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Vincent Pisani
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iCash Payment Systems (ICP)

Market Metrics

Issued Capital : 820.5m shares
Price : 5.3 cents
Market Capitalisation : $43.5m
Cash in the back : $6.0m
Debt : $0.9m


This is a bright little company (mkt cap $43.5m) that has only just begun marketing itself to institutional investors despite having been effectively listed since mid-2005 (via back-door) and in the ATM (automatic teller machines) business for four years. It diverted its destiny from entertainment into ATMs via the purchase of just 25 machines off a company called Banktech in Nov 05. It then bought another 135 ATMs for scrip a year later. The real breakthrough came in Jan- 07 when the company agreed to buy a $4m, 60% stake in struggling Korean ATM manufacturer Neo Technology. Neo was the #8 ATM player in the Korean non-bank ATM market at the time and losing money. It is now the #1 and profitable.

The company has further expanded in Australia and China (a small footprint of machines acquired but a much more significant JV with listed group, Yunnan Nantian Electronics - a major supplier of business and banking related machines in China), although the China venture can still be considered blue sky. More recently the group joined in partnership with NZ's Cashstar (and its retail alliances, notably Vodafone resellers) and is extremely close to kicking off its foray into that market with a breakthrough technology: allowing for the first time non-bank ATM access to all bank issue cards. Executive chairman, James Manny, has been the driving force behind the company since it back-door listed in 2005.

ICP is a technology driven company and sells its machines on features rather than price (I'm not silly, I realise it has to be price competitive, but winning the Metcash deal in Australia recently, and having been the fourth cheapest on price suggests features count). It has acquired or developed (in Australia and Korea) the advanced technologies required and its ATMs are arguably the most compliant across a number of jurisdictions and regions. For instance, only until recently, ICP’s machines were the only fully-APCA (the head body) compliant ATMs in Australia (and its main competitor, Customers’ [CUS] still aren't). This means ICP is ready for any legislative changes that come along in the near future, including higher security standards and the introduction of ATM restrictions in gaming venues. Machine capability surpasses most competition with the company's 'cashPod' machine capable of customisation, onscreen marketing to customers and printing of coupons. Functionality includes wireless comms (for quick install and cheaper comms) and smartcard enabled. All of this is enabled by ICP operating its own R&D and manufacturing facility.




Australia:
ICP is the number three ATM vendor in Australia (outside the banks) with a 4% share, well behind Customers (22%) and Cashcard (21%), and perhaps marginally ahead of Banktech. A key recent breakthrough was the winning of the preferred supplier agreement with Metcash - which entitles the group to market itself, with the help of Metcash via its 'Advantage' program and store owner referrals, to all 6000 affiliated retailers. As previously mentioned, ICP won the Metcash deal thanks to the features its machines offer, including the highest level of security and encryption and the attraction of advanced marketing capability. The contract was previously held by rival Customers. ICP is hoping to roll out 15-25 machines a month. In November, traditionally a weak ATM rollout month in the industry, it achieved pre-orders for 40 new ATMs from Metcash – a very promising sign. The company has a bit more than 1,000 machines in Australia and hopes Metcash can add at least 1,500-2,000. The Metcash contract has an agreed minimum margin, with ICP dividing the $2 direct charge between Metcash (for marketing), the merchant, admin and maintenance and of course itself. All of the machines are shipped from the ICP’s subsidiary Korean manufacturing plant. ICP's focus is on the number of transactions it can achieve rather than the number of machines it deploys: it is not interested in a price war for the sake of a land grab. Around 140 transactions/month is required to break even. Existing Metcash machines, for example, do an average 700/mth.

ICP has had a focus on convenience retail stores and has tended to avoid the commoditised gaming market (not entirely). Most of ICP contracts are for 5-6 years and its retention rate is an impressive 80% plus. ICP has a solid relationship with NAB which provides a steady stream of referrals. Comms (4.5c) and switching (5.0c) are extremely competitive and the group typically pays a merchant 60-70c per transaction, comparable to competitor payments of up to $1.40 (the price of a land grab). In other words, the company is confident of retaining $1 from every $2 of direct charge.

There are three models for deployment in Australia:
• Outright sale - where ICP retains 35-40c of the transaction fee. Machines are sold for around $10,000, cost to produce is close to $4,000.
• Partial sale - involving a blended transaction fee.
• Retain ownership - pay the merchant 60-70c, ICP retaining the first 200-300 transactions per month.

80% of the fleet is owned by ICP, with the remainder sold - mainly to independent deployers. The normal machine price is around $12,000. The group should do more than $10m in revenue in FY10 from Australia (versus $7.4m in FY09) as a result of a full year of direct charge and the increased deployment of machines. Australian NPAT in FY10 should land somewhere between $3.5-4.0m.

Korea: [ICP 52%]:
As mentioned, the company has built itself up to number one in the ATM retail market in Korea. That equates to 7,300 machines and a 39% share. This is before the new and significant contract recently awarded to Neo ICP by retail conglomerate Lotte Group. At an initial $30m, this contract is the biggest single ATM contract awarded in Korea. It initially involves 1,500 machines which will be rolled out in Lotte’s retail venues. Lotte recently won the final banking licence awarded in Korea and as a result there is a very high likelihood that the ICP contract will expand (the group is planning a spoke-and-hub banking approach, featuring ATMs) up to 4,500 machines.






The Korean business has been built on a sales model and ICP grabs and upfront sale plus an ongoing service and maintenance fee (typically 10% of the machine cost). Machine prices tend to be higher than Australian machines. For example, ATMs are being sold to Lotte for $20,000 and the margin on these is beyond 30%. The machines have advanced capability, including the ability to take deposits and recycle cash for withdrawals.

There is a recurring income to the sale model with ICP earning around 10% of the sales price in annual service and maintenance fees. But the company is working to introduce transactional based fees into the Korean market, working through negotiations to explain the benefits of the model. ICP has increased revenue in Korea regularly despite the lumpy nature of the business as it has moved to retail market leadership. Its intention is to now pursue leadership in the overall Korean market. This influence will make it easier for the group to push for changes to the model. ICP's Korean revenue in FY09 was just short of $12m but is expected to range between $15-20 in FY’10. NPAT is expected to be in the range $1.5-2.0m. Korea will be profitable in its own right (ex-transfer pricing) for the first time in FY’10. In FY11 the NPAT is expected to increase dramatically on the back of a full year of the Lotte rollout (at around 100 machines/mth = $24mpa rev) and increased volumes through the plant (via Aust, Korea and NZ). Initial plansare to list the Korean JV to gain further credibility and attention in Asian markets. Particularly with a view to China.

China: [ICP 50%]
While I described China as blue sky earlier, it is much more substantial than that in reality. It's just that I don't think an investor needs to consider China in order to invest in the company - it is more of a bonus. There is a joint venture arrangement with significant Chinese IT and electronics business Yunnan Nantian Electronics, a top 100 Chinese company. Nantian already operates 3,000 ATMs in China. It has been agreed that Nantian will deploy 6,000 ICP machines across China, but ICP will not agree to the commencement until it can find the most suitable and profitable sites. China's banking model is one where ATM fees are free when using your own bank's ATM. ICP has to find markets where customers will be encouraged to withdraw 'away from home' so to speak. The company is motioning an entry into the card market to facilitate is massive opportunity.

New Zealand: [ICP 30%]
This is a real opportunity that is just around the corner. ICP is seeking and likely to be granted approvals to introduce its revolutionary EFTPOS-based ATM technology into the NZ retail market. Why this is significant is because the NZ retail cash withdrawal system is basically limited to point of sale EFTPOS. There are a limited number of retail ATMs (90% of NZ ATMs are bank owned) but they do not communicate with all bank issued cards or international cards and have therefore not gained acceptance in the market place. ICP's technology will allow the rollout of all encompassing ATMs and segregate the cash withdrawal market from the point of sale market. It brings with it much cheaper transaction and communications costs. ICP's partners in NZ (ICP 30%) include Cashstar, ANZ and Aristocrat. Cashstar's Digital Mobile franchise is a Vodafone resale channel, with plenty of retail outlets.

Other:
ICP has branched further into the retail market, starting in Korea, with the launch of a 'back office' machine which effectively counts cash, puts it in a safe, does the bank reconciliation and issues a receipt to the cashier. There's nothing like it around and ICP is already selling these in Korea for $70,000 a pop. A great time and cost saver for the retail industry in particular. The company is working on a compact model for the Australian market.





The company also has ATMs on ships (cruise liners) and is working closely with an airline for an on-board ATM for international flights. These are lucrative money spinners. It is also looking at bus ticketing solutions in the Asian market, utilising the excellent R&D facilities in both Australia and Korea.

Financials:
The balance sheet contains more than $6m cash and the only debt ($0.9m). It is cashflow positive - a big chunk of NPAT turns to free cash. ICP recently raised $4.5m which will be used to assist with funding the weekend ATM float, capital guarantees for the Chinese jv and some R&D. If I take a conservative stance and take the bottom end of suggested earnings for this year I get $5m NPAT. This puts the company on 8.8x FY’10. I believe there is upside given the strong early start to the Metcash and Lotte Group rollouts. But even if there is not, it's not much of a price to pay for a company in its infancy with a strong earnings future. If we stretch it out a year, not including anything but Australia and Korea, the group could earn around $8-9m, which puts it on less than 5.5x. It's a good alternative to the maturing, one country company that is Customers. ICP has geographic and product diversity, blue sky and strong cashflow.


Written by Tim Powditch
Shaw Stockbroking
Institutional Sales - Emerging Companies
Tel : 612 9238 1239

Shaw Stockbroking Limited ABN 24 003 221 583 (“Shaw”) is a participant of ASX Limited and holder of Australian Financial Services licence number 236048.

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