Why I think under-loved PayPoint is fighting fit for the future

Why PayPoint looks in excellent shape, and management should be commended for being focused on the underlying fundamentals of the business.

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PayPoint (LSE:PAY) became an under-loved stock at the start of the coronavirus pandemic in early 2020, and its share price has struggled to recover since. Since 2016 it consistently traded at prices between 800p and 1,200p before falling off a cliff in early 2020 to reach an all-time low of 389p.  Today the price is sitting at around 650p awaiting the end of UK lockdowns.

PayPoint is best known as the company behind the in-store payment services found in thousands of UK locations including convenience stores, supermarkets and petrol stations.  As the majority of these locations have been closed for months, the company’s short-term prospects have looked rather bleak throughout 2020.

But I believe PayPoint is an exciting company that was in a very good position before Covid-19, and its long-term prospects remain excellent.  PayPoint is also amongst a unique cohort of companies that has had the same CEO in place for over two decades – which is always a good sign of underlying stability.

If we remove coronavirus from the analysis, ‘underlying stability’ is what defines PayPoint.  With an astonishing operating margin of 47.2%, in 2020 the company delivered £56.8m of profit before tax from a revenue of £213.3m, with net debt of just £12m.  Yet this was not exceptional – similar results were consistently delivered in 2018 and 2019, too.

A common misconception is that PayPoint is merely a provider and operator of ATMs.  This would represent a risk in a post-coronavirus cashless society.  But its network of 3,620 ATMs is just one of multiple highly diversified revenue streams.  PayPoint also delivers an omnichannel digital payments offering, which includes providing contactless and chip and pin to 9,435 retailers.  The company also operates a highly regarded parcel ‘pick up and drop off’ network across more than 8,000 sites, which processed 24.5m parcels in 2020.

PayPoint’s position working with over 46,000 retailers across the UK (and Romania) is therefore highly entrenched.  Its network has more branches than all UK banks, supermarkets and Post Offices put together.  98.3% of the urban population live within one mile of a PayPoint retail partner.  And the company is empowering its partners to engage with a portfolio of its services far beyond payments.  This entrenched position creates a near-impenetrable barrier against any real threat of competition from the emerging cohort of tech-led companies that are focused exclusively on point-of-sale payment processing.

Of course, PayPoint’s short-term prospects are inevitably highly correlated with the progress of the UK Government in combating Coronavirus and ending lockdowns.  But the company is in excellent shape and management should be commended for having paid down debt and focused on the underlying fundamentals of the business.  Given the ongoing success of the vaccine roll out in the UK, and the prospect of reaching the end of a series of lockdowns, I don’t believe there is any reason that PayPoint shares cannot breach their pre-coronavirus level of 1,000p in 2021.

PayPoint shares might not arouse much excitement amongst those most used to encountering its branded ATMs inside their local store or newsagent.  But with a price-to-earnings ratio of just over x10 and the changing coronavirus outlook in the UK, I’m considering buying it now, and expect a 65% appreciation in 2021 followed by a consistent future dividend yield of at least 5%.

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 considered so you should consider taking independent financial advice.

Tej Kohli does not currently own PayPoint shares. The Motley Fool UK has recommended PayPoint. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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