|Shares Out. (in M):||55||P/E||0.0x||0.0x|
|Market Cap (in $M):||119||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-5||EBIT||0||0|
Planet Payment (“PLPM”) is an international payment and data processor. In addition to traditional payment processing solutions for credit and debit cards and electronic check payments, the company has a unique international platform that enables merchants to offer consumers the option to pay in their own currency. The company has a great new CEO who recently bought over $160k of stock in the open market (average cost slightly higher than the current price) and was granted restricted stock that doesn’t vest until the stock rises close to 200% from current levels. Weak execution from prior management has resulted in the market overly discounting significant medium term potential of new large market opportunities in Brazil, Mexico and Indonesia. On our numbers, the stock trades at a mid single digit multiple of 2015 free cash flow, which implies “multi-bagger” potential consistent with the new CEO’s compensation agreement.
PLPM offers two main services: Multi-currency processing and traditional payment processing:
Multi-currency processing (about 2/3 of the current revenue rate).
If you have ever been to a foreign hotel that offered you the choice to pay in US$ instead of local currency, you were likely using PLPM’s multi-currency processing platform to complete the transaction. It may sound simple, but multi-currency processing is actually a fairly complex and dynamic process. We have talked to some of PLPM’s partners who have told us that building a comparable system would involve significant time and cost in the “10s of millions of dollars” just for 1 country. Even if they did bother to make the investment, there would be a chance that they would be liable for infringing on PLPM’s patents. It makes much more sense for them to partner with PLPM vs building on their own. The consumer is charged a premium of about 3.5-4% depending on the country. This premium is what the consumer would have been charged anyway from its card issuing bank. Even cards that advertise “no foreign transaction fees” typically charge you this premium for currency translation (ie, they use a wide bid/ask on fx). The premium is then shared roughly equally between PLPM, the merchant and the merchant acquirer. As of q42013, the company had 3.4k, 13k, and 7.3k active multi-currency processing merchants in the Americas, APAC and CEMEA regions, respectively. Average quarterly revenue for PLPM per merchant was the highest in the Americas at close to $400 but not far away that figure in APAC at $358. CEMEA had the lowest revenue per average active merchant last quarter at about $265. CEMEA’s lower average is likely a result of it being the region that has been ramping fastest – the merchants are still getting used to the service.
The company is currently in the process of ramping a partnership with Cielo in Brazil which has the potential to be transformational. Cielo is Brazil’s largest acquirer and has publically talked about having more than 100k merchants active before the World Cup this summer. It then wants to have more merchants on PLPM’s platform before the Olympics in 2016. Using a very conservative quarterly revenue per merchant assumption of less than $100, implies that Brazil alone has the potential to more than double PLPM’s multicurrency business. Moreover, the incremental revenue from this partnership should come with very high incremental margins as Cielo is responsible for marketing and training and PLPM’s investment has largely already been done. While PLPM’s prior CEO disappointed investors by announcing this partnership too early and not being ready for the ramp, both companies recently went live with the offering and seem very optimistic about its potential. It should be noted that Cielo is able to offer access to PLPM’s multi-currency platform with a software upgrade. The point-of-sale devices do not need to be changed. This means that the ramp could be very fast. The main bottleneck involves training the merchants.
Indonesia is another large potential market currently adding merchants to PLPM’s platform. PLPM’s partner in Indonesia is PT Bank Central Asia. Management has likened the opportunity with this partner to be similar to that of the Middle East, which quickly became 15% of total revenue.
Payment Processing Services (about 1/3 of the current revenue run-rate).
PLPM has a partnership with Visa and Grupo Bimbo in Mexico which has the potential to grow to be a significant revenue contributor. Grupo Bimbo is the largest bread company in Mexico. It delivers baked goods to hundreds of thousands small merchants throughout the country – most of which do not currency accept forms of electronic payment. The partnership effectively makes Grupo Bimbo an acquirer for Visa. PLPM is the transaction processing partner. It stands to collect about 5c per transaction. PLPM’s point-of-sale device was also developed to allow for non-traditional transactions such as mobile phone top up and bill payment. Visa has talked about this partnership involving around 150k Mexican merchants by the end of next year. Like with Cielo, incremental revenue should come at very high margins. If this partnership is successful, Visa will likely look to partner with PLPM in other emerging markets. For example, the 2 companies have already started a new partnership in Myanmar.
Significant upgrade in CEO.
While the potential in markets like Brazil, Mexico and Indonesia are exciting, the most interesting aspect about an investment in PLPM is its new CEO – Carl Williams. Mr. Williams previously led Global Payments’ International business. This was arguably the best performing business at Global Payments over the last decade and our reference checks on his execution abilities have been excellent. He is also very familiar with PLPM’s services as he was one of the company’s largest partners in Asia. The prior CEO was good at development partnerships but was not well regarded with respect to execution. The company also would announce partnerships too early, get the Street excited and then disappoint either because of poor execution or because of regulatory delays, which is what happened with Indonesia last year. Mr. Williams has brought a sense of urgency to the company and appears to be rapidly changing personnel. He seems to believe in the potential of the company a great deal. Not only did he leave a great job, he also bought shares in the open market and agreed to a compensation agreement in which he doesn’t make significant money until the stock rises past $6 per share. There seems to be a fair amount of “low-hanging fruit” for Mr. Williams. For example, while Global Payments had a good partnership with PLPM in Asia, Global Payments Canada currently has no relationship with the company. Given the amount of American tourists that go to Canada every year, this could be a fairly lucrative deal that Mr. Williams should be able to sign given his relationships.
We think we are using relatively conservative assumptions with respect to new markets like Brazil, Mexico and Indonesia and still have the stock trading at a mid single digit multiple of 2015 FCF. Moreover, we are not factoring in any new partnerships like the low hanging fruit with Global Payments Canada mentioned above. Brazil is the biggest contributor to medium term growth. While it may seem speculative to believe in 100k+ active merchants from just this one country, it should be noted that Cielo has well over 1 million merchants and is highly incentivized to have as many merchants as possible offering “pay in your own currency” by the World Cup and Olympics.
Near term and potentially why the opportunity exists.
The company reports q1 2014 earnings after the close this Monday. After some initial euphoria regarding Mr. Williams and the upcoming ramp in Brazil, the stock retreated about 45% from its high in January. The drop is very likely partially due to the weakness in overall small cap TMT stocks, but we also believe that there is a fair amount of fear regarding the short term. From talking to other investors and the few sell side analysts following the stock, there seems to be concern that the new CEO will revise down guidance for the year. This is not an unreasonable assumption given Brazil likely went live a little later than the company initially hoped. Mr. Williams also wants to reverse the historical pattern of over promising and under delivering. Nevertheless, it is always difficult to know exactly what is priced in. It may take some time for the Brazilian merchants to become familiar and trained but like Cielo, they are incentivized to do so. The incremental earnings power from Brazil and other countries mentioned above is a matter of when not if. While revenue guidance may very well be reduced in the short term, this is still a very good price to own at least a partial position.