash balances of £1.8m (presumably in Rumania) the net cash position increased £8.3m to £43.4m.* Over the last three years Paypoint's FCF has returned an average 49.5% on its capital employed, substantially exceeding its weighted average cost of capital of 9.2% (this also being its cost of equity, since it has no debt).

 

Management has decided to sell the parking and online payment processing companies to realise their value.  They have taken this decision as the "Fin Tech" market has entered what management have described as an arms race of investment, which resulted in a changed competitive landscape, bringing pressure for both faster development and larger scale to support lower margins.  Management rightly feel this is not a market that would generate acceptable returns, comparable with the rest of the Group.  The business has sales of £17m, is loss making (due to the recent increase in investment needed) and has net assets of £54.8m.

 

With the strong FCF, the increasing net cash position and disposal proceeds from the business up for sale, I would expect another special dividend (2013: 15p) at some point in the next 18 months.  At today's price of 929p (up 5.8%) the company is yielding 4.3% on the expected dividend next year, excluding any potential upside from a special dividend.

 

On a discounted cash flow basis I would estimate that the intrinsic vale of the shares at ~1025p (17x next year's expected earnings), giving a margin of safety of ~10%, this is based on the conservative assumption that they grow their FCF by 5% pa for the next 10 years; over the last five years they have grown it by 9%. 

 

A good candidate for an income portfolio - a reasonable yield, with a record of increasing dividends (12% over the past 5 years) and special dividend payments, backed by a strong FCF and net cash on the balance sheet.

* Net cash excludes client cash (2015:£3.8m; 2014:£6.5m), but includes cash that is part of the assets of the parking and online payment processing companies held for sale (2015:£3.3m; 2014:£nil).