Bet on Optimal Payments' FTSE 250 prospects

After listing on Aim as Neteller in 2004, the group acquired Netbanx in 2005 then Optimal Payments in 2011. The group processes payments, provides online wallets and sells pre-paid cards. It roughly doubled in size following its £846m takeover of rival payments group Skrill in August. The deal has added new services, allowed the group to process over 100 payment types in more than 40 currencies, and management expects it to generate around $40m in annual cost savings by the end of 2016.

Optimal's payment processing business, Netbanx, handled more than 130m transactions in 2014 and has more than 20,000 customers across markets such as retail, gaming, travel and enterprise. Optimal gained approval from MasterCard and Visa in Europe to act as an acquiring bank in 2014, which has broadened its appeal and allowed it to take a larger cut of processing fees.

Meanwhile, Optimal's other division, Neteller - its 'stored value' business - provides online wallets and Net+ pre-paid cards. Digital wallets reduce the hassle of e-commerce by allowing gamblers and shoppers to make purchases on different sites without entering their payment details every time, and enabling merchants to accept a larger range of payment methods. Users can also transfer funds on to physical pre-paid cards to make withdrawals at cash machines, while Skrill's 'paysafecard' lets consumers buy vouchers in cash from a distributor then use them to pay for goods and services online. Skrill's complementary offering and additional products bode well for the division's growth. Indeed, broker Edison expects pre-paid vouchers alone to generate 12 per cent of Optimal's revenues this financial year, rising to 24 per cent in 2016.

The Skrill deal follows Optimal's acquisition of two US payment-processing businesses, Meritus and GMA. And it recently acquired FANS, a mobile wallet and software developer that helps merchants gather and analyse data on their customers. Those deals have diversified the group away from gambling - which accounted for 46 per cent of first-half revenue - and Asian markets - it now earns 43 per cent of revenue in North America, 19 per cent in Europe and 38 per cent in Asia and the rest of the world. The transactions have also reduced its reliance on its largest client, which accounts for 29 per cent of total revenues.

Optimal's management plans to apply for a main market listing, which they expect to propel the group into the FTSE 250. That promises to broaden the group's investor base, reducing risk and volatility. It also wants to rebrand as Paysafe Group, continue to expand into the broader e-commerce market - it recently launched NetellerGO!, an online checkout page for e-commerce merchants - and develop new mobile and remittance services. But the group won't abandon its gambling roots, particularly as more and more US states look set to come online. It has agreements with the likes of Caesars Entertainment and 888 to provide payment processing, fraud detection and other services across the pond.

Rising sales in both Optimal's divisions fuelled a 28 per cent rise in first-half adjusted cash profit to $50m. Broker Canaccord Genuity predicts Skrill will accelerate the group's growth rate. It expects cash profit to rise 61 per cent to $139m this year, then 77 per cent to $245m in 2016. While the dilution effect of a May rights issue and new shares issued for the Skrill acquisition will hold back EPS growth, at 15 times consensus next-12-month earnings, Optimal's shares look cheap compared with PayPal on 23 times and Safecharge on 20 times.