2023-04-28 12:13:59 ET
Summary
- Worldline's 1Q23 results showed strong growth in the Merchant Services segment, with revenue increasing by 13%, while Financial Services continues to underperform.
- The recently announced joint venture with Credit Agricole in France has the potential to significantly expand Worldline's merchant services platform's reach in Europe and bring in billions of MSV.
- Worldline's valuation is currently at a reasonable level, and assuming it trades at the average PE ratio for fintech and payments players globally, the stock has a potential 46% upside.
Summary
Worldline (WWLNF) operates digital transaction processing platforms by offering solutions such as merchant services and terminals, mobility and transactional services, financial processing, etc. In the long run, I believe that structural tailwinds, such as the trend away from cash and toward cards, will favor Worldline. The company is well-positioned to profit from the expanding digital market, particularly thanks to its strong online and omni-channel presence. I think Worldline has the firepower and cash on hand to keep pushing for consolidation in Europe. Recent 1Q23 results were also much better than expected. The highlight was that management expects double-digit growth in the merchant services segment. I am positive with this guidance as there are three factors which lend credence to it. To begin with, the current rates and market conditions should allow for price increases top persist throughout the year. The second is that performance drag due to Russia headwinds should be less of an issue going forward. The guidance has de-risked consensus FY23 numbers, which is very encouraging. In my opinion, shareholders who have abandoned the stock over the past two years will be enticed back into it as the company continues to generate profitable growth. I recommend a buy rating.
1Q23 results
In line with expectations, Worldline's organic revenue growth of 9% to €1.07 billion was primarily driven by Merchant Services' 13% growth to €758 million. The continued success of Merchant Services is a major factor in the rise in revenue. The fact that growth occurred despite opposition from the Russia corridor makes the performance even more impressive. However, despite a 2.4% increase to €228 million, Financial Services remains an underachiever. Financial Services continues its streak of disappointing growth. For the fifth consecutive quarter, the segment grew at a slower rate than the mid-single digits goals. Despite management's assurances that the company's credibility will be restored this year thanks to an improved pipeline and increased customer engagement, I remain skeptical. It would be preferable, in my opinion, if management adopted a more cautious tone in order to reset expectations and then beat them. At this point, I believe it will paint an even worse picture for the Financial Services segment if they fail to deliver once again in 2Q23.
JV with Credit Agricole
My focus is on the Merchant services JV in France with Credit Agricole, which was announced on April 19th. To begin, this JV partner is a major player in the country, commanding a substantial share of the market. The announcement states that the joint company will start seeing revenues and generating OMDA in 2025. Therefore, I anticipate this JV to serve as a key organic growth driver beyond FY25. Strategically, this JV opens up a huge, previously untapped commercial acquiring market in France for Worldline, and it does so through a reliable partner with an already-established local distribution network. In addition, the key accounts in France would be provided with a comprehensive service package that takes advantage of Worldline's international acceptance and acquiring network and the local "Cartes Bancaires" payment system. This joint venture has the potential to significantly expand Worldline's merchant services platform's reach in Europe and bring in billions of MSV. All of this supports my original argument that Worldline's competitive position relative to competitors will improve with a much larger and global scale, allowing it to better pursue growth opportunities across all of Europe. Since the funding for the JV is a joint contribution, I do not anticipate any problems with the balance sheets of either party.
Valuation
Since 2015, the valuation of Worldline has fluctuated from 15x forward PE to a high of 40+x and back down to the current 15x PE. The question is, what is the normalized valuation? It would be counterproductive to use the average of 26x because it is skewed by the multiples between 2018 and 2020 (which I do not believe will occur again given the current equity risk premium environment). Worldline is a much larger business today, with nearly four times the revenue and profit size it had in 2015, and it now has a growth catalyst (a joint venture with Credit Agricole) that should drive further growth from FY25 onwards. As a result, it should trade at a higher multiple than the 15x in 2015. After removing outliers such as non-profitable (like Affirm) and faster growth players (like Wise), the average across all fintech and payments players globally is around 16.5x. Using 16.5x on consensus FY26 (JV impact) EPS, we get a share price of €57, a 46% upside.
Factset
Conclusion
Worldline's strong position in the digital transaction processing industry makes it well-positioned to benefit from the structural trend towards cashless transactions. The recent JV with Credit Agricole in France also opens up a significant growth opportunity beyond FY25. While the Financial Services segment has been underperforming, management's guidance for double-digit growth in Merchant Services is encouraging. Assuming the stock trades at peer's average of 16.5x forward PE, we could see a 46% upside if the business can hit consensus FY26 figures, which I think is plausible. Therefore, I recommend a buy rating for Worldline.
For further details see:
Worldline: Positive On Continuous Market Share Gains