Ron Shamgar, Head of Australian Equities at TAMIM Asset Management, takes a look at three stocks in one of his favourite market segments right now.
A sector we currently favour is the payments industry both domestically and on a global scale. Consumers are moving away from using cash and cheques with card and mobile payments taking over instead. Cards are now the most frequently used payment method in Australia along with many developed countries around the world.
Australians made ten billion card payments for a total transaction value of $678 billion during 2019. According to RBA data, the number of card transactions have increased by about 10% every year for the last decade. We only see that trend continuing into the foreseeable future.
We see consolidation of the sector accelerating globally and we have positioned our portfolio within the space accordingly. Our preferred picks for 2020 and beyond are Smartpay Holdings (SMP.ASX), Tyro Payments (TYR.ASX) and EML Payments (EML.ASX).
Smartpay (SMP) is a merchant payments business with a market leading position in NZ when it comes to merchant EFTPOS terminals (20% market share of terminals). It also has a fast-growing Australian merchant acquiring business that is currently annualising $14m of recurring revenue which we estimate will be growing between 50-70% p.a. for the next three years. SMP recently received an offer of $70m from Verifone for its NZ assets (which, at the time, was double the then market valuation).
We view this asset in NZ as extremely strategic and we expect market dynamics and structure to eventually force a bidding war. To recap, all card transactions in NZ go through two switch providers in Paymark (acquired by Ingenico for $190m in 2018) and Eftpos NZ (owned by Verifone). Currently, SMP routes transactions through Paymark which is by far the largest switch provider in the NZ market. We believe Ingenico is incentivised to counter bid for SMP’s NZ business and protect the value of their recent acquisition. Ironically, Ingenico itself is under a takeover offer so, as they say, watch this space. We value SMP in excess of 75 cents.
Recently listed and with a $1.9bn market cap, Tyro Payments (TYR) is a much larger version of SMP with 45,000 terminals in Australia and is targeting $240m of revenues next year. The total market opportunity is 1m terminals which are predominantly managed by the big four banks currently. We see this vertical as a non-core business for the large banks and expect the nimbler and more innovative TYR to win further share off the incumbents. This should translate to the current growth rates continuing for years to come.
Our industry research shows that both TYR and SMP offer merchants a more flexible solution and in some cases a huge saving on merchant fees. The RBA review into Least Cost Routing is a positive. We value TYR at over $4.50.
Finally, our preferred pick on a global scale is EML Payments (EML). Unlike TYR and SMP, which are merchant acquiring businesses, EML is a MasterCard/VISA issuer and has an impressive track record of growth over the last five years. The recent acquisition of Prepaid Financial Services (PFS) in Europe was transformational, will see EML process over $18bn of transactions this year and deliver $220m of revenues and $70m of profit (on a pro forma basis).
We expect further growth next year to come from EML’s digital bank solutions and other verticals such as gaming cards and digital gift cards across a thousand shopping malls globally. We value EML at $9.00 and the stock was just added to the ASX200 index. We see the upcoming half year result as a positive catalyst for the stock and we would expect another acquisition this year, potentially coming from the North America region. Once again, watch this space.
Disclaimer: SMP, TYR and EML are all currently held in TAMIM portfolios.
The TAMIM Australian equity portfolios, managed by Ron Shamgar, delivered outstanding returns for the 2019 calendar year:
Australia All Cap | 55.78%
Small Cap Income | 38.93%
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.