Declining retail sales will challenge PayPoint’s recovery

Just as point-of-sales provider PayPoint (PAY) is starting its recovery from the pandemic it is about to be hit with a cost of living crisis. The company provides payment software for small- and medium-sized enterprises, e-commerce and bill payments, but shopping makes up 51 per cent of group revenue and last year saw a 46 per cent rise in sales from continuing operations. This growth has been driven by the continued switch from cash to cards, which has been accelerated by the pandemic. Card payment volumes increased by 3.5 per cent year on year against tough comparators last year.

Service fees increased 13.1 per cent thanks to additional PayPoint One Sites and the annual retail prices index increase in prices. Most of PayPoint’s rising costs should be passed through to retailers, but higher prices of goods, by extension, could mean a lower number of transactions. While the structural shift towards cards is a long-term source of growth for the shopping business, in the medium term the cost of living crisis could result in a reduction in transactions. The GfK UK Consumer Confidence Index fell to -38 in April (from -15 this time last year), which implies consumers will be spending less. We have already seen this in the declining retail sales figures this year.

The other concern for PayPoint is the declining revenue from payments and banking. Last year, revenue was down 3.3 per cent and is down 22 per cent on a two-year basis. This is the result of consumers making fewer large bill payments. The switch to digital bill payments also means cash bill payments fell 8.1 per cent. 

FactSet consensus guides for operating profit to rise 5 per cent next year to £49.6mn. Broker Jeffries was also pleased with the reduction in net debt from £68.2mn to £43.9mn. This was largely driven by the £29.9mn disposal of the Romania business. Despite the gloomy macroeconomic outlook, the board remains “confident in the delivery of further progress in FY 2023 and meeting expectations”. This confidence is reflected in the 8.4 per cent increase in the final dividend, which is enabled by the strong underlying free cash flow.

The affordable forward price/earnings ratio of 11 reflects the declining payments and banking division and the unavoidable economic headwinds. This could offer a viable entry point, but we are struggling to look beyond declining consumer confidence. Hold.

Last IC View: Hold, 632p, 25 Nov 2021