Description

Paya (Paya) – $1.2bn Market Cap, $8mm ADVT

Executive Summary – Long PAYA

Paya is a payments company that completed its merger with a SPAC, Fintech Acquisition III, on

October 16, 2020.  Paya is a top 20 provider of payment processing in the US and #6 in overall

e-Commerce.  In the SPAC investor presentation management provided forecasts through 2021 and provided organic long term revenue targets of low-to-mid teens and EBITDA growth targets of 20%+.

Why does this opportunity exist?  Following a SPAC merger I believe the company is currently under the radar as a post-SPAC small cap equity with only 4 analysts covering the stock and limited liquidity.  There was a similar dynamic with RPAY, when it completed its merger with a SPAC in July 2019.  Market demand is still strong for small and midcap payments companies as evidenced by the IPO of NVEI CN (stock up 139% from its 9/22/20 IPO) and FOUR +~33% since 9/22/20 as well.

Relevant Themes: payment companies have been benefitting from the digitization of payments and the integration of payments with software (integrated payments).  Over $1 trillion of volume comes from a combination of replacing physical invoices and physical check as well as electronic payments that are not yet integrated into primary business management software.  Paya is well positioned to benefit from these trends.

Paya’s end markets are high growth with limited macro sensitivity – B2B Goods and Services, Healthcare, Non-profit, Government and Education.  As a result during the depth of Covid-19, monthly volume was down 7% vs. peers more exposed to SMB, which were down as much as 40%.  In addition to high growth and whitespace, these end markets offer attractive attrition characteristics – Paya’s customer attrition is 8% vs. the merchant acquiring average of ~15%.  The Pfizer Covid-19 vaccine announcement has brought some excitement to payments, and while Paya is not participating in has lagged, the news is very positive for fundamentals.  On the Q3 call they mentioned that the healthcare vertical (second largest) was still down year over year due to Covid.

I expect a strong Q4 and 2021 guide (see below) and believe current guidance is conservative.  Management presented at the Autonmous conference and below is some sales commentary regarding the guidance: “But final question from Craig on how conservative is there guidance was pretty telling as Jeff is an old-school operator who knows how the street operates which suggests they can provide good upside going forward.”

Paya has great visibility with 95% of 2021 EBITDA driven by expansion of current partners and large wins.  Q3 commentary was positive on this topic.

Organic revenue growth is the key driver of valuation for payment names (see valuation section) and as a result the risk reward in shares of Paya is quite compelling.  I see opportunity for a multiple re-rating, but more importantly the current whitespace should allow for meaningful Revenue, EBITDA and EPS compounding over the coming years. Also worth noting, there are publicly traded warrants from the SPAC transaction.  The sponsor has a history of redeeming warrants early, and I think they offer significant value.

Importantly, I expect to see increasing consolidation within the payments industry.  FIS and FISV should be at their leverage targets in mid-21, and an asset such as Paya would meet many of their acquisition criteria, most notably accretive to growth.

Company Overview

Paya is a provider of integrated payment and frictionless commerce solutions that help customers accept and make payments, expedite receipt of money, and increase operating efficiencies. The company processes over $30 Billion of annual payment volume across credit/debit card, ACH, and check, making it a top 20 provider of payment processing in the US and #6 overall in e-Commerce. Paya serves more than 100,000 customers through over 2,000 key distribution partners focused on targeted, high growth verticals such as healthcare, education, non-profit, government, utilities, and other B2B goods and services. The business has built its foundation on offering robust integrations into front-end CRM and back-end accounting systems to enhance customer experience and workflow.

PAYA came public through a merger with Fintech Acquisition Corp. III, which closed in October 2020.  The prior owner was the private equity firm GTCR, which retained a ~45% interest.  Fintech I and II also acquired payments companies, which both had successful outcomes (CCN sold to FDC and IMXI remains public).

Below is my summary model.  The Company just disclosed historical quarters today, so I plan on building a more robust model.

Summary of Recent Quarter

Shares sold off ~5% on Q3 print.  I think this is an attractive opportunity as the story likely got lost in the announcement of the Covid-19 vaccine.  Results were solid. There were no consensus estimates so below is a quick summary of KPIs

• Payment volume of $8.7bn +8% y/y Revenue 51.8mm +2% y/y
• EBITDA 13.5mm +11% y/y
• Record new onboardings with large ISVs in the B2B and non-profit verticals in Q3
• Continued certain pricing initiatives in the latter part of Q3, which I expect to have a positive impact in Q4
• On track and expect to hit 2020 targets ($205mm of revenue and $53mm of EBITDA)
• Implies $53mm / $15mm of revenue/EBITDA in Q4

Variant Perception

2020 guidance is conservative: The full year guide implies 3.5% Q4 revenue growth which is too low.  They just did 2.4% in Q3 with revenue accelerating throughout the quarter and announced strong customer wins, pricing and an acquisition.  The quarter should be a positive catalyst as it should bring current results closer to the medium term targets.

Path to profitability / Catalyst Path

• I believe PAYA is flying a bit under the radar as a small cap company out of a SPAC with limited analyst coverage
• Analyst Initiations – expect increased coverage, although timing uncertain
• Quarterly Earnings – expect continued attractive top line growth and profitability
• I expect Q4 to be meaningful.  On today’s Q3 call they mentioned onboarding an ACH client, pricing, and TPG acquisition.  They also mentioned that volume strength continued into October
• Index / ETF buying
• Warrant Redemption – the Fintech SPAC sponsors have a history of redeeming warrants in their SPACs post deal (IMXI and SFT)
• Acquisition by one of the larger payment peers (most likely FISV or FIS)

Risks and Mitigants

• Increasing competition
• There is meaningful white space and with ample opportunity for multiple players
• Highly levered at 4.3x
• Payment companies have strong cash flow conversion supporting debt service
• High EBITDA growth results in organic de-levering of 1x per year excluding pay down
• Small Cap, under the radar, hard to discover
• Sell side analysts have a history of picking up coverage on small payment names.  RPAY is currently covered by 10 analysts

Valuation

The key driver of valuation for payment stocks is organic revenue growth.  As you can see in the charts below there is a 94%/76% R-Squared between organic revenue growth and PE/EBITDA multiples.  Given, the leverage and some noise around below the line items, I think the most appropriate valuation metric for PAYA is EV/EBITDA.  Management guided to long-term organic revenue growth of low-to-mid-teens.  Assuming 13%-15%, based on the regression this would imply a multiple of 26-29x EBITDA vs. ~21x currently.

Catalyst

• Analyst Initiations – expect increased coverage, although timing uncertain
• Quarterly Earnings – expect continued attractive top line growth and profitability
• I expect Q4 to be meaningful.  On today’s Q3 call they mentioned onboarding an ACH client, pricing, and TPG acquisition.  They also mentioned that volume strength continued into October
• Index / ETF buying
• Warrant Redemption – the Fintech SPAC sponsors have a history of redeeming warrants in their SPACs post deal (IMXI and SFT)
• Acquisition by one of the larger payment peers (most likely FISV or FIS)