- Payment Data Systems is an emerging player in the fast growing payments processing industry
- The acquisition of Singular provides a significant boost to top-line
- Payment Data is significantly undervalued
The payment processing industry has seen robust growth in recent years. A report on the payments processing industry, “World Payments Report,” authored by consulting firms CapGemini and French bank BNP Paribas noted that in 2016, worldwide non-cash transactions grew 8.9% over the previous year, reaching 387.3 billion transactions. Growth continued in 2017. In the 2017 World Payments Report, CapGemini and BNP Paribas note that the industry is set to grow at a CAGR of 10.9% between 2015 and 2020. At this pace, worldwide non-cash transactions would reach 726.1 billion, nearly double the levels reported in 2016. That is phenomenal growth by any standards, and it is being driven by robust growth in the developing world.
The World Payments Report for 2017 notes that developing markets will see a sustained CAGR of 19.6% between 2015 and 2020 in non-cash transactions, driving global growth. However, growth in mature markets is also expected to be robust.
Two of the fastest growing segments within the payments processing are the E-Payments and M-Payments segments, forecasted to grow at a CAGR of 17.6% and 21.8%, respectively. The growth in both these segments of course will be driven the growing penetration of mobile payment devices, adoption of instant payments and growth in emerging markets, according to the World Payments Report.
About Payment Data Systems
Given the anticipated robust growth in the payments processing industry, one would expect promising players in the payments processing industry to trade at a significant premium. While some of the big names are indeed trading at a premium, there are still some emerging players that offer the chance to create significant value. One such company is Payment Data Systems (PYDS).
Based in San Antonio, Texas, Payment Data Systems is an integrated payment solutions provider. The company offers a wide range of payment solutions to merchants, billers, banks, service bureaus and card issuers. PYDS also offers merchant account services for the processing of card-based transactions through VISA, MasterCard, American Express, Discover and the JCB networks. PYDS is also engaged in the creation, management and processing of prepaid card programs for corporate clients.
Payment Data Systems operates through three entities; Payment Data Systems, FiCentive and Akimbo. In September, the company further expanded its operations with the acquisition of Singular Payments LLC. The deal was announced in March last year and the company closed it towards the end of the third quarter of 2017. The company paid $5 million in total consideration, which included $1.5 million in cash. The acquisition provided Payment Data with 1,200 new merchant account customers. In terms revenue, it represents an additional $10 million. The acquisition essentially doubles Payment Data’s top-line apart from enhancing its product offerings.
Growth Through Acquisitions
While Payment Data seeks to achieve organic growth, a significant part of the overall growth will be achieved through acquisitions. The Singular acquisition was part of this strategy of growing through accretive acquisitions.
In terms of growing through acquisitions, Payment Data is focusing on two areas. The first is credit card processing portfolios. The rationale behind such acquisitions is immediate cash flows. Those cash flows of course would provide PYDS the fuel needed to drive further growth. The second type of acquisitions will be of companies that have complementary products and services.
In terms of organic growth, PYDS seeks to leverage its indirect sales model to drive top-line growth.
Of course, growth will also be driven by favorable macro factors. As noted at the start of this report, the payments processing industry as a whole is seeing robust growth and the E-payments and M-payments in particular are high growth areas.
Another industry related factor that will drive growth for Payment Data is regulatory initiatives. In its World Payments Report, CapGemini and BNP Paribas note that “key regulatory and industry initiatives have taken a transformative approach encouraging competition among service providers and disrupting inertia in segments of the payments value chain. And, now, these changes are more obvious to customers in the form of innovative solutions.”
The main point that the report makes is that these initiatives have the potential to lead to significant results in the short-term. These initiatives will benefit the industry as a whole and of course emerging players such as Payment Data.
Recent newsflow has been quite positive for Payment Data. Earlier this week, the company announced that it successfully met criteria set forth by NACHA- The Electronic Payments Association (“NACHA”) to become a NACHA Certified Third-Party Sender. The certification will allow PYDS to set itself apart in today’s competitive market by demonstrating to financial institutions that they are vetted, validated, and valued.
Wayne Gonzalez, Vice President of Risk Management and Compliance at Payment Data, noted that being NACHA Certified means that effective controls, standards, and oversight are all core competencies.
In the final week of 2017, Payment Data also strengthened its financial position as it closed a $3 million registered direct offering. Net proceeds from the offering totaled $2.75 million.
With the acquisition of Singular, PYDS has boosted its top-line. The combined companies are expected to have revenue of over $20 million this year. PYDS though has a market capitalization of just $32.62 million, which means it is trading at a price to sales multiple of just 1.5x. For a high-growth company, this multiple is too low. I believe that the Singular acquisition has provided much needed fuel to grow further and this will slowly start to reflect in PYDS’ shares. Some of the acquisitions in the payment processing industry in recent years have happened at an average multiple of around 3x. If the same multiple is applied to PYDS, we are talking about a share price of around $4-5 per share, which is more than double from where PYDS is currently trading.
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