PayPoint vulnerable to ongoing consumer squeeze

PayPoint (PAY), the payment services business, is under no illusions about the unsteady state of UK consumerism. Across the six months to the end of September, it saw pre-tax profits fall – despite rising revenue – as cost of living pressures showed little sign of abating. 

However, the macro environment isn’t entirely to blame for the company’s current position: it said acquisitions shifted the balance of profit and cash generation toward the second half. Earlier in the year, it bought out multi-retailer gift card provider Love2shop – resulting in what it claims will be a “more H2 weighted performance and contribution to the financial year as a whole”.

Revenue in PayPoint’s shopping division increased by 4.2 per cent to £32mn, largely thanks to the expansion of its PayPoint One electronic point-of-sale (EPoS) solution. Meanwhile, sales in its e-commerce business rocketed up by nearly 72 per cent to £5.1mn on growing use of its Collect+ parcel drop off service. 

These wins were partly offset by falling revenue in the payments and banking division, which was down 2.3 per cent to £25mn due to a reduction in payment volumes in the energy sector. The company provides the financial infrastructure that allows customers on prepayment meters to ‘top up’ their gas and electricity. 

The cost of living crisis, combined with unseasonably warm weather, forced a shift in energy demand from prepayment customers. Though PayPoint trades on a humble forward price-to-earnings multiple of 8.2x for the full year, we think there could be some volatility ahead. UK retail sales have recently fallen to two-year lows – and that doesn’t bode well for a group that relies on growing transaction volumes. Hold.

Last IC view: Hold, 534p, 22 November 2022