Investment case for Touchcorp

I wanted to post my thoughts on the investment case for touchcorp. I believe it is one of the best risk/reward opportunities on the ASX and therefore represents a high conviction buy for me.

Breaking up the business.

1) Revenue
Core business is processing transactions, with several large-ish clients forming the basis of revenue.
Revenues are mainly based on transaction processing (>90%) and integration revenues when new clients come on board. In FY '15 based on the prospectus the integration revenues were much higher @ ~5m, and this may explain the lower than expected revenue growth this FY. Moreover Reitan has definitely rolled out the platform

The third (and most lumpy) form of revenue is development work for startups such as changeup and afterpay. This is done with a very low margin/ at cost with the benefits to accrue with growing the pie in the longer term. Given this has been a major component in the last 12 months and the cash balance has been steady, goes to show how well run this business actually is.

2) Market mispricing
So why is the market mispricing Touchcorp. The short answer is - this is extremely difficult to segment and analyse methodically. The simple thing to do is annualise the operating profit before abnormals ie 6.6m minus tax - giving NPAT ~10m for the year (give or take). If you then take out the 10m cash on balance sheet and value the equity components of afterpay and changeup at nothing, you have an EV of ~ 210m. This gives an undemanding PE multiple of 21 for a growing company. The second question is- are they actually growing.I believe transactional revenue is growing, so my investment thesis as above is that the FY 15 results had a slightly higher than expected integration revenue. Furthermore, they have not given any outlook statements, rather they are focusing on their core business.

3) Growth
There are multiple avenues for growth that may come to fruition over the next few years. Corner Bank will be a very large client within 2 years and they are rolling out quite quickly. There is a corporate development expense that has been expensed in the accounts already, which to my understanding is in order to win new (major clients). There are several other clients coming on board, particularly in Europe in the next year or two, and certainly large room to grow.

The biggest avenues though are almost certainly with Afterpay and Changeup. Afterpay is already processing 150m in annualised revenues, and if they succeed could support a very large transactional volume for Touch. Additionally, there is the 30% equity that Touch has in Afterpay which is worth over 130m dollars at current market prices, which has so far been discounted (to virtually nothing in this analysis). Please see my posts on the Afterpay thread "big future" for my analysis- certainly from what I can see I believe it is a viable (and potentially very lucrative) business model. Changeup, as there is no lending risk, has the highest gross margin of any transaction, and when it does roll out could be another game changer for touchcorp, and is again essentially valued at nothing in both business prospects and the balance sheet at current valuations.

Finally, if more and more clients choose the touch platform for processing, there will eventually be a network effect and all of the other synergies and scale that go with that (this is a long way away but represents the blue sky).

Overall, I think this is a very good risk/reward opportunity and I have invested accordingly. I think at current prices, there is very little downside risk and that moreover, I think this business is executing a plan very strategically that will unfold over several years.

Welcome to hear others' thoughts.