Playing it SafeCharge

This movement towards online transactions is good news for technology-enabled payments specialists, whose investment attractions have been highlighted in recent years by high-profile takeovers, such as Vantiv’s combination with Worldpay (WPY).

Within this burgeoning sector, Aim-traded SafeCharge (SCH) offers promise. The group facilitates secure payments for businesses and offers fraud protection via its own proprietary platform, which connects to all major card schemes (including Visa, MasterCard and American Express) and more than 150 payment methods. As well as working with third-party acquirers (payment processors), SafeCharge has its own acquiring model, which accounted for just over a quarter of first-half transaction value – 125 per cent growth year on year. Having multiple acquirers, including itself, on tap means customers can keep trading if their preferred acquirer temporarily falters.

SafeCharge's origins are as a provider of payment services for the regulated gaming and financial services industries, which is unsurprising given the company is 68 per cent owned by Teddy Sagi, founder of gaming software group Playtech (PTEC). However it is now branching away from these industries at the same time as it has purged itself of more risky customers. Over the half-year to June 2018, wins included ride-sharing organisation ‘Gett’ and e-commerce business ‘Global-e’, as well as two more gaming operators.

In the expanding payments market, scale – largely denoting transaction values – is essential for companies to remain competitive. Brokers believe SafeCharge's customer quality issue has now largely been addressed, which should allow it to increase its focus on raising transactions to its $20bn 2020 target. A November trading update revealed good progress, with transactions for the year expected to rise by over 40 per cent to around $14bn. However, even hitting $20bn will leave it some way off the $100bn being achieved by the industry's larger players, which means SafeCharge will need to stay focused on expansion.

The company has experienced margin decline as it shifts its focus to higher quality but less profitable customers. Investment in sales and marketing has also weighed on profits. First-half pre-tax profit was down 2.5 per cent to $13.2m despite a 26 per cent rise in revenues to $66.8m. There are signs that margins are stabilising, but given the commercial logic behind building scale (arguably SafeCharge's situation justifies a temporary reversal of the sales-are-vanity-profits-are-sanity adage), the group could decide it is worth sacrificing more margin to accelerate transaction value growth. 

Given the growth focus, it is encouraging that the company recently announced that revenue this year should beat earlier expectations, at $135m-$138m – up from Shore Capital’s estimate of $130m – while cash profits are expected to be in line. What's more, the company continues to be very cash generative, which supports the handsome dividend. The cash pile could be used to fund an acquisition to help boost the business's size and client mix. In addition to cash, SafeCharge holds $35m of mainly unquoted equity investments, which have recently been rising in value.