Company Overview: Pushpay Holdings Limited (ASX: PPH) is engaged in providing a strong platform for electronics payments, mobile commerce and tools for merchants. The company is also involved in the deployment and enhancement of mobile payment solutions. PPH caters to numerous different sectors such as faith sectors, corporate, and non-profit organisations, and enterprises both small and medium.

PPH Details

Acquisition Synergies and Robust Customer Base Aid PPH: The company remains on track to assist its key customers and offer innovative technology solutions. PPH entered FY21 on a strong note, delivering robust revenue growth, cash flow growth, increasing operating margins, and EBITDAF growth along with retaining customers throughout the changing COVID-19 environment.

• Increase in Customer Base: In FY21, the company reported an increase of 2% in its customer base from 10,896 Customers in FY20 to 11,099 customers. Total LTV of customer base in FY21 stood at US$5.3 billion, up 20% on a year over year basis. Notably, PPH witnessed increased demand from smaller customers, as churches pursue an all-in-one solution in the COVID-19 environment.
• Acquisition Synergies: Post the completion of the Church Community Builder buyout in December 2019, PPH’s key focus remained on combining the two solutions in order to grow its total Product Holdings over the year ended 31 March 2021. Notably, Product Holdings in FY21 stood at 13,552, up 10% year over year.
• Ramping up of Go-to-Market Strategy: The company remains focused on engagement and ramping go-to-market resources for the Catholic segment. For FY22, the company’s investment into the Catholic segment is anticipated to be between US$6.0 million to US$8.0 million, realising incremental benefit on a year-over year-basis.

In FY21, the company remained on track to witness an increase in subscription revenue, owing to the customers’ current purchasing power. Merger and acquisition continued innovation of its products and escalating into the Catholic market add further value to the business. The below picture depicts continuous growth trajectory in the company’s top-line and gross profit over four years.

Revenue & Gross Profit Trend; Analysis by Kalkine Group

Key Findings from FY21 Results:

• Increase in Average Revenue Per Customer (ARPC): During FY21, ARPV stood at US$1,475 per month, depicting an increase of 12% year over year from US$1,317 per month reported in FY20.
• Rise in Net Profit After Tax (NPAT): In FY21, PPH’s NPAT stood at US$31.2 million, up 95% year over year, owing to enhanced focus on cost-cutting initiatives and a higher revenue base.
• Higher Total processing volume (TPV): In FY21, TPV stood at US$6.9 billion, up 39% year over year. The volume increased substantially in the prior year as the company delivered on its robust strategy to increase the number of medium, large and small customers on its platforms.
• Improvement in EBITDAF: In FY21, EBITDAF for the period came in at US$58.9 million, depicting an increase of 133% year over year. 

Healthy Balance Sheet and Decent Liquidity: 

• Cash & Debt Position: The company exited FY21 with a cash balance of US$4.84 million. Total debt (lease borrowings) amounted to ~US$2.53 million at the end of the period.
• Improvement in Operating Cash Inflow. During FY21, the company generated an operating cash flow amounting to US$57.6 million, indicating an increase of 145% on the prior corresponding period cash flow of $23.5 million. Strong operating cash flow aided the company to fully repay its bank debt, procured to finance the acquisition of Church Community Builder.

Key Metrics: For FY21, the company reported gross margin, EBITDA margin, and net margin of 67.9%, 33.1%, and 17.5%, respectively. Gross margin, EBITDA margins, and net margin stood higher than the respective industry medians. ROE of the company for the same time span stood at 42.5%, higher than the industry median of 7.3%. The debt-to-equity ratio for the period stood at 0.03x, lower than the industry median of 0.42x.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Key update: On 7 July 2021, the company informed the market that Bruce Patrick Gordon, a non-executive director of PPH, has disposed of 33,88,463 shares in the company.

Top 10 Shareholders: The top 10 shareholders together form around 48.02% of the total shareholdings, while the top 4 constitutes the maximum holding. Sixth Street Partners, LLC is the entity holding maximum shares in the company at 17.76%. Mawer Investment Management Ltd. is the second-largest shareholder, with a holding of 6.04%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis:

• COVID-19 Led Uncertainties: The global pandemic is likely to slow the progress of pipeline opportunities in New Zealand and Australia.
• Stiff Competition: The company operates in a highly competitive environment, which is subject to ongoing significant changes, including business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.
• Rising Expenditure: In FY21, total operating expenses increased by 9%, which may limit margins, going forward.
• Forex Headwinds: The company is exposed to foreign currency fluctuations against the US Dollar as it has significant spending in New Zealand.

Managerial Changes: On 5^th July 2021, the company stated that Shane Sampson, the Chief Financial Officer of the company has resigned from his post, effective 1 October 2021. Shane was connected to the company in October 2015. Meanwhile, the company has commenced an official search to appoint a new CFO to scale its finance operations across the US and New Zealand. 

Outlook:

• The company expects to grow in sync with the US GDP growth forecast at 5-7%.
• In the long-term, the company is targeting to acquire over 25% market share in the Catholic segment by several communities.
• For the year ended 31^st March 2022, the company expects EBITDAF in the range of US$64 million and US$69 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~17.98% in the past three months. Currently, the stock has a 52-week’s high and low level of A$2.25 and A$1.405, respectively. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer average, considering stiff competition from peers, integration risk, market pressures, rising expenditure, and foreign currency fluctuation risks. For the purpose, we have taken the peer group - Afterpay Ltd (ASX: APT), Iress Ltd (ASX: IRE), to name a few. Considering strong financial performance, robust customer base, ramping up go-to-market strategies, encouraging long-term outlook, we recommend a “Buy” rating on the stock at the current market price of $1.555, down by ~0.639% as on 9 July 2021.

PPH Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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