Description

Repay is a high-quality business trading well below fair value and should re-rate as the company executes through a challenging 2023 macro backdrop. We believe shares could trade over 50% higher by the end of the year and longer-term could get taken out by a strategic acquirer at an even higher share price.

Repay Holdings is a payment solutions business focused on underserved niches of the payments industry. Primarily serving lenders and loan servicers across payday, automotive, credit unions, and mortgage financing, Repay enables debit, ACH, E-Cash, and other payment modalities to make it easier for creditors to make debt payments. The other 20% of the business is focused on B2B payments, particularly accounts payable (AP) automation, and software and services. 

Repay’s markets are nondiscretionary, meaning that creditors must make payments or businesses must service payables regardless of macroeconomic conditions. Therefore, the overall TPV is generally more stable than payments businesses focused on merchant acquiring. Despite this, tightening credit conditions have created headwinds to revenue growth, and investors have negatively re-rated the shares, which has been further exacerbated by the recent banking crises in the US. We believe investors are overestimating the negative impact the current credit tightness will have on the business and creating an opportune time to acquire shares of a durable business. We have adjusted our model assumptions to include the expected impact of the macroeconomic situation, and we are below consensus on every metric.

While the macroeconomic backdrop is uncertain, we believe investors are underappreciating the lifetime value of loans that Repay’s services cover. Auto loans have a life of 5-7 years on average and mortgage loans have a life of 15-30 years. Payday lending is the most sensitive (about 20% of revenue), as these loans range from a few weeks to a few months in duration on average. Therefore, the current tightness in credit is not a massively detrimental headwind to near-term earnings, and it would likely result in more muted growth in 2024 and beyond as slowdowns in loan initiations lead the revenue impacts to Repay. Our model reflects these assumptions on slower than consensus and guided growth. Worth noting, the ARM (accounts receivable management) portion of the business (10% of revenue) is countercyclical and grows well during periods of credit stress, as lenders and loan servicers are under greater pressure to collect.

Repay currently trades at a P/E of 7.8X in 2023, 7.2X in 2024, and 8.0X in 2025 – based on our estimates. If you consider the refinancing of the convertible issue that will need to occur in early 2025, that will amount to a drag of $0.20 on EPS in 2025 and a full-year effect of $0.24 on 2026 EPS. Consensus figures do not include this, but we include the impact on our 2025 EPS. Even without the impact of a refinancing in 2025, we are still below consensus on EPS by 9%. This is despite the company announcing new wins that should begin to drive further growth and margins that we also exclude from our numbers.

Repay’s GAAP FCF yields on our figures are as follows:  7.5% in 2023; 9% in 2024; and 6.6% in 2025 (assuming a refinancing). Repay’s valuation is well below any relevant payment processing peers, largely due to its customer mix of primarily mid-size and smaller companies, its exposure to subprime lending markets (although it also services prime lenders), and its leverage profile (~3.15X net debt to EBITDA for 2023).

We believe this business deserves at least a 11X P/E multiple in 2024 and a 14X P/E on 2025 EPS adjusted for the refinancing. This corresponds to FCF yields of 8.3% in 2024 and 3.9% in 2025, which we believe are appropriate for a business that can reliably grow topline HSD to LDD and EPS at LDD rates for the next few years. Further, we have conviction that Repay is strategic in nature, making it a likely candidate for a takeout from private equity (as has occurred in the past) or a competitor. 

• Our valuation projections result in target share prices in 2024 and 2025 of $9.60 and $10.42, respectively. This would present a two-year IRR of 32%.

Business Description

• Repay primarily offers payment acceptance solutions, such as debit payments, ACH enablement, and E-Cash, to offer lenders and loan servicers more modalities to get paid. Many subprime creditors do not have credit cards or traditional bank accounts, which can complicate payment acceptance if vendors do not have other payment options. Through its 240+ software integrations with loan management systems, dealer management systems, and other ERP software, Repay offers a seamless and sticky payment solution to clients.
• Repay also has a growing presence in B2B payments, particularly in accounts payable (AP) automation, virtual cards, and vendor enablement. Repay also has its own clearing and settlement engine that is uses to steer volume away from the traditional processors, partly to vertically integrate its offering to clients and partly to self-service the payday lending portion of the business (~20% of revenue) that Visa and Mastercard cannot service.
• Repay’s co-founders still lead the business, with one serving as CEO and the other as President, despite a few transactions with private equity in the 20 years since inception. Based in Atlanta, the business initially focused on debit payments acceptance in the payday lending industry but has expanded to a much more diversified business mix through organic investments and M&A.
• Since going public in 2019, following a stint of private equity ownership, Repay has taken advantage of being public and executed several M&A transactions, the biggest and most important being BillingTree. BillingTree allowed Repay to expand materially into B2B payments and verticalize further into healthcare and credit union clients. Payix is another important acquisition that expanded Repay’s coverage in the auto financing sector, where Repay integrates with auto lenders’ DMS systems to offer payment solutions.
• Business mix: 70% consumer payments, 20% business (B2B) payments, and 10% software and services.

Competitive Advantages

• Underserved Markets: Repay has built a successful business focusing on underserved niches, adding new verticals over time. The competition in payday lending, certain auto lending, and certain B2B payments markets is small, allowing for good organic growth and sustainable pricing. The bids for new business are often not formal RFPs and are often not competitive, as there is a lot of open space in Repay’s verticals.
• Deeply Integrated Solutions: Repay has over 240 software integrations, where Repay’s payment solutions are back ended into the core software clients use to manage accounts receivable and accounts payable. Owning these integrations is critical to landing new clients and retaining existing ones. Clients tend to run all payment volume through a single provider, such as Repay, and rarely switch processors.
• In-House Clearing and Settlement Engine: Repay started building its own clearing and settlement engine, allowing it to process its own volume, a few years back to solve for restrictions placed on payday lending payment processing by Visa and Mastercard. Since then, it has expanded to serve other clients outside of that segment, allowing Repay to sell a more vertically integrated solution and control the customer relationship more deeply.

Strategic Takeout Potential

• Repay has been owned by a few private equity sponsors during its life before becoming publicly traded. The rationale for going public was twofold: provide exit liquidity to the previous sponsor and allow for more inorganic growth with a share currency to do deals. Repay has completed a handful of acquisitions to diversify its business mix and deepen its coverage in key verticals like healthcare and automotive.
• We believe this diversification away from consumer payday lending increases the strategic potential for the business, as most competitors would not (and could not) own a business with significant exposure to that segment. This is largely due to the fact that Visa and Mastercard cannot process payday lending payments, which is why Repay created its own clearing and settlement engine in the last few years. With that exposure diminished to ~20% of revenue (and declining) and Repay’s clearing and settlement engine working, it makes it easier for a competitor to own this business. These hurdles were not and are not a consideration of private equity, making a PE takeout as likely today as in years past.

Balance Sheet Considerations

• Repay has a large, distressed convertible note that carries no interest expense. Repay issued $440mm of notes at 0.0% in January 2021 with a convert price of $33.60. The company took advantage of the interest rate policy during COVID, but likely will result in a refinancing in FY25, as the notes mature in January 2026. We estimate the full principal balance will be refinanced at a 6% interest rate to model out the impact to EPS. This would result in ~$26mm of interest expense annually. Our estimates for 2025 reflect the impact of a refinancing in early 2025.
• Repay’s net leverage is 3.18X and should end 2023 just below that at 3.16X. The company is acquisitive, but its leverage is too high to permit further transactions. Further, the company has made several acquisitions in the last 5 years, and management has publicly stated that they will be focused on integration and organic growth for at least the next year.  

Conclusion  

• While the current banking backdrop and credit tightening present headwinds to Repay’s markets, we believe the company is undervalued to its revenue durability, strategic potential, and margin improvement it possesses.
• We welcome any critiques and questions.

Catalyst

Execution of business plan