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Earthport: Would you buy it to play the cross-border payments market?

Publication Date: 14 Mar 2019 - By Kshitija Bhandaru By Kshitija Bhandaru
Actionable
Differentiated

Equity Fundamental Equity EU ex-UK UK Financial Services Fintech Technology

Earthport (LON: EPO) is a cross-border payment services firm, that provides access to a global payment network to its clients which include financial institutions, ecommerce companies, money transfer organisations and the likes. The company is listed on the London Stock Exchange's Alternative Investment Market (AIM).

The changing face of cross-border payments

With increasing digitalisation, consumers and corporates now seek immediate payment executions, superior user experience, and free digital services. Most banks are unable to keep up with these demands. This has given Fintechs like Earthport the opportunity to step in, providing banks and businesses with innovative solutions resulting in higher predictability, transparency and cost-efficiency. In 2018, Earthport was named as “Fintech Power 50”.

To keep up, some banks have started adopting blockchain to revamp cross-border payments. SWIFT had also launched its new network Global Payments Innovation (GPI) in 2017 to set new standards in cross-border payments.

Prominent names in payment industry like MasterCard and Visa have also been looking to enhance their cross-border payments experience. The two rivals were at loggerheads to acquire Earthport before MasterCard dropped its bid to buy another payment transfer network, Transfast.

Visa had initially made a 30p per share offer last December- almost four times the closing price of Earthport’s stock on December 27, at 7.45p. Soon after, MasterCard tried to counter with a 33p per share bid, forcing Visa to come back with an improved 37p per share bid. The stock was trading at 36p at the time of writing. Earthport’s current market capitalization stands at £236.2m.

On 11 March, Visa acquired 67.6 million shares in Earthport, equaling to a 9.9% stake. The company received a 14-day extension for its offer to wholly acquire EPO.

Earthport’s financials

In the six months ended December 31, 2018, EPO’s total revenues grew by 4.5% to £16.1m. Revenues from the core payment business grew by 18.8% to £11.9m. This was achieved as a result of higher transaction volumes, changes in pricing and business mix, and higher average monthly payment volume per customer.

The FX business saw a reduction of 9% in its revenues which came in at £16.1m resulting from increased competition and general margin pressure.

Adjusted operating loss for the period was £7.3m compared to £4.8 million in the prior year period. This included £3m of one-off restructuring costs included in administrative expenses. EPO’s administrative expenses jumped 22% to £17.5m which included non-recurring cost of £0.7m and staff costs of £9m-up by 14%. 

What’s your move?

Earthport has seen several operational issues in the past year including loss of a large payment customer which had significant impact on its payment revenues, weakness in corporate governance and leadership changes.

Despite this, the stock offers considerable upside - a consensus target price of 55p per share to the current 36.3p per share. If you are a potential (risk-taking) investor, you might want to consider making the leap. If you are an existing shareholder, congrats, you likely have the opportunity to cash in a ~400% premium being offered by Visa. 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Kshitija Bhandaru

 

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