We think the earnings potential for payment processing firm Worldpay (WPY) is not being fully recognised by the market and reckon now is a good time to buy the stock as it reaps the benefits from its $10bn combination with Vantiv in early 2018.

A trade-off from that deal was that the combined entity ended up having its main stock market listing in New York. Despite retaining an additional listing in London it no longer qualifies for the FTSE 100 index. That’s no reason to ignore the stock as you can still freely buy and sell it on the London market.

WHAT DOES IT DO?

Worldpay processes more than 40bn payment transactions a year across 146 countries and 126 currencies.

It makes money by collecting fees on these transactions. It also generates an income by advising customers on how to lower costs to credit issuers, card networks and other intermediaries, by settling these transactions in a currency of their choice as well as offering subscription-based data insights and fraud solutions.

As a leader in e-commerce payments, the company is well positioned to benefit from the continuing growth of online shopping across the globe.

UPGRADED GUIDANCE

Alongside first half results on 9 August Worldpay upgraded guidance on cost synergies from the Vantiv tie-up from $45m to $50m.

As well as the cost savings from aspects like combining back office functions, mergers and acquisitions can also deliver so-called revenue synergies from initiatives like cross-selling products and services.

For the first time Worldpay put a number on the latter, targeting $100m by 2020. This adds up to total synergies of $200m by this date.

Often when a company talks about the synergies from a big merger, they can feel quite intangible and there can be a suspicion the numbers have been massaged to help justify the money and time put into a big transaction.

However, there is solid logic behind the argument that Worldpay and Vantiv make a good fit and reason to believe that, if anything, the targeted synergies are conservative. Indeed, investment bank Berenberg sees synergies of $280m by 2020.

HOW DO THE COMPANIES SIT TOGETHER?

Vantiv was the number one merchant acquirer in the US, specialising in the retail, restaurant, grocery and drug sectors, and business-to-business markets. Worldpay specialised in digital services, the travel sector and online retail, and was the number one merchant acquirer in the UK.

Neither of the two parties had much of a presence on the opposite side of the Atlantic, meaning little geographic crossover.

The enlarged business recently secured its first two joint cross-sell contract wins with ‘large and well-known digital players’, showing how combining forces has already led to financial success.

‘E-commerce is a $3 trillion industry with volume growing mid-teens overall and 25% in cross-border e-commerce,’ says Worldpay’s chairman Charles Drucker. ‘We are the largest player in global e-commerce, targeting the fastest-growing area of the market, including global brands and large digital natives. This allows us to grow faster than the market, even though we are already a leading player.

‘As spending continues to move online, our opportunity continues to grow as the market adds approximately $300 billion of new growth annually.’

A RISK TO CONSIDER

One issue to note is the UK Payment Systems Regulator’s proposal to conduct a market review into the supply of card acquiring services. It wants to see if banks and payment specialists have taken advantage of a lack of competition to overcharge smaller businesses and prevent them from moving to alternative service providers.

Worldpay is among approximately 30 card-acquirers which dominate the UK market including Barclaycard and Lloyds Bank Cardnet. Worldpay’s UK business contributes 15% of total company net revenue with its UK small-to-medium business acquiring portfolio contributing approximately 5% of total company net revenue.

‘We believe the merchant acquiring market is competitive as evidenced by recent new entrants and industry SMB churn rates averaging 15% to 25%,’ insists Stephanie Ferris, Worldpay’s chief financial officer.

‘The PSR will likely conduct its market review in 2019 following a consultation period that ends in September of this year. Therefore, while it is impossible to predict the outcome of the review, we do not currently expect a near-term impact.’

OUR VIEW ON THE INVESTMENT CASE

While that is certainly an issue to monitor, we remain bullish on Worldpay’s investment case and certainly believe its shares are worth buying.

A price-to-earnings to growth or PEG ratio is a good way of valuing the business and Worldpay is very attractive on this basis. It trades on a 2019 PEG ratio of 0.9-times based on forecasts from Berenberg – a figure below 1.0 is considered good value. (TS)

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