FOUR - Repay Holdings: Digital Payment Trends Remain Favorable

2023-09-13 05:27:10 ET

Summary

• Repay Holdings Corporation is a unique player in the merchant processing industry with a history of successfully entering underserved markets.
• RPAY had a strong performance in Q2, surpassing revenue expectations and raising its guidance for the fiscal year 2023.
• RPAY's expertise lies in delivering payment solutions to underserved merchant sectors, such as auto lending, personal lending, and B2B payments.

Investment Thesis

I consider Repay Holdings Corporation ( RPAY ) to be a unique player in the merchant processing industry with a remarkable history of successfully identifying and entering overlooked or underserved markets, such as personal and auto loan payments, and the B2B sector. RPAY has steadily expanded its market potential through strategic mergers and acquisitions in fragmented markets, and I believe there is ample opportunity for further consolidation. Although the macro environment has been challenging, RPAY continues to experience strong product demand, evident by its impressive performance in Q2 and the addition of significant new clients and partners during the previous quarters. The strong demand stems from consumers' growing need for digital and omnichannel payment experience, as well as businesses' increasing demand for quicker and more efficient Accounts Receivable and Accounts Payable solutions. Hence, I remain bullish on the company and assign a buy rating to the stock.

2Q23 Review and Outlook

RPAY had a strong performance in Q2, surpassing revenue expectations. The growth was mainly due to robust take rates and a significant increase in Consumer Payments revenue, which grew by 10% year over year. Their adjusted EBITDA for Q2 was $30.3 million, beating analyst estimates, leading to an adjusted EPS of $0.19, which was in line with expectations. Additionally, the company raised the midpoint of its revenue and gross profit guidance for the fiscal year 2023. The updated guidance includes higher expectations for card payment volume, revenue, gross profit, and adjusted EBITDA. However, the management still considers the possibility of a macroeconomic slowdown in the latter part of 2023 Nevertheless, I believe the likelihood of a macroeconomic recession in the near future seems less probable and believe that RPAY is undervalued and well-positioned to expand its market share in an underdeveloped market.

RPAY Brings Omnichannel Payments to Underserved Merchant Verticals

RPAY's exceptional performance is fueled by its expertise in recognizing and delivering compelling payment solutions to merchant sectors that have been historically underserved, including auto lending, personal lending, and B2B payments. The company's core strength lies in its ability to adapt to evolving market demands and provide a diverse range of innovative products and services to meet the specific needs of these merchant verticals.

Within the lending industry, RPAY is leading the charge in guiding lenders toward a digital transaction landscape, departing from traditional payment methods. The company's dynamic ecosystem of products caters to this transformation, offering a wide array of tech-enabled channels, such as mobile, online, text, and voice, which significantly improve the user experience by simplifying the loan repayment process. For instance, RPAY's instant funding product enables lenders to directly transfer funds to borrowers using V/MA rails, ensuring prompt receipt of funds without the hassle of physical cash pickups or waiting for ACH clearance. Additionally, borrowers benefit from the convenience of repaying loans with debit/prepaid cards, enabling round-the-clock payments, unlike the limited business hours of traditional methods. Furthermore, lenders gain real-time insights into fund availability, bypassing the reliance on the time-consuming ACH settlement period.

Similarly, RPAY addresses the challenges faced by the B2B sector, assisting commercial customers in transitioning away from paper-based payment practices and automating costly processes. On the receivables side, RPAY seamlessly integrates with merchants' ERP accounting software, streamlining payment reception and management from their customers. On the payables side, the company offers a robust AP automation platform that encourages corporates to initiate transactions through virtual cards, replacing slower ACH or check processing while still accommodating these traditional methods.

Growing Addressable Market with Plenty of Room for Further Accretive M&A

RPAY has strategically expanded its presence into adjacent and underserved markets, such as mortgage services and payables, resulting in a substantial Total Addressable Market ((TAM)) valued at approximately $5 trillion. This remarkable market opportunity has been achieved through the company's astute merger and acquisition (M&A) strategy, which focuses on targeting high-growth businesses in untapped sectors.

One example of RPAY's successful M&A approach is evident in its entry into the B2B payments space following the acquisition of American Payment Services, a provider of integrated payments solutions that enable card acceptance for B2B receivables. Subsequently, through the acquisition of Ventanex, RPAY expanded its B2B portfolio to include outbound healthcare payments and mortgage services within the loan repayments vertical. Additionally, the acquisition of cPayPlus allowed RPAY to enhance its offerings by becoming an AP automation provider, issuing virtual cards across multiple industries.

Furthermore, the TriSource acquisition played a vital role in contributing to RPAY's growth trajectory, not primarily from a TAM perspective but by providing greater control over its backend processor. This control enables the company to optimize its transaction flows and opens doors to future synergy opportunities. RPAY appears well-prepared to continue its M&A endeavors in the foreseeable future. Overall, RPAY's well-executed M&A strategy and its capacity to capitalize on emerging opportunities make it poised for sustained growth and success in the market.

Valuation

RPAY stands out as a small-cap merchant acquirer and, in my view, should command a premium due to its unique position in the market. To provide context, I have compared RPAY to a group of smaller-cap peers such as EVERTEC, Inc. ( EVTC ), Shift4 Payments, Inc. ( FOUR ), and i3 Verticals, Inc. ( IIIV ). Additionally, I've included Global Payments Inc. ( GPN ), despite its larger market cap, due to the company's high overall percentage of merchant acquiring revenues. RPAY outperforms these peers in terms of revenue growth, which is a favorable indicator. RPAY, with its consistent execution, above-average growth, and scarcity value, I anticipate growing investor interest in the stock over time. Hence, I remain bullish on the stock and assign a buy rating to the stock.

Investment Risks

RPAY's focus on the consumer lending vertical is an important factor to consider, as it is a less competitive sector. However, being indirectly connected to consumer lending brings some significant macro risks. However, it is important to note that RPAY primarily plays in the medium to large enterprise space, and has not seen any weakness in spending, as consumers typically consider their auto/mortgage/personal loans as nondiscretionary. Moreover, it is essential to be aware that RPAY operates in industries under scrutiny by regulators. As a result, the company may face follow-on risks.

Conclusion

Several factors inform my positive rating on RPAY, including a double-digit growth profile, a substantial total addressable market, a dedicated focus on delivering omnichannel solutions to underserved industries, exceptionally low levels of relative debt, and strong revenue visibility thanks to recurring income streams. The robust demand for RPAY's products is driven by consumers' increasing preference for digital and omnichannel payment experiences, along with businesses' growing need for faster and more efficient solutions in Accounts Receivable and Accounts Payable. Therefore, my outlook on the company remains optimistic, and I assign a buy rating to the stock.

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