Recession catches up with PayPoint

It wasn't so long ago that PayPoint's management sounded confident that their business - which allows customers to pay a variety of utility bills, obtain cash from pay-ATMs, or top-up their mobile phones - would prove to be fairly recession-proof. Indeed, with November's half-year figures management said that "the company's bill and general payments sector is robust in a recession, where the consumers' discretion in expenditure is limited for essential services." But such resilience wasn't so apparent when PayPoint issued a trading update earlier this month - revenues had slumped 11 per cent in the period from end-March until 26 July.

On balance, that isn't so surprising. When times get tough, people fall behind with their bills and become more cautious when topping-up mobile phone credit. Evidence for that can be seen well beyond PayPoint's experience. Take mobile phone giant, Vodafone, for example - in its trading update last month, management said that the European operations had suffered voice and message revenue decline. Utility providers are also being hit as customers struggle - British Gas owner Centrica, for instance, reported this month that "credit losses from both residential and business customers increased in the UK, and there was a significant increase in charges for bad debts." And it remains doubtful that struggling consumers will flock to use pay-ATMs when cash can be withdrawn for free elsewhere - at the full-year stage, PayPoint reported that the average transactions per ATM site had fallen from 620 a month to 565.

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And with economic pressure increasing, customer use of Paypoint's services could continue to drop. Unemployment has already reached 2.4m, with most economists expecting it to peak at around 3m or more during the course of 2010. And economic growth isn't showing much sign of life either. UK GDP fell a staggering 5.6 per cent in the year to June, with the OECD forecasting no UK economic growth at all, overall, during 2010. So, PayPoint can expect its hard pressed customers to continue to struggle with their bills, or to go easy when topping up their mobile phones, for some time to come. In fact, broker Numis Securities doesn't expect earnings growth to return at PayPoint until 2011.

That said, it's not all bad news. The group's online operation, for example, saw transaction volumes grow 34 per cent in the year to end-March, with revenues up 63 per cent to £8.1m. The group's fledgling Romanian operations area also growing fast - its terminal network there grew 42 per cent in the year to end-March to 5,702 sites, although has since fallen to 5,567 as low volume sites were removed. A 3.6 per cent prospective dividend yield, based on Numis' full-year pay-out estimate, looks decent enough, too, and the group's hefty cash pile certainly offers comfort in today's difficult times.

But that shouldn't detract from the fact that PayPoint is proving to be far from recession proof. Moreover, it's not clear that PayPoint's prospects will brighten substantially once the recession ends - margin pressure, in particular, could become a concern. "Mobile top-up commissions are currently very lucrative and we think unsustainable," points out analysts at Numis Securities. Indeed, it could even prove to be the case that cash-based payment services, such as PayPoint's, have only a limited shelf life. "We believe cash as a means of payment is in structural long-term decline," says Numis.