So, I've been running some numbers and scenarios based on the recent numbers we have been provided and thought I share and get some feedback and thoughts from others.
I've put together some scenarios on what the situation COULD be come Dec/Jan. Now these are just possible scenarios and there are many moving parts, the most significant variable for me being is where the MSF bps margin (Gross Profit on card processing) will start to sit once GPTV volumes get larger.
For the 3 months of Q2 (June Quarter) I have calculated that MSF ran at an average of 276bps (April at 320bps, May at 229bs and June at 280bps).
Now, when there was a significant volume uplift in GPTV from June to July we have seen MSF drop to 209bps. This may be for a number of reasons, possibly a large merchant was onboarded and therefore given their size a better rate was negotiated, hence impacting the overall MSF average, or possibly merchants from different sectors were added and those sectors don't demand as stronger MSF margins for ISX. Either way it is still a very strong gross margin and well above the >125bps that is being mentioned in announcements. Whether a bps at or above 200bps can be maintained as growth continues, well we will have to wait and see.
I've created some scenarios below to give an idea of some paths ISX could head down and then have shown how I think the rest of the year could play out. In pulling this apart the way I have, I have come to the conclusion that to meet guidance, ISX will need to do better than the "base case" scenario I have put together. I have used a 50x Forward EBIT multiple as the growth trajectory, if it plays out, warrants it, supported by multiples seen throughout the payments sector.
FY20 Base case starting forward looking run rate commencing Jan 2020:
$1.5bil GPTV @ 175bps MSF = $26.25mil
9 mil card transactions @ 25c = $2.25mil
$1.5b EMA @ 100bps = $15mil
Probanx/Other = $1.5mil
Total Gross Profit = $45.00 mil
Minus Opex of $11mil
EBIT = $34mil
Share Price @ 50x Forward EBIT = $1.57
Expected case starting run rate commencing Jan 2020:
$2bil GPTV @200bps MSF = $40mil
12mil transactions @25c = $3mil
$1.5bil EMA @100bps = $15mil
Probanx/Other = $1.5mil
Total Gross Profit = $59.5mil
Minus Opex of $11mil
EBIT = $48.5mil
Share Price @ 50x Forward EBIT = $2.25
Possible Guidance case for Full Year FY20
Start at $2bil run rate, $3bil actually processed, end FY20 at $4bil run rate.
So $3bil @ 200bps MSF = $60mil
18mil transactions @25c = $4.5mil
$2bil EMA @ $20mil
Probankx/Other = $2.5mil
Gross Profit total of $87mil
Minus Opex of $15mil
EBIT = $72mil
Share Price @ 50x Forward EBIT = $3.33
In the above scenarios for next year I have not factored in revenue from Flykk or geographical expansion, though I have indicated that I think Opex will increase to $15mil (from current $11mil) as I expect expansion into new territories will require this.
Now below is a possible way that the rest of the year plays out. I have relied on us having been told that $880mil will be processed this CY/FY in cards. I have also tried to be conservative in that I have progressively reduced the MSF achieved as each month goes by, though this may not actually be what happens and as I mentioned at the start, variables in the MSF achieved will effect things significantly.
I have averaged transactions based on the data we were provided to May on transaction volumes, this may be out but it is a smaller area of revenue so will not affect results significantly. I've also used the historic average of .25c per transaction.
I've kept EMA revenue as has been previously stated for full year as I don't think any meaningful revenue was generated in EMA's in H1. I've assigned a minimal contribution from Probanx and Other which would include KYC and FX fees. These are hard to estimate as we have little data to work with.
As, you will see, I have had trouble reducing things to the point of only meeting the minimum $11mil needed to meet guidance. This makes me think that if growth continues exponentially and is backended (we know growth is skewed to the end of year) then it is highly likely that we will get an EBIT guidance upgrade in the coming months.
H1 EBIT was -($0.3mil)
H2 EBIT needs to be $11mil to meet CY/FY guidance of $10.7m
Total GPTV processed during H1 19 was approx $195mil
Total GPTV to be processed during H2 19 needs to be approx. $685mil to match original guidance of a total of $880mil of contracts being processed during FY/CY19.
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 |
|---|
| 1 | JUL | $69m GPTV ($830m p/a) @ 209bps | MSF = $1.45m | 415k trans @ 25c = $104k | TotalGP $1.59m |
|---|
| 2 | AUG | $85m GPTV ($1.02b p/a) @ 200bps | MSF = $1.70m | 510k trans @ 25c = $129k | TotalGP $1.83m |
|---|
| 3 | SEPT | $100m GPTV ($1.2b p/a) @ 195bps | MSF = $1.95m | 600k trans @ 25c = $150k | TotalGP = $2.10m |
|---|
| 4 | OCT | $120m GPTV ($1.44b p/a) @ 190bps | MSF = $2.28m | 720k trans @ 25c = $180k | TotalGP = $2.46m |
|---|
| 5 | NOV | $140m GPTV ($1.68b p/a) @ 185bps | MSF = $2.59m | 840k trans @ 25c = $210k | TotalGP= $2.80m |
|---|
| 6 | DEC | $170m GPTV ($2.04b ann) @ 175bps | MSF = $2.97m | 1.01m trans @ 25c = $255k | Total GP= $3.25m |
|---|
Total GPTV Processed in H2 = $684m @ average of 189bps
MSF Total for H2 = $12.94m
Trans Total for H2 = $1.06m
MSF and Trans Total for H2 = $14.00m
EMA = $3mil
Probanx/Other = $1m
GP Total = $18.00m
Opex = $5.5m ($11mil annual rate halved)
H2 EBIT = $12.5mH1 EBIT = ($0.3m)
FY/CY19 EBIT $12.2mWhichever way you look at it, in my opinion, if you believe this growth profile continues to play out then ISX remains undervalued.
