Share of the week: PayPoint decision causes price surge

Investment in online and mobile payment services has taken off over the last few years and PayPoint has struggled to keep up. Now, bosses have decided to bow out of the market, to the relief of many in the City. Excited investors chased the shares higher, too, hitting an eight-month high over 14% above last Friday's closing price.

Alongside full-year results, chief executive Dominic Taylor talked of an industry fighting for faster development and on a larger scale. The board doesn't reckon the risk is worth it, especially when pegged against the opportunities it has around its retail proposition. With a book value of £55 million on JP Morgan estimates, the cash raised from the sale may help PayPoint buy into new territories.

The online and mobile business was loss-making at year-end despite transaction volumes growing 10%. So, the divestment should stem losses and increase earnings reliability. And PayPoint will still continue to use the technology to develop its multi-channel offering.

"We believe the planned disposal simplifies the equity story," says Bob Liao, an analyst at Cannacord Genuity. "The company plans to refocus on helping retail network clients and retailers serve consumer needs. We believe a strategy refocused on leveraging its network should allow the group to increase return on assets."

(click to enlarge)

PayPoint's Romanian operations and retail services drove growth in the 12 months to 31 March. Net sales jumped 8% to £123.1 million and pre-tax profit rose by 8% to £49.6 million, giving earnings per share of 57.4p. Income investors will be pleased with a 9% boost to the dividend at 38.5p per share, underpinned by strong cash conversion.

Increasing profitability and market share, the number of Romanian bill payments rallied by over a third, with the number of Collect+ joint venture transactions up 39% at 18.8 million. Although online and mobile transactions were up 10% at 145.3 million, the business still lost money.

Management spent £10 million on new third generation tablet-based terminals in the period, which is set to be piloted by customers in the next year.

JP Morgan likes PayPoint's offering of different payment channels to different customers. The broker is bullish on exposure to "pockets of growth", including the new site network in the UK and Romania, as well as Connect+. However, they are worried that exposure to its Top-Ups business and a "relatively" full valuation could limit upside risk for the moment.

Cannacord doesn't think so. "Shares trade at 14.7x 2016 EPS, a significant discount the UK technology universe median of 16.1x. We believe the shares should trade at higher multiples given PayPoint's high cash conversion, high reliability of earnings and attractive dividend yield. We reiterate 'buy' and our target price of 1,400p (based on DCF using an 8% discount)."

The news helped PayPoint's share price shoot through technical resistance at 900p (see chart) and through its 200-day moving day average. However, the shares, according to the relative strength index (RSI), are now in overbought territory.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.