Wag Payment's debt pile will drag on earnings

Trucking software company Wag Payment Solutions (WPS) wants to be a one-stop shop for its freight customers, which means that it has been buying up smaller companies to widen its own functionality. This has left it with a lot of debt just as interest rates are elevated and the economy is slowing. 

The problem with Wag is its exposure to macro conditions, which are notoriously hard to predict. With the freight exposure and big debt pile, there is lot riding on the direction of inflation, interest rates and the wider economy. Management has blamed the macroeconomic environment for its decision to lower near-term net revenue growth guidance into the mid teens, down from the high teens previously expected.

Growth has continued despite the wider economic slump. Organic net revenue increased 14.4 per cent, while the organic adjusted cash profit (Ebitda) rose 21.6 per cent.  For any software business a cash margin above 40 per cent is good. Combine that with the double-digit top-line growth and Wag should command a big valuation.

Holding it back is the net debt pile of €301mn (£257mn), up from a cash position of €28.7mn last year. This was mostly due to an over €306mn acquisition of Polish and Slovenian fleet management software business Inelo, which took Wag’s net debt to adjusted Ebitda ratio to 2.9 times. Interest expenses increased 196 per cent to €8.2mn, which contributed to the 37 per cent drop in profit before tax to €8.5mn.

Broker Peel Hunt has lowered its 2025 adjusted cash profit estimate by 10 per cent but despite these cuts still has Wag trading on a 2025 free cash flow yield of 10 per cent. For a company with this much growth that looks cheap. But the debt will create a headwind, and we would like start seeing that come down before we upgrade. Hold.

Last IC View: Hold, 83p, 17 Mar 2023