Description

Worldpay 

Worldpay is a leading payment processor, formerly known as Vantiv (changed the name after buying Worldpay Group, a UK payment processor).

The new WP is a best in class payment processor, with a leading position in the U.S (Vantiv) and a global eCommerce platform (Global eCom, which was a part of Worldpay Group).

Worldpay currently trades at around 21x~ 2019 P/E and offers an IRR of high teens at least for the next 5 years. Our base case calls for high-single-digit organic revenue growth, continued margin expansion given WP’s high incremental margins and thanks to its appropriate financial leverage and good history of capital deployment.  We believe this is a reasonable price to pay for a high quality company, in a very defensive industry, with top management and secular tailwinds for the foreseeable future.

In this writeup we will review the following key points to our thesis:

•  Business description.
•  The eCommerce Payments market.
• Integrated solutions in the U.S (a.k.a IPOS / ISV / integrated payment systems) market.
• Synergies following the merger with Worldpay Group.
• Downside case.

Business description

Worldpay’s business comprises three segments. Technology solutions (40%), Merchant solutions (51%~) and issuer solutions (9%).   Merchant solutions is a slow growing segment, with traditional merchant acquiring through ISO, direct and merchant bank (bank referrals, which currently grows a bit faster due to low scale and market share gains, but we don’t count on that continuing for long). Issuer solutions is processing and card issuing for financial institutions that outsource their payment processing, which is forecasted to grow LSD as well.  Technology solutions is WP’s main growth engine, and is made up of 50% eCommerce (growing high teens) and 50% integrated solutions (growing mid-teens). 

In January this year, Vantiv, one of the leading payment processors and merchant acquirers in the U.S took over Worldpay Group, the leading merchant acquirer and a global eCommerce provider.  The new company will end 2018 with $4B revenues, 50% Adj. EBITDA margins and more than $1B in FCF.  

eCommerce market

The eCommerce market is currently $2.8T, or 13% of the global payments market ($21T~) and forecast to grow at a CAGR of 16%, with domestic transactions expanding at 13-14% and cross border transactions at 25%~.    Over the past 5 years, eCommerce grew from 7% share to 12% of total consumer spending as it continued to benefit from cash-to-card conversion.

The eCommerce market is highly fragmented, with mostly regional players. There are very few players that are able to compete on a global scale, and even fewer which offer complete omni solutions for multinational merchants (including traditional POS, eCommerce, and iPOS).  WP currently has 12% market share of the global eCommerce market, with around $350B total volume processed, second only to PayPal.

We view WP’s competitive standing favorably, due to its massive scale, ability to provide one-stop solutions to U.S. and European merchants and due to their unequal ability to support cross border eCommerce for  99% of the world’s GDP, with over 300 payment types and 126 different currencies. According to our market analysis, the eight largest eCommerce players (WP, PayPal, Adyen, Stripe, Wirecard, FDC, Ingenico), will command 70%~ of the entire eCommerce market by 2022 (85% exc. The Chinese eCom market, which will still likely be controlled by domestic players). Consequently we expect smaller, domestic players to lose share to the benefit of large providers such as WP.

Integrated solutions

The integrated solutions market (payment solutions integrated with the merchant’s commerce systems,) in the U.S offers a $2T total processing volume opportunity.   WP is one of the leading players (alongside FDC, Square, GPN, Chase Paymentech), and uses a partnership model, as opposed to a captive model (i.e SQ and FDC). In the partnership model, WP offers an API to any ISV (independent software vendor) who wishes to enable payment capabilities in their software solution.  Because WP does not bank on a specific vertical (such as GPN, which buys specific ISV’s or Square – which is mostly used for SMB’s in retail or restaurants) WP taps the entire TAM, has better growth prospects and is less reliant on specific industry verticals.  While differentiation between Integrate Solution payment gateways may be limited, scale is critical in processing thanks incremental costs.  As a scale player in the traditional market, WP will therefore likely win its fair share of the integrated market. With less than 50% of the TAM penetrated, we see a runway for 3-4 more years of growth in the teens for WP’s integrated payments sub-segment in the U.S alone.

Synergies

WP announced a three year plan for $200mm of synergies by end of 2020.  The total synergies provide 470bps EBITDA expansion, even without core business improvement.  In our opinion those synergies are beatable, and the company has a history of successfully exceeding prior synergy targets

Downside case

Our downside case envisions a recession in which WP’s revenues decline by 5% , EBITDA contracted by 6% (at a conservative 80% incremental margin on the way down). We expect WP to command a 20% premium to the market in such an environment and see its multiple shrinking to 16x in a mild recession. Consequently we envision  30% downside in total for the shares, and would be happy to acquire more shares at that valuation.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Catalysts

Secular tailwinds – cross border eCommerce exposure

Cost synergies

High quality management – proactive and not reactive