Description

Payment processing can be an attractive business.  Merchants realistically must accept credit cards and need help connecting to the plumbing of the card-payment system.  In exchange for handling the interaction between the merchant and card issuer, the payment processor receives a tiny cut of each non-cash sale.  As cash continues to lose share of payments and the market grows in line with consumer spending, the industry has a nice tailwind that is partially offset by fairly constant pricing pressure within this ecosystem.  Processors usually have good economics, low capital requirements, and no material customer concentration.

NICE Information & Telecommunication (“NICE IT”) is the largest payment processor in Korea, with a transaction market share of ~19%.  It has historically grown both revenue and profitability at an attractive pace. 

The company is part of the NICE Group of businesses, which primarily owns extremely high quality and market leading financial information firms.  The founder appears to have been an incredibly talented businessman, creating the group in 1986 and growing it into the top player in payment processing, consumer credit bureaus (Experian model), corporate credit bureaus (Dun & Bradstreet model), and ATM management, with dominant market shares and exceptional economics in each category. 

The problem for Korean payment processors (and credit card companies) has been government regulators lowering the maximum interchange rate (fee) that card issuers are allowed to charge merchants (politically motivated).  This squeezes card issuers, who then re-negotiate with processors, who in turn re-negotiate with their independent sales agents (or fire them). This has gone further than I’d have expected with a couple rounds of cuts, but at some point will reach equilibrium.  The negative impact was significant but in no way devastating to large processors, and will likely encourage further consolidation. For now, the dust is somewhat settled with the adjusted economics reflected in current results.    

Business economics are still excellent, which is all the more impressive considering that NICE expenses its cost of merchant acquisition (partly masking their FCF potential, considering their historically growing market share).

Based on the current price, NICE IT appears to sell for approximately ~8x earnings and ~4-5x earnings net of cash.  This is among the cheapest payment processors in the world despite their leading market share, conservative accounting, and very rapidly growing online payment gateway segment.  Excess cash (approximation given negative working capital in the business) accounts for about ~40% of their current market cap. 

There is no strong catalyst for the share price to improve given that this is a small-cap controlled company in Korea.  However there are multiple potential ways that the investment could appreciate in the medium term. 

NICE IT has a very rapidly growing online payment gateway business.  This segment now accounts for about ~1/2 of total revenue and grew ~30% year-over-year (albeit at lower margins than in the offline space).  Any continuation of its current growth trend with some margin expansion at scale could grow business value considerably.

Very sadly, the founder of the NICE Group passed away and professional managers have taken a more central role at the company.  While the circumstances are unfortunate, it appears that there have been signs of real governance improvement over the past few years.  The company seems willing to engage with shareholders, having recently expanded their investor relations activities and disclosures, and seem willing to spend a few hours meeting with a foreigner in Seoul.  They have also recently granted stock options to management (incentivizing them to improve the valuation), begun publishing more detailed investor presentations (in English), had some non-deal road show activity, engaged in share repurchases at attractive prices, and seem to have some appetite for raising their payout ratio.

Feedback from local investors suggests that governance was never the main reason for the depressed valuation (as seen by the more reasonable trading multiples at NICE sister-firms, with the same controlling shareholder).  Local concerns focus principally on regulations or disruptive payment methods. I believe both of those risks are very manageable for the business and significantly over-discounted in the current share price.

This situation (like all investments) has real risks.  Governance, capital allocation, business economics, government regulations, competition, technological changes, QR code product launches, geopolitical events, and additional factors could all negatively impact the company.  Another major risk clearly includes the author of this post not being or speaking Korean. 

But the other side of the coin is a growing market leader, in an attractive industry, with strong historical growth and economics, which seems increasingly willing to engage with outside investors and which sells at a large discount to my best assessment of a growing fair-value.  As such I believe it is attractive near the current price (and I own shares).

Historical Revenue Growth:

Disclosure: Have ownership interest in Nice Information & Telecommunication at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of Nice Information & Telecommunication without notice for any reason at any time.

Catalyst

Continued growth of PG business and/or regulatory stabilization in VAN segment