Why Has Optimal Payments Plc Soared While Monitise Plc Sinks?

Is Optimal Payments Plc (LON: OPAY) set to prosper and will Monitise Plc (LON: MONI) sink?

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The online and mobile payments business is a potentially lucrative one, but it’s highly competitive, as a look at two companies with contrasting fortunes will attest.

The past two years has seen the share price of Optimal Payments (LSE: OPAY) soar by 136% to today’s 289p, including an 11% rise on the day so far following a bit of after-hours news on Monday evening. Optimal has been attempting a takeover of Skrill Group, a digital payments company operating across Europe, and now has approval from the Financial Conduct Authority for the deal.

Completion is expected on 10 August, and the firm intends to apply for a main market LSE listing shortly afterwards to move away from AIM.

Profit is what counts

Optimal, which described Skrill as “one of the largest pre-paid online voucher providers in Europe with its paysafecard brand” has the advantage of having been in profit for several years, so we do have some valuation metrics from which to judge. And even with the big share price jump we’ve already seen, that judgment looks favourable to me.

Prior to the update on the Skrill deal, forecasts were suggesting a P/E of 18 for this year, dropping to a little over 15 in 2016. That’s a bit above the FTSE average, and Optimal’s dividends should yield less than 1% this year and next, but for a company with strong growth potential it’s an attractive valuation.

Fortunes have, sadly, gone in the opposite direction for Monitise (LSE: MONI), once a favourite with Visa Inc which was an early shareholder and partner. But Visa is moving towards its own payment system, has been selling off its Monitise shares, and is widely expected not to extend its deal with the company beyond its expiry in 2016. The result has been an 89% collapse in the share price over the past 12 months, to just 4.5p.

Reversal of fortunes

To put the two companies into further perspective, their relative market caps have reversed — after the collapse, Monitise is now valued at only £105m, while Optimal Payments’ valuation has climbed to more than £1.2bn.

The future for the whole digital payments business is still very open, and the launch of Apple Pay by Apple Inc in the UK has certainly livened things up — after just a few weeks of business in the US, Apple Pay had already captured 2% of the mobile payments market.

But it’s not necessarily bad news for Optimal Payments or Monitise, as both are working on integrating their systems with Apple’s as Apple opens its interfaces for access by others — and the end result should be complementary.

Which is better?

Should you buy either of these two companies? Well, if you bought into Monitise you’d be banking on the shares being oversold, but sentiment does seem firmly against the company at the moment — and with the highly competitive nature of the business, it’s unlikely that all of today’s players will be around in five years time.

If I had to choose, I’d go for Optimal Payments, as it is already profitable, is paying dividends (just), and its latest acquisition will bring desirable European expansion.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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