Description

This writeup is for information purpose only, is not investment advice, and is not a recommendation, solicitation, or offer to buy or sell any security. Information contained in this document may constitute forward-looking statements or reflect the opinion of the author as of the date written. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated herein. This material has been prepared from sources and data believed to be reliable, and is subject to change without notice. No representations are made as to the accuracy or completeness of this material, and the author does not undertake any obligation to update or review any information or opinion contained herein.

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Summary:

At current levels we believe Points International (TSX:PTS / NASDAQ:PCOM) represents a highly attractive investment – very strong downside protection and huge upside potential.

It’s also the best R/R for travel/reopening we have identified.

PCOM’s stock is down 31% from pre-COVID levels (and we think the stock was very undervalued before COVID). Significantly, so is its enterprise value. We note that because many travel/reopening companies were forced to issue equity and/or debt during the crisis. The result is that many of those companies currently sport enterprise values near to or more than pre-COVID levels.

Moreover, PCOM’s earnings power is not only unimpaired because of COVID, but greater today than a year ago because of new and expanded partnerships announced during 2020 and existing customers further leveraging PCOM’s offerings.

We also think PCOM possesses huge latent potential that it could realize either standalone or in partnership/combination with complimentary strategic players.

At current levels, we think PCOM has little downside, will likely trade 50%-100% higher on travel normalization, has line of sight to >3x upside, and has a chance to be a massively larger company.

Business Overview:

PCOM was written up in July 2019 by BJG and we recommend referencing that post for background information. We’d also recommend the Company’s investor presentation as a resource for general business overview (https://investor.points.com/events-and-presentations).

We think these are the most salient points regarding PCOM’s business:

-        PCOM has a strong position in the very large and secularly growing loyalty programs market. PCOM is a key partner to the largest loyalty programs in the world (the top 10 airlines and top 5 hotel loyalty programs are all customers) and helps them maximally exploit the value that these programs can generate. These are very strong and sticky relationships – PCOM has never lost a meaningful customer for reasons other than M&A.

-        PCOM has direct software integrations with 60 loyalty programs that allow PCOM to increase or decrease individual loyalty member point balances and reconcile those changes (and their financial implications) with the overall loyalty program.

-        The slide below gives a sense PCOM’s reach and partnerships:

-        PCOM is – barring a worldwide pandemic – a generally stable and growing business with high economic margins (gross profit is the best measure of their net revenue, and on that basis economic EBITDA margins are 33%). The table below shows summary metrics over the last few years:

-        PCOM is an asset light business. 2019 D&A was $3.5mm vs. CapEx of $2.4mm.

-        PCOM uses its cash for shareholder friendly purposes. Since 2015, the Company has repurchased $30mm of stock, a significant amount compared to PCOM’s market capitalization over that time period.

Base Case Thesis:

-        We like PCOM’s business model and business prospects:

o   We think they are a long-term grower with the potential for outsized inflection if some things go right.

-        PCOM is really cheap – PCOM’s EV is $165mm:

o   That compares to pre-COVID 2020 EBITDA guidance of $23mm-$27mm and pre-COVID 2022 exit-rate target of $45mm.

o   Notably, over the course of 2020, PCOM signed meaningful new partnership or expanded partnership deals with companies including Air Canada, Qatar Airways, Delta, Caribbean and Ethiopian Airlines, amongst others. We think those new/expanded partnerships + the typical 10% organic growth PCOM has experienced within its existing customer base, means that run-rate – COVID normalized – EBITDA power today is $30mm-$35mm. Consensus estimates have EBITDA for 2021/22 at $11.5mm/$17mm. We think PCOM will dramatically exceed those numbers.

o   We think loyalty program activity returns to pre-COVID levels over 2021 and therefore PCOM is trading at 3.5x-6.5x EBITDA.

-        PCOM’s business has remained relatively resilient during the pandemic:

o   As referenced earlier, unlike the vast majority of travel/reopening companies, PCOM did not have to issue any equity or debt as a result of COVID (it did draw on a credit line, but net cash remains essentially unchanged since the beginning of the year).

o   YTD EBITDA is +$2.8mm. 2Q+3Q EBITDA was -$0.8mm. While the Company’s headline YTD cash from operations looks bad, it is overwhelmingly due to the outflow of customer funds tied to lower new points issuance activity. Excluding that, cash from operations is positive YTD.

o   The resilience of PCOM’s business is highlighted by the relative performance of flight activity vs. PCOM’s gross profit (again, the best proxy for net revenue):

§  Flight activity (https://www.tsa.gov/coronavirus/passenger-throughput)

·       2Q20 = 10% of 2019 levels

·       3Q20 = 30% of 2019 levels

·       4Q20 QTD = 35% of 2019 levels

§  PCOM gross profit:

·       2Q20 = 49% of 2019 levels

·       3Q20 = 41% of 2019 levels

·       4Q20 = positive commentary on 3Q20 CC & meaningful customer activity (see below)

-        PCOM is likely to be one of the earliest beneficiaries of the return of travel:

o   In front of travel returning, we believe airlines and other hospitality companies will aggressively exploit their loyalty programs to attract back travelers; likewise, we believe that travelers will actively look to redeem miles they have been accumulating but not spending (i.e. miles generated from online credit card purchases).

o   Many of PCOM’s customers are offering attractive incentives to customers to purchase points in 4Q20 (https://onemileatatime.com/great-opportunities-to-buy-points/). Of the 14 programs highlighted in that article, only 2 are not selling their points through PCOM.

o   Airlines such as AA, UAL, and DAL are providing more transparency into the financials of their loyalty programs and in some cases have secured financing based on the programs. We think that bodes well for those airlines using PCOM to further monetization of the programs.

Transformational Opportunity:

PCOM is currently capturing a fraction of the value it has the potential to.

PCOM offers an exceptional value proposition to its loyalty program customers. Loyalty points sales generate 60% gross margins for loyalty programs, and PCOM enables programs to capture more of that business.

We have spoken with many of PCOM’s largest customers. They universally speak very highly of PCOM – it’s capabilities, execution, management quality, and the value PCOM delivers.

Based on our analysis, the global TAM for PCOM’s largest segment, Loyalty Currency Retailing, implies a gross profit opportunity of ≈10x 2019 levels (PCOM’s 2019 GP from the segment was $50mm).

We believe PCOM will capture an increasing share of that opportunity, much of which will come from up-selling and cross-selling to existing customers vs. signing new customers. PCOM’s largest LCR customers – who provide PCOM with better access to data and thereby facilitate better targeting – generate 3x the gross profit (on like-for-like basis) of customers whose engagements with PCOM are more limited.

PCOM’s Platform Partners segment represents a huge but mostly untapped opportunity. Platform Partners enables loyalty members to earn and redeem points with a much wider variety of channels than airlines and credit cards only. For example, someone can earn Hilton points by riding with Lyft, and then use those points either with the respective loyalty program or exchange them for points with other programs (including Lyft). That Hilton/Lyft integration is powered by PCOM.

The core idea of Platform Partners is a big one: make loyalty points an alternative currency that can be earned and used across the spectrum of businesses that consumers interact with. And the idea makes sense. If a business is going to give consumers $1 off a purchase, why not instead offer the equivalent of $2 in the form of points on a loyalty program the consumer cares about? The business is happier if that facilitates a sale; the consumer is happier if they value the $2 in points more than the $1 in cash (and the popularity of rewards credit proves there are a lot of consumers that do); the loyalty program is happier because they sold points they otherwise would not have.  Economics and business relationships improve for all parties. In this business, PCOM serves as a platform providing any merchant one point of integration to the loyalty ecosystem and providing any loyalty program one point of integration to a broad variety of merchants. PCOM – through Platform Partners – is Stripe for loyalty programs (hyperbole acknowledged).

PCOM’s Platform Partners business has not realized its potential because neither airlines nor retailers have been willing to fully lean into the program, and there is a chicken/egg type problem – the business needs scale to succeed, but companies want to join only if there is already scale.

We see Cardlytics (see VIC write-ups for background) as being an analogous business and being in an analogous position as PCOM, but they’re dealing with banks and retailers instead of airlines and retailers.

Like PCOM, CDLX possesses unique relationships (banks instead of airlines) and proprietary customer data (credit card spend instead of points balances/spend). Both companies use those relationships and data to present compelling deals to consumers, and those deals benefit all parties in their respective ecosystems. The mechanics are different and there are other differences between the businesses, but at a fundamental level they are very similar.

The CDLX comparison has two meaningful implications:

1)     It highlights the potential of PCOM’s Platform Partners business. CDLX has grand ambitions, and it’s $4.0bn EV reflects that. CDLX trades at 49x 2019 gross profit (PCOM trades at 2.8x). The market believes CDLX will becomes a scaled walled garden digital advertising platform.

2)     Given PCOM’s unique position in the loyalty market, we think their strengths would complement the data and capabilities of a number of potential strategics. While PCOM has strong prospects as a standalone business, we think a tie up of PCOM and someone like CDLX – either through a strategic partnership or an actual combination of the companies – makes a ton of sense. (We’d say the same about similarly oriented strategics as CDLX – of which there are a few and we expect more to come (see CDLX Q&A discussion)).

To use CDLX as an example: A tie up of PCOM and CDLX would provide CDLX’s advertisers access to either the bank or loyalty channel, meaning that advertisers could offer hundreds of millions of consumers deals in either cash or loyalty points. For example, SBUX could offer a targeted cohort of consumers $1 in cash or $2 in loyalty points (from a range of programs) off their next purchase of $20 or more. The benefits to CDLX, PCOM, SBUX, and the loyalty programs are all obvious.

The vision that a PCOM/CDLX tie up could realize is a universal loyalty points platform that could be leveraged by all loyalty programs, financial services, and retail companies seeking to use those points as part of consumer deals.

The tie-up would also yield meaningful data and analytics benefits, thus furthering the competitive advantages both companies enjoy (data and analytics is core to both companies – knowing what customers to target when with what offers).

In short: a PCOM / CDLX tie up would be transformative for both companies.

Notably, the Chairman of PCOM is on the board of CDLX. He was previously the CFO of Aimia, which first invested in CDLX in 2011, likely with the view that the loyalty and bank marketing channels could be synergistic. We think the logic of that thesis is more obvious today than ever.

(To reiterate, the above applies similarly to other strategics, but hopefully highlights the value of PCOM’s capabilities.)

Valuation:

Base Case:

We expect that a year from now things will be trending back to normal, run-rate EBITDA is north of $30mm and on its way higher, and PCOM trades for at least 8x-12x EBITDA.  Even in a case where things never return to normal – either for travel generally or PCOM specifically – and PCOM’s EBITDA is only $15mm, the stock is worth $10/share. Frankly, even in that scenario we have a hard time believing that there aren’t various strategic and financial buyers that wouldn’t happily buy PCOM at a nice premium to the current quote. We also think our multiples are very conservative vs. the general market and may prove far too low. In any event, the R/R skew is fantastic:

Transformational Opportunity:

Should PCOM successfully capitalize on the huge opportunity in Loyalty Currency Retailing or Platform Partners – either on a standalone basis or in partnership/combination with CDLX or someone else – we think the upside from currently levels is many multiples the current share price.

Catalyst

See write-up