WAG Payments’ cash flow set to surge next year

Wag Payment Solutions (WPS) sells fleet management software to trucking companies. A concern from an investment angle is that the haulage industry is particularly cyclical, so the slowdown in European economies will limit Wag’s growth this year. But there is now also a concern linked to rising debt, with the leverage ratio expected to exceed the top end of its target.

The company invested heavily during 2022. Cash levels dropped by 35 per cent to €146mn (£127mn) due to technology investments and the acquisition of Webeye and JITpay. Once the acquisition of Inelo, a fleet management solutions provider in Poland and Slovenia, is complete then net debt to cash profit (Ebitda) will rise above the targeted 1.5-2.5 multiple range. Management has promised to bring it within range over the medium term and, if growth continues at the same pace, this should be possible. Last year, organic revenue increased by 19.4 per cent and adjusted cash profit rose 17 per cent, thanks to a 12.9 per cent increase in customers to 16,950, while a strengthening net revenue retention rate points to a degree of brand loyalty among its payment solutions and tax refund customers.

When it eventually pulls back on investment and acquisitions, cash flow should surge. House broker Peel Hunt expects cash from operations to rise to €82mn next year, up from €44mn. This would give Wag a nice free cash flow yield of 8.1 per cent. The broker also highlighted the 43 per cent adjusted cash profit margin in its buy case.

We are a little more cautious about investing in a logistics adjacent company that has taken on a lot of new debt heading into an economic downturn. The valuation is cheap but we are going to stick to hold for now.

Last IC View: Hold, 7 Sep, 2023