A testament to the opportunity presented by the changing way people shop is the growing number of payment processing companies in the FTSE 350. And the online payments growth story looks healthy. Digital research company eMarketer forecasts that global retail e-commerce sales will hit $2.4 trillion (£1.9 trillion) this year, more than double the level of four years ago. That expansion is reflected in City earnings forecasts for Worldpay (WPG) and Paysafe (PAYS), with both expected to post double-digit earnings growth this year.
But there are less positive themes, too. The ever-present threat of cyber attacks is something that Paysafe has fallen victim to in the past. And payments companies also face pressure from regulatory authorities to combat money laundering and fraud. What’s more, the immature nature of the market means winners and losers are inevitable.
Worldpay is currently the UK’s largest payments company by market capitalisation. Its underlying cash profit was up by almost a fifth in the first half of 2016 as it processed over £200bn of transactions. And it expects to increase revenue by around 10 per cent a year over the medium term. But that growth looks to be priced in already, with the shares trading on almost 22 times forecast 2017 earnings. That’s not far off the PE ratio of 24 commanded by industry giant PayPal (US:PYPL).
Paysafe had a rocky finish to 2016 after a short-seller made a series of damaging claims about its business, including that it had overstated its earnings potential and had links to gambling operations in countries where it may be considered illegal.
We moved our buy tip to hold on the back of the negative sentiment, but Paysafe appears since to have shrugged this off. Management has dismissed the claims, pointing out that plenty of due diligence was done before it moved from Aim to the main market.
The other player, PayPoint (PAY), resolved several issues last year. The group finally offloaded its online and mobile payments businesses, which funded a 38.9p special dividend and sharpened its focus on retail technology and services. Then, in December, PayPoint reached agreement with Collect+ partner Yodel on future terms of business.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| PayPoint | 964 | 657 | 16.5 | 5.8 | 13.4 | Hold, 965p, 23 Dec 2016 |
| Paysafe | 381 | 1,857 | 35.3 | 0.0 | -3.1 | Buy, 399p, 18 Mar 2016 |
| Worldpay | 285 | 5,700 | 27.9 | 0.2 | -5.6 | Hold, 315p, 9 Aug 2016 |
Favourites: If Paysafe stays on track to deliver the 15 per cent earnings growth tipped by the City this year, the shares could start to look interesting again, particularly as they trade on a lowly 10 times forecast earnings, according to Bloomberg.
Outsiders: PayPoint still has much to prove this year. The rollout of its new retail terminal, PayPoint One, is under way and we have some concerns about the costs associated with this. With the shares trading on a relatively full 15 times forward earnings, we stay on the sidelines for now.
