European Midcap Payment Solutions Provider [PREMIUM REPORT]
10 November 2024
This European Midcap Company specialises in specific-purpose payment solutions and is known for its strong track record of financial performance. It is a global market leader, operating in 35 countries with a 40% market share.
Attractive business model: The company benefits from a capital-light business model, generating over 40% EBITDA margin and 30-40% ROIC. It has high recurring revenue, low customer churn, high scalability, and low market penetration (i.e., long growth runways). Operating leverage helps drive margins higher. FCF conversion has been steadily growing, exceeding 70%.
Benefiting from inflation: Not only does the company’s revenue strongly correlate with inflation, but the business also operates with negative working capital and runs over €4bn of float, generating higher returns as rates have increased compared to the previous decade.
Competitive Edge: high barriers to entry, local and global scale advantages that lead to higher margins due to the fixed cost nature of the business, and a strong moat through extensive local networks of merchants and corporate clients that reinforce its competitive moat. Additionally, the company benefits from high inflation due to over €4 billion in float within the business, enhancing its profitability.
Growth Drivers: The company potentially offers over 20% total annualised return over the mid term, given its current 9% FCF yield (LTM) and a 13% historical organic growth rate. Additional acquisitions, expansion into adjacent segments, consistent dividends and a recent buyback programme could provide further upside.
Why the opportunity exists: Following negative news on potential regulatory changes, the stock has dropped 43% this year and is trading at the lowest valuation multiples in its history - 11.9x next year’s earnings (2025E) and 6.8x EV/EBITDA, using consensus estimates. Its historical P/E multiple has been in the 20-30x range (and 11-20x for EV/EBITDA). These regulatory risks are arguably priced into the stock, limiting future downside risks, in our view.