Description

Planet Payment, Inc. (NASDAQ:PLPM) is a rare micro-cap with accelerating growth, strong free cash flow and margin expansion with a seasoned management team that has a history of delivering shareholder value. PLPM provides international payment, transaction and multi-currency processing services, where its two segments are (a) multi-currency processing services, which is represented by the point of sale (POS) services designed for the retail, hospitality and restaurant industries, and (b) payment processing services, which offers banks and their merchants with services to accept, process and reconcile electronic payments. To foster a partnership, banks, merchants and processors integrate PLPM’s secure and reliable processing platform to their existing systems.

PLPM has witnessed a sharp price decline recently of nearly 25% since the beginning of 2017 as a result of missing the Street’s topline expectations in 3 of the last 4 quarters as management has purposefully not renewed the low margin business. Contrary to what some investors are expressing by selling off the stock, we think management has done an outstanding job of shifting the focus to improving profitability and free cash flow growth, while still being able to grow revenue at a 5.5% CAGR over the last 2 years.

More specifically over the past 2 years, management has fostered EBITDA margin expansion from 13.6% to 20.9% and FCF growth from $3.8M to $10.8M with a FCF yield in the high single-digits. Now that management has reduced SG&A by nearly 25% since 2012, we believe we will see a nearly 50% increase in EBITDA margins to 30%+ in the second half of 2017 and 2018 due to growth acceleration driven by new ATM relationships which have 2x the Opt-In rate of the additional POS DCC business. Given DCC gross margins are over 90%, this should significantly expand EBITDA margins in 2017 and 2018 as the World Pay relationship further develops. China Union Pay e-commerce relationship should also see accelerating growth, as should Brazil, as the company has worked through its software upgrade at POS.

The pipeline is composed of several new and existing relationships to drive continued growth. PLPM has an agreement with WorldPay to launch DCC at ATMs throughout WorldPay’s network of 70,000 ATMs in the United States in 3Q17 and PLPM will also launch DCC at ATMs in Asia Pacific with CIMB Bank. PLPM will further develop its relationship with SecurePlus Union Pay to provide added solutions for the billions of cardholders in China as international e-commerce proliferates. PLPM has reached a 3-year contract extension with Brazil’s largest acquirer, Cielo, to allow time for a more complete roll-out of the technology to Cielo’s vast merchant network. Through its partnership with Cielo, PLPM continues to strive toward maximizing revenue from existing accounts through an ongoing training process and close coordination with Cielo’s sales and marketing teams to identify merchant opportunities. PLPM will expand opportunities with Global Payments, Inc. (NYSE:GPN) in Canada and the United States to grow PLPM’s footprint with North American retailers. The full launch of HDFC in India will also drive the relationship forward with growth in the India banking markets. Through the growth in cross border transactions and foreign travel, PLPM will witness revenue growth and margin expansion, where Visa (NYSE:V) and MasterCard (NYSE:MA) are reflective proxies that publicly show the growth overtime.

PLPM’s expanding presence throughout the world and its fortified position should drive an extended period of continued top- and bottom-line growth. Considerable operational leverage exists in the business model, as the current expense structure is sufficient to support much higher revenue levels. Margins will continue to expand alongside the expected revenue growth, to an extent that it should grow much faster than revenues in future periods.

When examining the comparables across the payments domain, PLPM trades at a discount on an EV/EBITDA NTM basis despite similar margins and higher growth. PLPM should trade at 12x forward EV/EBITDA multiple minimum given its strength in the global payments arena, which would put the stock at $5.00 (47.5% upside), and if it were afforded a 14x multiple, the stock would trade at $5.82 (71.4% upside). The Street’s guidance is back-half loaded, but it should be noted that even if PLPM grows at 8% this year instead of 10-12%, EBITDA will still grow a minimum of 15% to EBITDA margins of ~24%, which should result in at least 12x multiple.

With the continued revenue growth, margin expansion and FCF generation, the historic comparables become easier in 2Q17 and even easier in 3Q17 and 4Q17 as PLPM witnesses accelerating growth in the latter half of 2017 as the e-commerce business with Union Pay accelerates, U.S. DCC ATMs with WorldPay goes live in 3Q17, and Brazil, Mexico and Canada DCC businesses accelerate. Additionally, as Las Vegas continues to witness traffic from international gamblers, who utilize their credit cards and settle in their home currency, PLPM will continue to witness an increase in volume of transactions per account alongside merchant expansion. Growth of multi-currency processing should lead to solid adjusted EBITDA generation due to the inherent leverage in PLPM’s business model and the ability to convert incremental revenue to EBITDA at a very high percentage level.

Led by CEO and Chairman Carl Williams, management has been actively repurchasing shares for the last several years. Williams, who has done an outstanding job of reducing the operating cost structure by nearly 25%, leads the management team. Management recently noted that the company repurchased 6.8M shares in 2016 and we expect the company will continue to utilize its free cash flow to aggressively repurchase shares.

With the Russell 2000 trading at a frothy multiple of 25x earnings and over 15x EBITDA, Planet Payment is one of the few microcap companies that has strong management, an excellent balance sheet and strong free cash flow growth. For more disciplined, value based manager’s who don’t need to chase performance, we believe Planet Payment offers a very attractive risk reward over the next 12-18 months. We can expect underlying 15-20%FCF growth, share re-purchases and 1-2 turns of multiple expansion as management does a better job of executing on its plan going forward.

Catalyst

·      Now that management has reduced SG&A by nearly 25% since 2012, we believe we will see a nearly 50% increase in EBITDA margins to 30%+ in the second half of 2017 and 2018 due to growth acceleration driven by new ATM relationships which have 2x the Opt-In rate of the additional POS DCC business.

·      Given DCC gross margins are over 90%, this should significantly expand EBITDA margins in 2017 and 2018 as the World Pay relationship further develops. China Union Pay e-commerce relationship should also see accelerating growth, as should Brazil, as the company has worked through its software upgrade at POS.

·      PLPM has an agreement with WorldPay to launch DCC at ATMs throughout WorldPay’s network of 70,000 ATMs in the United States in 3Q17 and PLPM will also launch DCC at ATMs in Asia Pacific with CIMB Bank.

·      PLPM will further develop its relationship with SecurePlus Union Pay to provide added solutions for the billions of cardholders in China as international e-commerce proliferates.

·      PLPM has reached a 3-year contract extension with Brazil’s largest acquirer, Cielo, to allow time for a more complete roll-out of the technology to Cielo’s vast merchant network.

·      PLPM will expand opportunities with Global Payments, Inc. (NYSE:GPN) in Canada and the United States to grow PLPM’s footprint with North American retailers.

·      The full launch of HDFC in India will also drive the relationship forward with growth in the India banking markets.

·      Through the growth in cross border transactions and foreign travel, PLPM will witness revenue growth and margin expansion, where Visa (NYSE:V) and MasterCard (NYSE:MA) are reflective proxies that publicly show the growth overtime.