Description

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Summary thesis (including 3 key tenets)

Prosegur Cash (CASH) is the cash logistics spin-off from Prosegur Group and the #2 by size, but most profitable, industry player globally. It is an 'unsexy' but critical part of the global financial system, performing a function which allows CASH to earn 20% operating margin (OPM) / 15% Cash Return on Investment (CFROI) today. The investment case is built on the belief that the franchise's ability to create value through compound growth at a high return on capital for many years to come is misunderstood, and therefore mispriced, by the market. The pricing inefficiency most likely occurs due to 1) the mis-conception of cash already being in structural decline, whereas the core Cash-in-Transit (CIT) market is still growing 4-5% globally, and 2) country risk premia due to its 2/3-plus LatAm exposure. The industry is oligopololistic with key features being high fixed costs and economies of scale, high switching costs and some network effects. Organic growth is hooked to nominal GDP with a tailwind in LatAm from higher penetration of outsourcing (plus an elevated security requirement) and cyclical macro recovery, which will be leveraged on a more than 90% fixed cost base; as such, 8-9% sales CAGR drives ~20% free cash flow (FCF) CAGR. Capital from FCF plus re-gearing the B/S to 2.5x ND/EBITDA (worth €1.24 per share) will be allocated to value-accretive M&A, consolidating an industry still fragmented below country leaders who typically have 30-50% share.

The key tenets of the business model are:

1)    Cost leadership: economies of scale through the high fixed cost base of network infrastructure - higher density leads to lower marginal cost per customer drop / pick up - meaning that profitability correlates tightly with market share.

2)    Trusted brand & reputation: reputation for a high level of service & security is critical and the entrenched position this provides then enables cross-sell of value-add services;

3)    Switching costs: services are tightly integrated into customer business processes and enable cost-effective operational efficiency for the client, e.g. superior working capital (WCap) management, which helps account for 95% retention rates.

The shares today are a clear valuation anomaly at a 20% discount to peers (using consensus figures) despite faster growth, operational superiority and conservative forecasts post the spin-out, all suggesting rerating potential. At 10x my estimate of normalised owner earnings, the stock today already prices in a zero growth outlook, mispricing the strength of the moat and a realistic market growth outlook. Base Case FV €3.56/sh (+55% TSR or 17% 3Y IRR) based on 15x 2019e NOPAT (peers 20x-plus today) and >8:1 bull/bear skew suggest a highly attractive risk / reward setup. There is likely to be a short-term catalyst with a placing from the parent when their lock-up expires in September.

Business background (history, brief division descriptions & market positions, historic financial performance)

CASH has a dominant position in the cash logistics industry predominantly in Spain and Latin America – a position which is difficult to replicate in a market where there is a high correlation between market share and profitability. The acquisition of Juncadella in 2001 was critical in the corporate development, as it established CASH as a leader in Latin America, giving it a presence in seven countries there. They have since used M&A to enter Asia (Singapore and India) and Germany in 2012, as well as reinforcing their position in Brazil with the acquisition of Nordeste. Finally, they entered Africa by acquiring a minority stake in South African based SBV. The overall global cash logistics market is ~$15bn in size and growing at 4-5% CAGR. CASH are number 2 in global CIT market share with 14% (Loomis are number 1 with 20%), with the top 3 (Brink’s number 3) accounting for 47% of global share and the top 5 equal to 61%; the remaining ~40% is made up of 500+ smaller regional players, who often lack national coverage and are therefore operating from a position of significant competitive disadvantage. The shares listed at €2 (low end of the pre-IPO range) in March 2017 and are up ~15% since.

Product mix [N.B. all figs pro forma 2016]

Cash-in-Transit (68% of sales), or CIT, is the collection and transportation of cash from bank branches, ATMs (including refills), retail clients and central banks; this is the known as the ‘first wave of outsourcing’.

Cash Management (28%), or CMS, is the processing and vaulting of cash intake at specialist cash branches operated by the company, as well as cash stock management for some central banks, and is the ‘second wave of outsourcing’.

New Products (6%) is a variety of value-add outsourced services comprising the ‘third wave of outsourcing’, most notably end-to-end ATM management and retail cash automation; the latter provides note and coin acceptors and recyclers for both front and back office, early credit where necessary (based on this visibility of cash flows) and is offered in standard solutions for small and medium sized customers, or customised solutions for larger customers, increasing stickiness.

Banks and retailers dominate market volumes, with retail margins highest due to banks typically commanding larger volume discounts. The regulatory burden is increasingly leading to financial institutions incrementally outsourcing labour intensive activities, which means that the synergistic CMS activities are growing faster than traditional, lower margin (relatively commoditised) CIT for customers seeking an integrated solution; bundled pricing means that overall margins are also trending up.

Geographic mix

LatAm (€1.2bn sales, €314m EBITDA): High cash usage (91% of transactions), persistently high levels of inflation, elevated security requirements and still-growing penetration of outsourced services make the key Latin American countries of Brazil and Argentina uniquely structurally attractive cash logistics markets. The region is dominated by Brazil and Argentina, but they also have profitable operations in Mexico, Colombia, Peru, Chile, Uruguay and Paraguay. Overall regional market share across the cash supply chain stands at 57%.

-          Brazil: €482m sales / ~30% EBITDA margin, nearly 50% market share. Outsourcing is relatively well developed within financial institutions (~60% of volumes) but more under-penetrated at retailers; the latter is changing with the introduction of automatic cash machines meaning this segment, which ialso higher margin, is growing in double-digits. Competition is predominantly Brink’s (23% share) and local player Protégé Group (~20%), with CASH the only player providing nationwide coverage. There is room for further consolidation of the remaining ~7-10% held by up to 20 smaller regional players.

-          Argentina: €435m sales / ~30-35% EBITDA margin, market share 65-75% across Argentina, Uruguay and Paraguay. Demand is concentrated in financial institutions currently, although interestingly Uruguay has the highest penetration of automated retail cash machines in LatAm. Typical CASH contracts only last 1Y due to the high inflation, allowing the company to negotiate the pass-through of cost inflation to clients (backdated to 1 Jan). Despite this, the business has >30 year business relationships with its top 10 clients. Additional growth through acquisition should not be expected due to their already very strong position.

Europe (€0.5bn sales, €60m EBITDA): dominated by Spain and Germany – they have 50% market share in home market Spain, which has served as a testing ground for a number of productivity enhancements (Loomis have 49% of the remainder); they are also market leader in Germany with 40-45% share and the only player with national reach (Ziemann are number 2 with ~25%). These are lower growth regions given higher penetration rates, but a  cost-out led turnaround opportunity at the German business - where margins are currently ~5% vs 21% for the rest of the region after a number of years acquiring smaller, lower productivity businesses – will support profit growth, as will mix shift towards the 3rd wave of outsourcing.

Asia, Oceania & Africa (€0.1bn sales, €10m EBITDA): these figures are effectively Australia as I do not include the JVs in India and South Africa, which may be long term growth opportunities provided there is change in legislation re. foreign ownership of majority stakes.

Historic financial performance & current balance sheet position

Sales have grown 10x over the last 20 years to €1.7bn, of which ~1/2 has come through M&A. Over the past 3 years, sales CAGR at constant currency has been 13% (organic ~8%), with operating margins growing from 17.8% to 19.5% over the same period (indicating drop-through margins ~30-35%). CFROI has improved from 10% to 14%.

This compares to OSG / OPM at peers of:

-          Brink’s 3% / 5-6%

-          Loomis 2% / 10-11%

Higher profitability can be seen as being in large part as being  due to better efficiency metrics: both EBIT per CIT vehicle (€67k) and EBIT per branch (€838k) are ~2x higher than Brink’s or Loomis.

EBITDA converts at ~80-90% into Operating Cash Flow (OpCF) with some working capital (WCap) investment as they grow (cash conversion cycle ~40 days). WCap seasonality typically sees collection weighted to the second half of the year; CASH does not make use of factoring or reverse-factoring instrument as a policy for normal course of business. CapEx intensity is ~5% of sales p.a. predominantly on cash centres/vaults (30%) & armoured vehicles (25%). I estimate maintenance CapEx at €46-50m i.e. broadly in line with depreciation.

The current balance sheet (B/S) position is comfortable at ~1.4x ND/EBITDA (pro forma) despite taking on €600m additional debt as part of the spin-off; interest cover is 15x / fixed charge cover 6x. This leaves ample room for the business to continue with the strategy of fill-in acquisitions (see below). 86% of financial liabilities are denominated in €, with the key syndicated loan’s covenants consisting of i) ND/EBITDA below 3.5x and ii) EBITDA/financial interest greater than 5x. Undrawn facilities include €200m 5Y revolver and €60m bilateral credit lines.

[N.B. Much more detail on product mix, the various geographies and this historic financials can be found in the prospectus or sell-side initiations; my aim is to focus on the core components of the investment thesis.]

Business model (‘how do they make money?’) & barriers to entry

Cash handling contract pricing typically references volume (sometime value) of cash handled, in addition to other metrics e.g. visit frequency, collection times. This can drive positive operational gearing effects if inflation-led growth in cash values outstrips handling cost inflation, due to automation or the introduction of larger currency denominations. Price increases are negotiated via contractual indexation (i.e. wage inflation pass-through) or annual renegotiation. In Latin America, CASH passes through wage inflation retrospectively on completion of collective bargaining agreements. Liability for loss or theft is capped in most contracts. Contract duration for CIT is 1-2 years as standard, with integrated solutions contracts, covering CIT and CMS, usually 3 years and retail automation contracts typically 3-5 years, so there are clear earnings quality improvements from building the full integrated solution.

The industry has oligopolistic features at a country level and, while competitive strategies include price, differentiation is dominated by other factors. The following paragraph is taken from competitor Brinks’s 10K: “Primary factors in attracting and retaining customers are security expertise, service quality and price. Although competitive pricing pressure exists in many markets, high levels of service, security and expertise and value-added solutions are used to differentiate the proposition as opposed to competing on price alone.”

Some key factors for business success in the cash logistics industry are therefore (in no order):

-          Brand name recognition

-          Reputation for high level of service and security

-          Risk management and logistics expertise

-          Global infrastructure and customer base

-          High quality insurance and financial strength

The company’s core operation (CIT) is fairly commoditised, so we need to understand the sustainability of the current strong return on capital profile within this context. BCG’s ‘The Art of Embracing Commoditization’ offers good insights to corporate strategy in this environment: a company facing a commoditised product must “determine whether it can establish a sustainable position on the basis of any one of three factors: its cost position; whether, and to what extent, there are imperfections in the market that it can exploit; and its ability to redifferentiate its product.” I will focus on the first and the last of these, as there is clear evidence of their existence within the cash logistics industry. In many ways, traditional CIT activities are following the Tobacco model i.e. over time, declining volume / commoditisation of the service drives industry consolidation and pricing rationality. On top of this, there is a drive for a larger component of sales coming through higher value-add services which can leverage the network and existing relationships – this means that cash logistics is still a good model as they have the opportunity to penetrate the customer base further with limited additional fixed assets (higher asset turns) using bundled services, which have more opaque pricing (higher margins).

Undoubtedly, though, the key barrier to entry is the scale factor where, as one often sees, many of the factors mentioned below come together to create a virtuous circle. Per Bruce Greenwald’s ‘Competition Demystified’, 2 essential conditions must exist for company to harvest the benefits from economies of scale:

1)    “Fixed costs…must account for a large share of total costs, with the measure of ‘large’ related to the size of the market in which the company operates.” Economies of scale only exist so long as the decline in fixed costs for the last unit sold is still significant – in bigger total markets there are fewer relative economies of scale. CASH’s fixed costs are 90-95% of the total cost base and their market is defined at a local / country-level market, so cost bases are not spread across borders. Proof = correlation of mkt share vs profitability.

2)    “The competitive advantage of economies of scale has to be combined with some customer captivity in order to keep competition at bay.” Prosegur Cash operations are well embedded in customer workflows and help them become more efficient e.g. better WCap. The operations therefore have switching costs, are labour intensive (CASH employs ~39k people ex-JVs) and outside customers’ core competences, involving a level of capital intensity (armoured cars, retail cash counters) which is more appropriate and cost effective for a specialist outsourcer able to spread the fixed costs over a number of customers. Proof: low churn / 95% retention rates – market shares have traditionally been relatively stable with large gains typically built through M&A; it has often been suggested that banks might in-source but this has never happened suggesting that the economics do not stack up.

However, as ‘The Art of Embracing Commoditization’ also mentions, scale advantage does not automatically lead to cost advantage, and operational excellence is a key component. Most notably, this means stable processes and integration of continuous-improvement regimes as well as developing technologies and methods to reduce waste and increase yields – in this case typically efficient routing technology for the fleet of armoured vans.

To summarise the components of the ‘moat’ that we see at Prosegur Cash:

Cost advantage / economies of scale: marginal costs for the market leader are lower than for smaller players – higher market shares drive a bigger dilution of fixed costs through higher route density for armoured vehicles (i.e. more stops per hr for each truck) and better efficiency at cash centres. CASH is #1 in 9 of the 15 markets in which it operates, with market shares overall well above 40%. This provides a strong position to pass on labour cost increases to customers despite some concentration (top 10 are 34% of total). With CASH’s strategy and industry trends both heading towards more consolidation, this appears a relatively permanent cost advantage.

Perceived product differentiation through trusted brand / reputation: Prosegur Cash has been operating since 1976 and churn rates overall are very low – e.g. retention rates were 95% in 2016, and in Argentina the top 10 clients have been contracting with CASH for more than 30 years on average. Larger players like CASH can offer a full range of security services and offer a “total risk approach”, involving internal audit, security and insurance to mitigate risk.

Locking in customers through high switching costs: switching costs are ultimately greater than simply 1-3 year average contract tenures. Their role is systemically important, they help improve efficiency and are designed into systems and customers’ operational work flows. The new waves of outsourcing / technology-led services also improve their ability to get close to the most advanced clients; this means they have input into innovation which helps cement or improve their market position.

Well-invested IT infrastructure: CASH operates 2 distinct IT platforms that cover the entire value chain for cash logistics and processing. Continued investment in these platforms will drive productivity gains, facilitate best practice transfer and improve cost efficiencies.

Drivers of Growth and Profitability

I expect CFROI to continue on an improving trend from 14% to 17-18% over the medium term, as increased sales density over a predominantly fixed cost base drives operational gearing. Sales growth is hooked to cash volumes which track nominal GDP growth, plus / minus outsourcing penetration in LatAm vs the increase of non-cash payments in Europe. Brinks have indicated they see a 3x-plus leverage effect (ref: Strategy Presentation) - the key to driving this positive operational leverage effect is mostly straightforward, but worth being reminded of:

1)    Running more volume through existing infrastructure

2)    Optimise existing route structure using technology to increase density

3)    Hub and spoke operations for money processing (CMS)

4)    Utilise larger branches with  satellite garage network for CIT

5)    Grow SG&A slower than revenue

Two other core levers exist to improve profitability through internal actions: 1) cost-cutting / restructuring, notably in Germany where EBITDA margins should rise from 5% to 12% vs Other Europe currently 21%; 2) increased mix of value-add services e.g. retail cash automation. Cost inflation has historically been passed through successfully - the industry typically differentiates through service levels, security expertise & value-add solutions rather than competing on price. I forecast 7-8% sales CAGR to 2019 vs 13% to 2016 and EBIT margins to improve from 20% to 24%. Guidance is mid-single digit sales growth (in €), in line with the weighted average consultant market growth forecast of ~6%, plus €50-150m annual bolt-on contribution (+3-9%). The opportunity for further consolidation is material as 500+ smaller regional players across the world lack national coverage (40% of global mkt), while CASH management have an observable track record of value creation to date following this strategy.

Strategy: how are management widening the moat through capital allocation, what is their track record at doing this and are they incentivised appropriately to deliver this strategy, and how is competition responding?

Management target mid-single digit organic sales growth in € terms, €50m to €150m spend on M&A per annum, plus investment to best position CASH to benefit from the third wave of cash logistics outsourcing, including retail automation, ATM management and other high margin services. This move up the value-chain is widening the moat by deepening already strong relationships by embedding CASH’s services further into customers’ business processes. Management have guided to being comfortable re-gearing the business to 2.0-2.5x net debt-to-EBITDA to deliver this, which is lower than peers (who target 3x) but I see as appropriately conservative given high fixed costs and some sensitivity to the macroeconomic environment.

CMS is more capital intensive as it involves the use of greater fixed assets e.g. cash centres, vaults and cash counting machines as opposed to just the fleet of armoured trucks (operating leases used in Spain only); as such, CMS growth captures 50% of total CapEx spend vs 25% for CIT. Retail automation’s capital intensity is still unclear as the dominant model may involve either customers or the cash logistics provider owning the cash handling equipment (leasing to the customer in the latter case).

“Success leaves traces.” Sir John Templeton

Management have a clear and observable track record, having worked at CASH for an average 15Y across a range of roles and delivering 10x sales growth over 20Y o/w ~50% has come through M&A at ~0.7-0.8x sales paid. LTIPs are based on FCF generation and value-accretive acquisitions, and bonus based on FCF performance, which I view as appropriate for the business model and strategy.

Both peers, Loomis and Brink’s, have stated intentions to grow their business in Latin America – this is understandable given the high margins and higher organic growth rates available there. In Brink’s case they have a foothold in Brazil already, while Loomis have recently announced an acquisition that gives them ~20% market share in Argentina. We believe that there are a couple of prescient points to make here: firstly, Brink’s is under pressure to improve profitability at the core through restructuring, which belies a patchy track record on operational execution as well as being somewhat incompatible with aggressive growth and pricing irrationality; secondly, Loomis would appear a generally rational competitor in other markets plus there is no guarantee that they would be successful in gaining share permanently under any irrational pricing strategy due to CASH’s deep knowledge of operating in a country that is not a straightforward environment. In any case, some re-investment is baked into my forecasts to account for this.

Forecasts & Valuation

On current year (FY17) numbers, the shares trade on 13.5x EV/NOPAT (i.e. owner earnings), 7.5x EV/EBITDA, 2.0x EV/Sales (vs 20% OPM), 4% dividend yield covered by 6% FCFe yield after growth capex. This is a clear valuation anomaly versus the peer group: on consensus, a greater than 20% discount on EV/NOPAT and EV/EBITDA to Brink's (25x / 9x n.b. depressed profitability) & Loomis (18x / 8x), as well as also being cheaper than parent Prosegur Group (20x / 8x) despite the broader group’s earnings being diluted by the lower quality manned guarding business. These discounts are too wide - and arguably should not exist - given the fundamentals of growth and profitability favour Prosegur Cash over the peer group. Regressions of EV/IC vs ROIC/WACC and  EV/S vs OPM highlight this well (75% correlation), against a broad peer group of business services providers including those whose top line is also hooked to volumes in the cash market e.g. De La Rue (UK-listed banknote printer). The valuation ascribed to Prosegur Cash is currently implying a deterioration in conditions and/or is being driven by factors not totally related to the fundamentals of the business which are transitory, namely: perceptions of country risk premia and placing / minority ownership overhang. For the latter, one has to be comfortable as a minority investor in the business as, while there will be sell downs of the Prosegur Group stake in the near future (see below), the parent has indicated that it wishes to retain 51% ownership; there is little incentive for the parent to pursue unhelpful oversight and, while the dividend that is upstreamed is a large component of cashflow, this should not prove an impediment to capital allocation for growth at CASH given further consolidation of the cash logistics market was a stated intention of the spin-off. Like all risk premia, country risk is highly subjective but I would note that i) a higher cost of capital is embedded in my assessment of fair value and ii) risk premia for Brazil and Argentina should, ceteris paribus, be trending south given the trends of recovery observable in both economies (political scandals notwithstanding).

The key components of my forecasts out to FY19 are:

• Group sales CAGR +7.8% in € terms (+8.4% at constant currency), within which Europe’s CAGR is 2% and LatAm ~10% due to higher nominal growth.

• Group EBITDA margins grow from 22.2% to 25.6%: variable costs (10% of total FY16 cost base) grow at the same rate as sales; fixed costs grow at 75% of sales growth, which implies some reinvestment compared with simply growing these at inflation.

• Europe EBITDA margins grow 410bps from 13.1% to 17.2% supported by Germany’s margins expanding from 4.5% to 12% driven by cost out initiatives; the remainder of the European business has gentle margin accretion from 20.8% to 21.6%.

• LatAm EBITDA margins grow 240bps from 26.7% to 29.1% despite higher growth, as I assume Argentina’s margins remain stable at 32.5% (mid-point of mgmt.’s guidance of 30-35%) due to some re-investment due to increased competitive intensity from Loomis’s entry; Brazil’s margins grow from 30% to 33% based on the cost formula above.

• Assuming stable 1,500m diluted share count, this drives earnings power in FY19 of €0.21; note that I add back post-tax amortisation of acquired intangibles (effectively goodwill, such as customer relationships / brands which already have costs to support them borne within the income statement).

• With tax at 90% of P&L (34% effective rate) and €90-100m p.a. CapEx (vs guidance ~€80m) they will be producing €200-270m FCFE p.a. over 2017-19 providing scope to pay a €130-170m divi (policy 50-60% of net income) and still be building cash for use in M&A. Note FY17 includes cash proceeds from sale of the Brazilian security business back to the parent.

Base Case FV €3.32/sh (+43% TSR or 14% 3Y IRR): 15x FY19e NOPAT based on current ROIC being sustainable for 10Y (in line w/ business services sector history) at 5% CAGR before fading to the 9% WACC; this is supported by current peer profit multiples & EV/S regression value (€3.74). It implies a 1.5 turn re-rating from the current 13.5x which is consistent with delivery against conservative targets set at the time of the spin-off and as the discounts associated with the forthcoming parent placings and country risk shrink. Note that this base case does benefit from some debt to equity value transfer within the EV, but does not give any credit within valuation for the strategic re-gearing of the business to 2.0x – 2.5x ND/EBITDA via bolt-on M&A. It also strips cash required for WCap purposes, which I estimate at 10% of sales. Sensitivity to de-rating: 11x = €2.60, 12.5x = €2.96 (i.e. 8-9% capitalisation rates).

Bear Case FV €1.69 (-26% TSR): 3% sales CAGR (organic) which leads to FY19 EPS 10% below consensus, capitalised at 9% to assume zero growth and a de-rating from the current multiple.

Bull Case FV €7.35 (+221% TSR): 12.5% sales CAGR (organic) / 29% EBITDA margin which leads to FY19 EPS 68% ahead of consensus, capitalised at the Loomis multiple (20x NOPAT) based on strong delivery of upgrades closing the gap to fair value; also add the excess capital from re-gearing to 2.5x ND/EBITDA (€1.24/sh).

Catalysts

1. Earnings momentum: Consensus is still forming with sell-side initiations so there is limited signal from sell-side forecast revisions yet. 1H17 results were good, though, with +22% sales growth (+16% OSG) vs consensus FY17e +11% suggesting strong operational momentum. Drop-through margins are 30-35% so the key driver of future revisions is beats / misses at the top line which are generally supported by a stronger global growth environment including ongoing cyclical economic recovery in LatAm. There is also a mix effect from higher margin geographies (LatAm) and services (Cash Mgmt / Other).

2. M&A: acquisitions to build out the network density, notable growth opportunities in Asia and Africa e.g. buying out Indian JV if Indian government allow foreign CIT companies to hold controlling stakes.

3. Higher interest rates: could boost currently low growth rates in Europe.

4. Parent sell down: Prosegur Group still own 72.5% (via 2 structures) so there will be liquidity events to take this to 51% (180 day lock ups i.e. September placing).

Other considerations

Relationship with Prosegur Group parent

CASH procures central functions (HR, finance, legal etc) from an independent entity, PGA, which serves both the Prosegur Group and Prosegur Cash and is charged at attributable costs plus 5% (FY16: €47m) on a 5Y contract with automatic renewal. CASH also pays 0-3% of revenue to the parent for the use of the Prosegur brand. The pro forma cost for 2016 was 1.8% of sales, based on revenues and profits of the local operating companies (aka “effectiveness of the trademark”), but the gauge and level is somewhat opaque as an outsider.

Currency

CASH does not hedge currency exposure, which is over 80% Latin American currencies (predominantly Brazilian real and Argentinian peso) at the EBITDA level, while financial liabilities are largely denominated in € today (see above). Given the amplification of effects further down the P&L, a sensitivity of these currencies shows that at ARS / EUR 19 and BRL / EUR 3.2 there is a ~7% negative impact on EPS.

Labour

Employee costs currently account for ~2/3 of total costs and ~95% of the workforce is unionised; CASH therefore manages more than 70 collective wage agreements so is in constant union negotiation. Note that there is a €58m provision on the B/S to account for 2,754 open labour cases, of which the bulk relate to “Causas Trabalhistas” in Brazil, which are both common and long duration. I apply a 50% weighting to these liabilities within my valuation to roughly account for time value of money and historic rate of conversion into actual cash outflows.

Risks

1. Cashless society: while there is generally no clear evidence of a full shift to a cashless society, bar Sweden, this is a risk over time – initially in developed markets (~15% of CASH operating profit) followed by emerging markets, with a likelihood that development times may shorten. The key regarding value of CASH equity is 1) how rapidly this process happens and 2) CASH’s own ability to innovate. Much has been written on this topic in the various broker initiation notes – I recommend Citi and Santander as providing the best overviews.

2. Macroeconomic sensitivity: cash in circulation correlates with nominal GDP, while interest rate levels can make moving cash more (high interest rates) or less (low i/r) attractive.

3. Political risk: there are 2 aspects to this – i) FX: Brazil and Argentina account for 70-80% of current group EBITDA, so there is some translational exposure back into € should the Brazilian Real (BRL) or Argentine Peso (ARS) weaken significantly, as well as a mismatch with finance costs given all of the new €600m debt is euro-denominated. While these currencies are historically volatile, the correlation between currency depreciation and high inflation benefits CASH’s business and offsets the possible negative effect at EBITDA. Given amplification further down the P&L, Exane estimate that each BRL 0.20 and each ARS 1 move have 2.0-2.5% sensitivity to EPS; ii) Cash repatriation: while there are no controls currently in place, these have been something that CASH has had to deal with recently in Argentina.

4. Concentration of clients: while in-country cash services markets are typically a duopoly or oligopoly, concentrated demand means it can also be an oligopsony. There is a tail risk that the large commercial banks could form consortia and insource these contracts. There is no evidence of an inclination to do this in any of CASH’s geographies, but it did happen in the Netherlands and Brazilian banks have recently done something similar in the credit checking industry so it is a risk that needs to be monitored.

5. Regional profit concentration / competition: profits are dominated by the high margins achieved in Brazil & Argentina (LatAm >80% of operating profit) and therefore theoretically at risk from increased levels of competition, particularly in Argentina as the market opens up. Competition is inevitable, however I believe (per comments above) that there are appropriate barriers to entry and limited historic examples of wholesale organic market share gains, while both the ability to deliver strategy successfully (Brink’s in Brazil) or desire to act as an irrational entrant given acquisition of a 20%-plus market share (Loomis in Argentina) is not clear-cut.

6. Attack risk: attacks are ultimately a cost of doing business – CASH maintains insurance cover for claims in excess of €1m, and manages smaller claims liabilities through risk mitigation, self-insurance and ad hoc 3rd party cover.

Catalyst

Per above: 1) Earnings momentum given run-rate ahead of forecasts, 2) M&A, 3) Higher interest rates, 4) Liquidity event likely for parent sell-down