PayPoint suffers weakening UK consumer sentiment

Payments company PayPoint (PAYE) is starting to feel the effects of weakening UK consumer demand come through in its results. The company is split into three divisions: shopping, ecommerce, and payments and banking. Shopping has slipped from making up 53.2 per cent of the business mix at the 2021 half-year to 51.8 per cent this year.   

Overall, the shopping division actually saw net revenue increase 3.2 per cent. However, this growth was driven by a 9 per cent increase in service fee revenue, which is indexed to retail price index inflation. When this is stripped out, card payment net revenue was down 0.6 per cent because card value processed decreased 0.7 per cent to £3.54bn.

Compared with the wider economy, these numbers aren’t too bad. In the three months to October, overall UK retail sales were down 2.4 per cent compared with the previous quarter. However, PayPoint can only resist the cost of living crisis for so long. The ecommerce division was the strongest performing corner of the business, with net revenue increasing 45.7 per cent and transactions up 60.6 per cent. Fast growth is great, but the issue is that ecommerce makes up just 5 per cent of revenue.

With the payments pie probably shrinking, PayPoint plans to take more of what is left. It recently agreed to acquire gift voucher and prepayment company Appreciate Group for £83mn. The platform has 400,000 customers and the hope is that these customers would also be interested in PayPoint’s payment products.

Despite the share price slipping, the FactSet consensus 2024 price/earnings ratio has risen to 14 because of some earnings downgrades by brokers. We are similarly sceptical about how things will hold up in the choppy economic environment, but the double-digit free cash flow yield is soothing. Hold.

Last IC View: Hold, 585p, 26 May 2022