Money Talks: 3 payment stocks that will profit as more consumers choose card over cash
Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to see what’s hot, their top picks and what they’re looking out for.
Today, we hear from Ron Shamgar, head of Australian equity strategies at TAMIM Asset Management.
Listed fintechs have enjoyed a strong 2019, driven by scorching growth in the buy now, pay later (BNPL) space.
But let’s not forget about the payments sector; because who uses cash anymore?
Card is now the most frequently used payment method in Australia.
In 2018-19, we made 10 billion debit and credit card payments for a total value of $678 billion – that averages out to $26,800 over 395 payments for each Aussie resident.
Consumers are moving away from using cash and cheques in droves, with card and mobile payments moving in to the fill the gap, Shamgar says.
That’s why he likes the look of the payments industry, both domestically and on a global scale.
“The number of card transactions have increased by around 10 per cent every year for the last decade, according to RBA data — we see that trend only accelerating into the foreseeable future,” he says.
“We have positioned our portfolio within that sector and our preferred picks for 2020 and beyond are SMP, TYR, and EML.”
Market Cap: ~$87m
Merchant payments business Smartpay boasts a market leading position in New Zealand, Shamgar says.
“It also has a fast-growing Australian merchant acquiring business that is currently annualising $12m of recurring revenues and growing between 70 per cent, per annum for the next three years,” he says.
“SMP recently received an offer for its NZ assets from Verifone of $70m — 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. We believe Ingenico is incentivised to counter bid for SMP’s NZ business.
“Watch this space. We value SMP in excess of 70c.”
Market Cap: ~$1.87 billion
Recently listed Tyro is a much larger version of Smartpay. With 51,000 terminals in Australia, it is targeting $240m in revenues next year, Shamgar says.
“The total market opportunity is 1 million terminals which are predominantly managed by the big four banks,” he says.
“We see this as a non-core business for the banks and expect the nimbler and more innovative Tyro to win further share off the incumbents which should see growth rates continue for years to come.
“We value TYR over $4.”
Market Cap: $1.42 billion
Shamgar’s preferred pick on a global scale is EML payments. Unlike TYR and SMP, which are merchant acquiring businesses, EML is a MasterCard/VISA card issuer and has an “impressive track record of growth” over the last five years.
“The recent transformational acquisition of Prepaid Financial Services (PFS) in Europe will see EML process over $18 billion of transactions next year and deliver $210m of revenues and $65m of profit,” Shamgar says.
“We expect further growth next year to come from their digital bank solutions and other verticals such as gaming cards, and digital gift cards across a 1,000 malls globally which they manage.
“We value EML at $9 and the stock was just added to the ASX200 index.”
Ron Shamgar was the cofounder of TBF Investment Management (The Boat Fund) and was portfolio manager of the TBF Small Cap Value Growth Fund from 2013 to 2018. At TBF, Shamgar was responsible for research, company analysis, portfolio construction and marketing the fund. He has been investing actively on the ASX for over 15 years.