stargroup limited (stl): cashing in on 8 may 2016 ... · stargroup limited (stl): cashing in on ......
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PAC Partners | Equity Research Stargroup Limited (STL)
Stargroup Limited (STL): Cashing in on fragmented industry
8 May 2016Peter Kopetz
EquityResearch
• Posted stellar half yearly results as revenues increased by 589% y/y to $1.2m during 1H16
• Delivered 9th consecutive record quarter of ATM networkrevenues, increasing by 65%
• Achieved 20% reduction in payback period (reducedCOG’s by 53%) for initial investment per ATM, withpayback on capital expected to be 15 months (downfrom 18 months)
• Recently launched StarPOS business and the RecyclerATM which could add significant growth
• Monthly average transactions (key metric KPI) industrybest 648 a month per machine
Key Points Recommendation
• Successful integration of recent mergers andacquisitions has considerably expanded its ATMnetwork base in Australia and will deliver the Companyits maiden profits in FY16.
• Backed by an experienced management team, it aimsto maintain growth through disciplined ATM siteselection and value accretive deals with smallerunlisted ATM deployers in Australia.
• Its Recycler ATM initiative has tremendous potential totrigger demand as Australian banking industry seeksalternatives to rationalize cash handling costs.
• Diversifying and growing its business model throughventure into EFTPOS/payWave space will strengthenSTL’s foothold in the industry. More than 70% of debitcard transactions in Australia are managed by theEFTPOS payment system.
RISKS• ATM usage is declining in Australia hit by usage fees
and migration to a cashless society.• Growing popularity of contactless mobile payments to
overtake demand for contactless card payments.• Success of Recycler ATMs requires careful
implementation.
RECOMMENDATION: From undertaking expansivenetwork strategy to launching innovative technologycoupled with direct strategic alliance with the ATMmanufacturer, STL is all set to build a strong foothold inthe Australian payment industry. We initiate ourcoverage with a Buy rating with a 12mth price target of$0.081 per share based on DCF valuation.
Investment RationaleEPS Changes & PAC Partners vs. Consensus
Financial Forecasts & Valuation Metrics
STL Share Price Performance
TheinformationcontainedinthisreportisprovidedbyPACPartnerstoWholesaleInvestorsOnly.Theinformationcontainedinthisreportistobereadinconjunctionwithotherimportantdisclosuresattheendofthisdocument.
Initiation
Risk Rating High
Current Share Price $0.04
12 Month Price Target $0.081
Price Target Methodology DCF/NAV
Total Return (Capital + Yield) 102.0%
DCF Valuation $0.081
Market capitalisation $16.6m
Liquidity – Daily Value 2.69m
Y/e CY ($m) FY16F FY17F FY18FConsensus EPS (cps)PAC EPS (cps) (0.28) 0.49 1.51PAC vs Consensus (%)
Y/e FY ($m) FY16F FY17F FY18F FY19FRevenue 4.5 13.1 23.4 30.6NPAT (1.1) 2.1 6.3 6.2EPS (cps) (0.28) 0.49 1.51 1.49EPS Growth 0% 279.8% 205.3% (1.0%)DPS (c) 0 0.24 0.24 0.45EV / EBITDA (x) (12.6) 6.9 1.4 2.1PER (x) (13.8) 7.7 2.5 2.5Dividend Yield 0.0% 6.3% 6.3% 11.8%Gearing (14.0%) (9.9%) (30.7%) (1.4%)Interest Cover (x) (4504.7) 0 0 0Source: PAC Partners estimates
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PAC Partners | Equity Research Stargroup Limited (STL)
Company Strategy
Short Term Catalysts
• Business growth centered on fragmented industry consolidation, with STL in the top3 operators dominated by Canadians.
• Acquisitions based on disciplined financial and location model. It’s important for STLto target the best networks as it will affect the Company’s best in the industry returns.
• Focusing on customer service has won over many new clients and that differentiationhas a big impact on client retention and satisfaction. Quick and easy installation andfree maintenance is a selling point.
• Diversification of business through the introduction of new services and productssuch as Recycler ATM, PayWave or casino settlement solutions,
• Large ATM customer network enables STL to leverage its product suite and on sellservices and products.
• Identifying and selecting the right locations for its ATM network is key in maintainingbest in industry transaction volumes.
• Bulking up in size to attract possible predators as as a quality ATM is attractive asevidenced by recent buyout of Customers Ltd (CUS)
• Recycler ATM/Intelligent Deposit Certification in 2Q16
• Further EPS accretive ATM acquisition opportunities
• New tenders being pursued with large Australian businesses
• Stargroup Debit/Credit Card rollout 3Q16
• New EMV technology upgrade revenues expected from ATM customers in 4Q16
• Growth in EFTPOS/PayWave business in 2nd half of 2016
• Quarterly updates showcasing growth figures
PAC Partners | Equity Research Stargroup Limited (STL)
Overview
Stargroup Limited (formerly known as iCash Payment Systems Limited) is atechnology company deploying ATM’s in Australia and providing EFTPOS and payWavetechnologies through its StarPOS subsidiary. Post iCash merger, STL became theexclusive distributor of the cashPod ATM range including the recycler ATM, back officeand payment technologies in Australia. STL has a direct ownership interest (19.25% at30 June 2015) in NeoICP Korea Inc, the manufacturer of cashPod ATM’s, back officeand casino settlement solutions. NeoICP also has a 6.39% interest in STL.
Product Suite:
StarATM: Consists of cashPod ATMs, Recycler ATMs, back office, coin counting andcasino settlement solutions. The Company is the exclusive distributor of these worldleading technologies, best in the industry, in Australia and on sells these technologies tothird parties.
Star Payment Systems: The Company installs ATMs in its customers’ premises within4 weeks of approval and also provide free service on the installed ATM for the life of thecontract. This includes free maintenance, including parts and other consumables. Thereare no hidden costs or fees in its contracts.
StarPOS: STL’s EFTPOS terminals offers easy card payments processing solutions anddo not charge any terminal rental fees. The Company offers from a basic low costterminal, full service integrated terminal for detailed reporting, to a portable terminal forpayments on the go. The product range is intended to provide complete access to arange of extras such as Pre-Authorisation, Customer Preferred Currency, Extra Servicesand Tipping functions.
Revenue Model
The Company primarily generates revenue through ATM transactions. Other revenue isgenerated by the sale and deployment of ATMs, cash handling and other bankingequipment. From 2H16 onwards, it will also generate recurring revenue from recentlylaunched EFTPOS and payWave Terminals and Recycler ATMs representing asignificant growth opportunity.
Key Market Segments
The Company’s ATMs and EFTPOS Terminals have wide applications across retail,hospitality and entertainment industries.
Todd Zani, Chief Executive Officer & Executive ChairmanMr. Zani was the founder of Ezeatm in early 2000 and subsequently vended thatbusiness into Ezeatm Limited in 2011, which became the largest ASX-listed ATMdeployer in 2012 and had on 30 July 2012 a market capitalization of $34.5m. Mr. Zani isa Chartered Accountant with over 25 years experience and is a director of Ezetax PtyLtd, a chartered accounting firm he founded in 1999 which provides financial, accountingand taxation services to clients involved in various industries. Mr. Zani was the CEO andCFO of Ezeatm from 2006 to 2013, including of Ezeatm Limited from 2011.
Shaun Sutton, Executive DirectorMr. Sutton is the Chief Operating Officer of Stargroup and has extensive experience inrunning and operating ATM networks in the Australian ATM industry and was the formerNational Logistics Manager of Ezeatm Limited and in that capacity oversaw thesignificant growth and national expansion of the Ezeatm business.
Management Overview
Highly experienced Board and Management team with over 75 years experience and track record of building large-scale operations
PAC Partners | Equity Research Stargroup Limited (STL)
We have based our growth assumptions on ATM terminal deployment and StarPosrollout. FY16 forecasts of 313 ATMs looks achievable (3QFY16 >250 ATMs deployed)which equates to growth of 184% yoy. If similar acquisitive and rollout pace strategy isadopted in FY17/18, then STL’s stated goal of 1,000 ATM network by FY19 will be ontrack.
The key metric to STL’s revenues is number of transactions per ATM and ourassumptions are based on current quarterly of 650 per ATM. If that figure is maintainedthrough the next 2-3 years correspondingly the total number of transactions growssignificantly driving revenue growth.
The StarPos is in its infancy but has clearly the blue sky potential with anticipated growthof 500% in FY17 and 90% growth in FY18. The successful rollout and market share gainwill go a long way to underpinning the massive jumps in revenues. PayWave andEFTPOS have grown grown strongly in 2015 hence we are optimistic STL can win asmall percentage of the huge market.
Assuming STL hits its ATM and EFTPOS numbers, revenues will grow strongly as feesare fairly rigid especially on ATMs ($2.50 per transaction). Fees can vary on EFTPOSmachines but are still relatively transparent. Taking a mid approach on fees, revenuesare expected to hit ~$23m by FY18.
We are anticipating the margins to improve although majority of the costs are somewhatpredictable and fixed. We have already seen management slash costs on ATM rolloutswith payback time decreasing ~20%. As a result of much improved revenues and costcontrols, we expect EBITDA to jump significantly to $8.2m in FY18.
FY16-FY18 Earnings Growth
PARTICULARS(A$inM) FY16F FY17F FY18F
PARTICULARS FY14A FY15A FY16F FY17F FY18FNOOFACTIVEATMsINSTALLEDONNETWORK
StarATM Network 36 110 313 522 750
PARTICULARS FY14A FY15A FY16F FY17F FY18FTOTALNOOFTRANSACTIONS
StarATM Network 77,640 615,939 1,637,234 4,008,960 5,760,000
Source:STL
PARTICULARS FY14A FY15A FY16F FY17F FY18FNOOFACTIVEEFTPOSDEVICESINSTALLEDONNETWORK
StarPOSNetwork - - 200 1,275 2,409
Revenuefrom Cont Ops 4.51 13.10 23.44
PARTICULARS(A$inM) FY16F FY17F FY18FAdj.EBITDA (0.89) 3.08 8.15
PAC Partners | Equity Research Stargroup Limited (STL)
STL has been aggressive over the last 12 months to implement its ‘5 point growth-plan’that includes organic roll out of ATM machines and value accretive mergers andacquisitions.
In Aug’15, Stargroup and iCash Payment Systems Limited completed a mergertransaction worth $5.5m whereby iCash acquired Australian end-to-end ATMdeployment and electronic payment services provider, Stargroup Limited, and changedits name to Stargroup as part of the deal. The price consideration for the acquisition waspaid by issue of approximately 142.9m shares and 14.3m shares to StargroupInvestments Limited (SIL) and NeoICP respectively @ 3.5 cents per share. Theacquisition boosted the combined business network by more than 2x to over 80 ATMswith capabilities to process 580,000 transactions annually.
In Oct’15, the Company announced yet another expansion of its business operations byacquiring 109 ‘quality’ ATMs off Cash Plus Australia Pty Ltd, in a deal worth $6.5mpayable 50% in cash and 50% equity. Established in 2005, Cash Plus Australia Pty Ltdis an independent ATM provider with operations in Australia and New Zealand. Itsnetwork covers an area from Perth through to the Chatham Islands off the east coast ofNew Zealand. The acquisition was completed in Nov’15.
Operating Margins In Green Post Cash+ Acquisition
Following the Cash Plus acquisition, STL stands to benefit from an expansive networkstrategy and positive cash flows. The combined ATM network of STL now exceeds over250 ATMs as compared to 121 ATMs before acquisition. The acquired ATMs are locatedin Western Australia, Queensland, New South Wales, South Australia, Tasmania,Victoria and Northern Territory which are considered to be ‘quality’ ATM network sites.The added benefit of scale should see revenues and operating costs affected positively.
The Company continues to report strong growth in monthly ATM transactions across itsnetwork since 2H15 and is poised to report robust growth into FY16 triggered by valueaccretive deals. It is expected to process ~2.0m annualized transactions in FY16 whichis almost 2x the level it handled before Cash+ acquisition. 3Q16 saw an average of 648transactions per month per machine (2Q16: 667), which is ~30% higher than the monthlyaverage transactions per machine reported by industry leader, Directcash Payments.During 1H16, STL revenue increased by 6.5 x to $1.3m from $0.2m in 1H15. For fullFY16, it is likely to achieve annualised revenue of $4.5m (1Q16: $1.2m; FY15: $1.5m)partly driven by successful integration of recently acquired deals. This is likely to add atleast $1.3m to its EBITDA (annualized) driving the Company to post positive EBITDA inFY16 as compared to a loss of $732k posted in FY15.
Monetizing Through Mergers & Acquisitions
30 50 121 230100580 800
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500
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STL’ExpansiveOperations FollowingM&As
NumberofATMs Annualized Transaction (in '000s)
iCashPaymentSystemsLtd.
PostStargroupmerger
BeforeCash+Acquisition
PostCash+Acquisition
0.4
1.5
4.5
0.0
1.0
2.0
3.0
4.0
5.0
FY14 FY15 FY16(E)
STL'sAnnualized RevenuetoJumpby300%inFY16($inm’s)
For3Q16,STLrecordedaveragemonthlytransactionof648perATMmachinewhichisconsidered ‘industrybest’
582 613 654710
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STL'smonthlytransactionsaregrowing
PAC Partners | Equity Research Stargroup Limited (STL)
Foray To EFTPOS Business: A Good Diversifier For STL
607665 678
713745 754
789841
886
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1,000
2007 2008 2009 2010 2011 2012 2013 2014 2015
ETFPOSTerminals('000s)inAustralia(attheendofDec)
122 145 165 185212
246283
316351
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2007 2008 2009 2010 2011 2012 2013 2014 2015
DebitCardTransactionsMonthlyVolume(inm’s)inAustraliaAtPOSTerminals
Number of EFTPOS terminals in Australia reported a 8-year CAGR of ~5.4% between Dec’07 – Dec’15
-10
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2007 2010 2013
GrowingShareofRetailPaymentsbyCardinAustralia
The Company has reached another significant milestone recently with the first sales of itsEFTPOS and payWave terminals through its subsidiary StarPOS Pty Ltd. StarPOS installed the firstterminal in Jul’15 as a part of the soft pilot project that was successfully completed in Sept’15and was followed by the official launch of StarPOS in Oct’15.
Rapidly Growing EFTPOS Terminals in Australia
EFTPOS terminals market has gained significant momentum in recent years driven by the needfor fast and integrated payment solutions, technology innovation, ease of use, and low-costpayment alternat ives. There has been a significant growth in the monthly debit cardtransactions volume at points-of-sales (POS) in Australia. Total value of monthly debit cardtransactions at POS terminals increased to ~$20.0b in May’15 from ~$15.0b in May’11 at a 4-year CAGR of ~7.5%. EFTPOS has grown to be Australia’s most popular payment systemaccounting for over 70% of debit card transactions. Higher reliability and durability followed bysignificant reduction in total cost of ownership is aiding the growth in demand for EFTPOSpayment solutions among small and medium sized businesses. As of Dec’15, therewere 886,000EFTPOS terminals in Australia (Source: APCA) , an increase of ~97,000 terminals in 2 years.
Retail, Hospitality & Entertainment Sector: A Lucrative Market Opportunity
Apart from the advantage of easy and cheap payment method, EFTPOS payment system offers awide range of applications including printing bills, inventory management and executing loyaltyprograms. This is in contrast to other payment methods and has largely fueled the extensive useof of EFTPOS in retail, hospitality and entertainment industries.
In the retail industry, among the different retail formats, sub-regional, neighbourhood shoppingcentres and large format retail have been the most active driven by strong housing market andproliferation of residential housing developments. They have in turn created sustained demandfor food-places and entertainment services around them as the consumer demand continues todiversify from traditional nine-to-five retail concept.
PAC Partners | Equity Research Stargroup Limited (STL)
Anthem is an EDI and supply chain software vendor with over 50K established users across Australia & NZ
PlannedUnifiedPaymentSystembySTL,AnthemSoftware&ClaimCoGroup
The average EFTPOS device in Australia processes ~$27Kper month in VISA and Mastercard transactions and $24K in debit card transactions
Australia:Consumption&GDPOutlookAustralia:TotalRetailTurnoverGrowthbyCategory
MSFfordifferentNon-CashPaymentMethods (in%oftransactionvalues
acquired)
Source:JLLResearch,Deloitte, ABS
On the other hand, the aggressive expansion strategy undertaken by establishedinternational retailers like Aldi, etc. to penetrate into the Australian retail market, hasstirred the demand for CBD and regional shopping centres format. It is estimated thatnew regional centres and new large format retail in the country will each add over 1.0m2
of space during 2016-2020.
Strong growth in house prices in Australia will continue to boost household wealth andconfidence and solid residential construction activity is expected to be the key demanddriver for household goods spending. Also depreciating Australian Dollar has been apositive for CBD retail markets especially on the back of increase in inbound tourism.The tourism industry is booming in Australia – number of visitors travelling in the countryincreased by 8.2% y/y which in turn is also driving the hospitality industry. The abovedevelopments are favorable for sustainable demand of EFTPOS.
‘Low-Cost Payment’ Factor To Drive Higher Adoption of EFTPOS Payment System
The relatively low cost of EFTPOS, when compared with Visa, Mastercard, AmericanExpress debit and credit cards, have made it a popular non-cash based retail paymentmethod especially among small businesses.
EFTPOS is the lowest-payment cost method for all transactions valued above $20 theaverage merchant service fee (MSF) for EFTPOS transactions is around 10 cents pertransaction, i.e., ~0.17% of the average EFTPOS transaction value. This is quite low incomparison to the average fee paid by merchants to their financial institution forMasterCard and Visa credit and debit cards transactions which have remain largelyunchanged at ~0.78% of the transaction value.
PAC Partners | Equity Research Stargroup Limited (STL)
PlannedUnifiedPaymentSystembySTL,AnthemSoftware&ClaimCoGroup
STL Striking Deals To Roll Out Bulk Supply Of EFTPOS SolutionsThe Company is working closely with both Anthem Software and Claim Co Group todevelop a software channel and deploy STL’s EFTPOS devices into Anthem’s businesscustomer network. The main theme is to monetize from the strong customer-base ofAnthem whose single customer uses its back-end to process as much as $1.4b ofpurchases via its EDI network.
Under the proposed unified payment system, the business shall order goods andservices from suppliers via an STL’s EFTPOS interface, and the customers will pay forthe purchase using the same payment system. The trio thus aims to integrate twoseparate transaction chains to serve the same end purpose. This deal has greatpotential to trigger mass rollout of the Company’s EFTPOS/payWave technologies to thebroader Australian market and highlights management’s innovation-focused approach. Itis most likely to boost STL’s topline performance from FY16 onwards.
Management To Leverage Their Extensive Market Experience
The Company has entered this arena by signing a leveraged wholesale agreement,negotiated at excellent rates with big players like Visa and MasterCard. This hasenabled STL to roll out its own EFTPOS machines to its customers.
STL plans to build up to 3,000 EFTPOS devices by FY19 via StarPOS over the next fewyears. StarPOS can generate net revenue between 0.25% and 0.85% of gross revenueprocessed by each terminal. Considering that an EFTPOS machine can process,depending upon location, monthly transactions varying between $10K to $100K, eachStarPOS terminal can add anywhere between $300 to $10K annually to the Company’stopline performance.
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PAC Partners | Equity Research Stargroup Limited (STL)
STL Reaching New Heights Through StarATM
STL is the only ASX-listed company having a direct ownership interest in the manufacturer of its ATM technologies
Worldwide 40%oftheaverageATMoperationalcostisspentoncashhandling
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STLPaybackPeriod (months) ForTheInitialInvestmentPerATM
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KeyConcerns ForBanksWorldwide InCash HandlingCycle
Source:AsianBankerResearch2011Survey
The Company recently launched Recycler StarATM, a game changing strategy and theformal certification is to be achieved in 4Q16. STL has a 5-year exclusive Australiandistribution agreement with its ATM machine manufacturer, NeoICP, and this strategicrelationship has potential to deliver competitive advantages to the Company. It achieveda milestone in early 2016 reporting significant reductions in operating costs of its ATMnetworks backed by successful renegotiations with a number of key suppliers.
Recycler StarATM To Revolutionize Australian ATM industrySTL ‘Recycler’ ATM machines, which allow customers to deposit and withdraw moneyfrom an ATM with all accounts being updated in real-time, is an innovative propositionby the Company.
While Recycling ATMs entails a larger investment compared to traditional ATMsbecause of high end and superior technology, one of the biggest advantages for banksis large reductions in cash replenishment and cash-in-transit costs. It is estimated thatthe annual cost of cash handling in Europe and the US exceeds $60b and $300brespectively (Source: Ovum and Giesecke & Devrient) while the big banks in Australiaspend hundreds of millions each year for operating ATM networks.
As per the White Paper released by Wincor Nixdorf in Dec’15, banks in emergingmarkets consider cost and security as equally key concerns when managing cash.Recycling ATMs tend to reduce the annual operating costs of ATMs by 17% therebyimproving return on investment (RoI). Moreover, security is another major advantage astellers no longer handle cash, minimizing the scope for attacks.
STL expects to receive official certification in 4Q16. STL’s strategy to deploy RecycleATMs will serve a dual purpose: Firstly it will lower ATM maintenance and servicingcosts for banks and secondly it is likely to promote ATM services among rural regionswhere access to traditional banking services is very limited.
STL Continues Focus On Improving Bottom-line Performance
The Company has renegotiated a number of key supply contracts of its ATM division.This has resulted in a significant reduction of major operating costs of its ATM networksby up to 52.9% and has lowered the payback period for the initial investment per ATM byover 20% to ~15 months.
STL is dedicated to achieve further operating efficiencies as it continues to review andrenegotiate contracts in light of the growing business scale, strengthening STL’s footholdin the Australian ATM industry.
STL’s Strategic Alliance with NeoICP Provides Competitive Edge
STL’s 5-year exclusive Australian distribution agreement with its ATM manufacturer,NeoICP is expected to reduce the Company’s costs by 30%, generating annual savingsof $1.1m in Capex. NeoICP is a leading independent ATM manufacturer in South Koreawith over 50% ATM market share and a majority of market share in currency handlingsystems. Moreover, the reciprocal shareholding between STL and NeoICP has evolvedas another revenue source for the Company diversifying the overall business model.NeoICP is extensively trailing its innovative technologies (casino settlement machines,cash redemption terminals and back office technologies) throughout the Asia Pacificregion, especially Macau – the world’s 2nd largest gambling hotspot. Through its 11.28%stake, STL emerges as the indirect beneficiary of NeoICP’s improving financialperformance.
PAC Partners | Equity Research Stargroup Limited (STL)
Risk Assessment
Monthly ATM withdrawal has declined from 72.9m in 2008 to 60.0m in 2015
FraudLosses byTransactionType(in$mn)
Fraud losses related to EFTPOS and ATM transactions rose from $13m in 2011 to $23m in 2014
Australia’s smartphone penetration approached 85% by mid-2015. According to eMarketer, about 1 in 3 internet users in Australia conducted mobile banking activities in 2015.
ATM Usage DecliningAs per the data released by Australian Payments Clearing Associations (APCA), monthlyATM withdrawals have continued to decline after touching a peak in 2008. Introduction of$2 ATM usage fees and growing popularity of easy and cheap payment options likeEFTPOS, online banking, tap-and-go technologies, Paypass and PayWave, smartcards,mobile payments, etc. is making ATMs less popular among Australians.According to the Reserve Bank of Australia (RBA), there is an oversupply of ATMs inAustralia relative to the population. As per their forecasts, the number of ATMs needed inthe future is expected to decline further as digital payments registers multi-fold growth inuser base. In light of above developments, STL’s strategy to expand ATM network inAustralia through organic growth and acquisition of smaller unlisted ATM deployers mayadversely impact the Company’s operationalefficiency in the long run.
Success Of Recycler ATMs Contingent Upon Careful ImplementationRecycler ATMs is a great boost for the banking industry, however its successful operationrequires (i)compliance with market-specific legislation for issues like money laundering, etc.and (ii) optimization of the broader cash management processes. Deployment of this newhardware not only involves higher initial investment but should be accompanied by acomplementary set of solutions comprising of appropriate cash management software,branch consulting services and hardware. This will only ensure the banks are achievingcost savings benefits and revenue-drivingpotential.STL management must ensure that their infrastructure for the deployment of RecyclerATMs is well planned, works seamlessly and all issues are effectively dealt with. Anyloophole in the system may fail to deliver targeted end results.
Rising Fraud LossesWhile non-cash based retail payments have grown in popularity and are widely useddriven by low cost option and ease of use, it has been accompanied by growing levels offraud. Although the fraud losses relating to EFTPOS-enabled and ATM transactionshave remained considerably lower compared with scheme cards, they have beenincreasing gradually since 2012 after spiking in 2009. due to a pick-up in cardcounterfeiting/skimming fraud. However, it is expected that the ongoing rollout of theEMV chip standard will curb this counterfeiting activity in future.
Growing Popularity Of Contactless Payments Via MobileAustralia is considered to be the world leader in the adoption of contactless paymentswith ~70% of credit card transactions being ‘tap and go.’ In the last two years,contactless payments have grown enormously to evolve even further into mobilepayments, which allow consumers to be ‘card free’ by making payments with theirsmartphone. Apple Pay, Android Pay, Westpac tap and pay and the most recent entrantANZ Bank’s Mobile Pay tap-and-go technology are changing the contactless paymentlandscape in Australia by eliminating the requirement for cards for making purchases.STL is a relatively new-entrant in the tap-and-go contactless card payment solutionsspace, but the growing boom for mobile-payments in contactless terminals may makethe Company’s offerings less popular.
PAC Partners | Equity Research Stargroup Limited (STL)
Valuation & Outlook
Valuation Summary (A$ in m except per Share data)
Sensitivity Analysis
Stargroup looks well placed to gain market share in the ATM network and grow significantlythrough the rollout of StarPOS. The key to STL lies in the experienced management,disciplined approach to acquisitions, successful rollout of StarPOS products and servicesand its huge emphasis on customer service. If STL is successful in achieving its mediumterm goal of ~1,000 ATM network plus make inroads into the EFTPOS market, the stockappears cheap on a DCF valuation of 8.1c. We have set our 12 month price target at 8.1c,believing that within 12 – 24 months with huge growth potential the stock should be tradingnear its valuation. The WACC of 14.79% takes into consideration its micro cap standing,higher risk and higher volatility associated with the story. Overall STL is a compellinginvestment, and suitable for high risk investors.
TotalPresentValueofFreeCashFlows= 33.4
Add:Cash&cashequivalents= 0.51
Less:P.V.ofTotalDebto/s(asperlatestfilings)= -
Less:MinorityInterest -
EquityValue (PresentValue)= 33.9
NumberofSharesoutstanding(inm)= 415.68
FairValueperShare(A$)= 0.081
Source: PAC Partners estimates
Sensitivity Analysis
Reducing our WACC to 13.79% increases the valuation to $0.094/sh. Increasing ourassumed long-term growth rate from 3.0% to 4.0% lifts the valuation to $0.088/sh
Change in Target Price with a 1% change in WACCWACC 13.79% 14.79% 15.79% 16.79% 17.79%
Terminal Growth % 3.00% 3.00% 3.00% 3.00% 3.00%
Target Price ($ / Share) 0.094 0.081 0.071 0.062 0.055
Change in Target Price with a 0.5% change in Terminal Growth %
WACC 14.79% 14.79% 14.79% 14.79% 14.79%
Terminal Growth % 2.00% 2.50% 3.00% 3.50% 4.00%
Target Price ($ / Share) 0.075 0.078 0.081 0.085 0.088
Source: PAC Partners estimates
PAC Partners | Equity Research Stargroup Limited (STL)
Stargroup Limited Price $0.04
NFPOS 416 m Market Cap $16 m
PROFIT & LOSS ($m) Y/e Jun FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23FRevenue 4.51 13.10 23.44 30.64 34.09 39.60 44.17 48.18 EBITDA (0.89) 3.08 8.15 9.43 11.17 14.06 15.96 18.09 Depreciation & Amortisation
0.26 1.02 1.88 1.85 1.74 2.22 2.43 2.63
EBIT (1.14) 2.06 6.28 7.58 9.44 11.85 13.53 15.46 Net Interest 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Income tax 0.00 0.00 0.00 1.36 1.70 2.13 2.57 3.25 NPAT underlying (1.14) 2.06 6.28 6.21 7.74 9.71 10.96 12.21 Equity Accounting ProfitsLess non-controlling Interest
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
NPAT underlying - attributed to shareholders (1.14) 2.06 6.28 6.21 7.74 9.71 10.96 12.21
Abnormal items 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 NPAT Reported. (1.14) 2.06 6.28 6.21 7.74 9.71 10.96 12.21 NPATA
BALANCE SHEET ($m)Y/e Jun FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23FCash 1.38 1.61 7.15 (0.29) (1.17) 2.81 6.56 9.74 PP&E 1.05 2.98 3.23 4.93 6.94 8.73 10.80 12.96 Debtors & Inventory 1.40 2.28 3.68 5.27 5.83 6.58 7.36 8.22 Other Financial Assets 1.54 5.51 6.51 6.51 10.35 10.48 11.49 13.30 Intangibles 5.02 4.68 4.00 4.00 4.00 4.00 4.00 4.00 Total Assets 10.52 17.21 24.73 22.48 28.03 35.07 42.98 51.54 Borrowings 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Trade Creditors 0.52 0.83 1.27 1.62 1.69 1.90 2.10 2.13 Other Liabilities 0.10 0.15 0.20 0.27 0.33 0.37 0.41 0.38 Total Liabilities 0.62 0.98 1.47 1.89 2.02 2.26 2.51 2.52 NET ASSETS 9.90 16.22 23.27 20.59 26.01 32.81 40.48 49.03 OEI and Pref Shares 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Shareholder Equity 9.90 16.22 23.27 20.59 26.01 32.81 40.48 49.03
Cash Flow ($m)Y/e Jun FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23FOperating EBITDA (0.89) 3.08 8.15 9.43 11.17 14.06 15.96 18.09
Interest & Tax (0.00) 0.00 0.00 1.36 1.70 2.13 2.57 3.25 Working Cap. 0.91 1.45 2.37 5.45 5.89 6.79 7.63 9.02
Operating Cash Flow (1.80) 2.54 7.23 5.00 9.03 11.03 12.55 13.46 PPE 8.17 2.15 2.15 3.55 3.75 4.00 4.50 4.80
Intangible Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Free Cashflow (FCF) (9.97) 0.40 5.08 1.45 5.28 7.03 8.05 8.66 Ord Dividends 0.00 1.00 1.00 1.86 2.32 2.91 3.29 3.66 Equity, (Debt Paydown) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net Cashflow (9.97) (0.60) 4.08 (0.42) 2.96 4.12 4.76 4.99
SEGMENTAL SUMMARY (A$m)Y/e Jun FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23FRevenueStar Payments and CashPod ATM Network Revenue
3.97 9.32 14.36 16.89 16.52 18.17 19.08 20.03
StarATM and CashPod ATM Revenue 0.31 0.24 0.24 0.31 0.34 0.38 0.40 0.42 StarPOS Revenue 0.23 3.54 8.84 13.44 17.23 21.05 24.69 27.73 Total 4.51 13.10 23.44 30.64 34.09 39.60 44.17 48.18
PAC Partners | Equity Research Stargroup Limited (STL)
Stargroup Limited Date: 4-May-16
Model Updated: 4-May-16
KEY RATIOSY/e Jun FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23FEBITDA Margin (%) -19.7% 23.5% 34.8% 30.8% 32.8% 35.5% 36.1% 37.5%NPAT Margin (%) -25.4% 15.7% 26.8% 20.3% 22.7% 24.5% 24.8% 25.3%ROE (%) y/e -11.6% 18.8% 38.7% 30.2% 29.8% 29.6% 27.1% 24.9%ROI (%) y/e -13.4% 14.1% 39.0% 36.3% 34.7% 39.5% 39.9% 39.4%
NTA per share ($) 0.02 0.03 0.04 0.04 0.04 0.06 0.08 0.09Eff Tax Rate (%) 0.0% 0.0% 0.0% 18.0% 18.0% 18.0% 19.0% 21.0%Interest Cover (x) -4504.69 0.00 0.00 0.00 0.00 0.00 0.00 0.00Net Gearing (%) -14.0% -9.9% -30.7% 1.4% 4.5% -8.6% -16.2% -19.9%
VALUATION PARAMETERSY/e Jun FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23FEPS Adj (cps) -0.275 0.495 1.511 1.495 1.861 2.337 2.636 2.938PE Adj (x) -13.8 7.68 2.52 2.54 2.04 1.63 1.44 1.29Enterprise Value ($m) -0.3 0.2 0.1 0.1 0.1 0.1 0.1 0.2EV / EBITDA (x) -12.6 6.9 1.4 2.1 1.8 1.1 0.7 0.4EV / EBIT (x) 0.3 0.1 0.0 0.0 0.0 0.0 0.0 0.0Price / NTA 1.8 1.3 0.9 1.0 0.9 0.6 0.5 0.4DPS (cps) 0.00 0.24 0.24 0.45 0.56 0.70 0.79 0.88Dividend Yield (%) 0.0% 6.3% 6.3% 11.8% 14.7% 18.4% 20.8% 23.2%Franking (%)Free Cash / Share (c) -2.4 0.1 1.2 0.3 1.3 1.7 1.9 2.1Price / FCF PS (x) -1.6 39.9 3.1 10.9 3.0 2.2 2.0 1.8
DCF VALUATION & SENSITIVITY
PV of Cashflows 2016 to 2023 5 Risk Free Rate 2.5%PV of Term Year Cashflow 76 Equity Risk Premium 8.5%Less OEI at CY15 y/e 0 Equity Beta 2.05Cash and Equivalents 1 Cost of Equity 14.8%Debt 0 After Tax WACC 14.8%PV of Equity 34 Terminal Growth 3.0%PV of Equity per share 0.081Risked PV of Equity Per Share 0.012
DIRECTORS MAJOR SHAREHOLDERS%
Todd Zani 24,255,262 Hover Holdings Pty Ltd 19.30Shaun Sutton 744,286 Dream Bright Nominees Pty Ltd 13.81Jong Ho (Jay) Kim NeoICP Korea Inc 6.39
Tomialcocl Pty Ltd (Tomialcocl Family A/C) 5.84
Top 20 64.74%Source:LatestAnnualReport.Ason1September,2015
GROWTH PROFILE (YoY)Y/e Jun FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23FSales Revenue 190% 79% 31% 11% 16% 12% 9%EBITDA 447% 165% 16% 18% 26% 13% 13%EBIT 280% 205% 21% 25% 26% 14% 14%NPAT 280% 205% -1% 25% 26% 13% 11%EPS 280% 205% -1% 25% 26% 13% 11%DPS 0% 0% 87% 25% 26% 13% 11%
PAC Partners | Equity Research Stargroup Limited (STL)
Melbourne(HeadOffice) Level10,330CollinsStreetMelbourneVIC3000 +61386339831
Sydney Level9,56PittStreet,SydneyNSW2000 +61292339600
Perth Level29,219StGeorgesTce,PerthWA6000
CRAIGSTRANGERManagingDirector
386339832
SEANKENNEDYCorporate Finance
03 8633 9836
ANTHONYSTANICorporateFinance
0386338251
BROOKEPICKENEquity Capital Markets
03 8633 9831
PAULJENSZDirector, Senior Industrial Analyst0386339864
ANDREW SHEARERSenior Analyst
03 8633 9862
LAWRENCEGRECHSenior Analyst
0404 052 913
ROGERCHENJunior Analyst
03 8633 9868
PeterKopetzResearch Analyst
BRENDANFOGARTYCorporateSales
0386339866
TOMFAIRCHILDCorporateSales
+610386339867
EDWINBULESCOCorporateSales– Perth
0431567550
PHILCAWOODInstitutional Sales– Sydney
0299945552
IANLEETECorporateSales– Sydney
0299945551
Buy Hold Sell
>20% 20%– 5% <5%
A Speculative recommendation is when a company has limited experience from which to derive a fundamental investment view.Risk RatingPAC Partners has a four tier Risk Rating System consisting of: Very High, High, Medium and Low. The Risk Rating is a subjective rating based on: Management Track Record, Forecasting Risk, Industry Risk and Financial Risk including cash flow analysis.Disclosure of Economic InterestsThe views expressed in this research report accurately reflect the personal views of about the subject issuer and its securities. No part of the analyst's compensation was, is or will be directly or indirectly related to any recommendation or view expressed in this report.The following person(s) do hold an economic interest in the securities covered in this report or other securities issued by the subject issuer which may influence this report:•the author of this report •a member of the immediate family of the author of this report DisclaimerPAC Partners Pty Ltd. (“PAC Partners” or “PAC”) is a Corporate Authorised Representative of PAC Asset Management Pty Ltd holder of an Australian Financial Services Licence (AFSL No. 335 374). PAC Partners is a business partner of Phillip Capital Limited (“PhillipCapital”) (AFSL 246 827).The information contained in this report is provided by PAC Partners to Wholesale Investors only. Retail investor and third party recipients should not rely, directly or indirectly, on this report. Users of this research report should not act on any content or recommendation without first seeking professional advice. Whilst the report has been prepared with all reasonable care from sources which we believe are reliable, no responsibility or liability is accepted by PAC Partners, for any errors or omissions or misstatements however caused. Any opinions, forecasts or recommendations reflect our judgement and assumptions at the date ofpublication or broadcast and may change without notice. This report is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This publication contains general securities advice. In preparing our Content it is not possible to take into consideration the investment objectives, financial situation or particular needs of any individual user. Access of this report does not create a client relationship between PAC Partners and the user. Before making aninvestment decision on the basis of this advice, you need to consider, with or without the assistance of a securities adviser, whether the advice in this publication is appropriate in light of your particular investment needs, objectives and financial situation. PAC and its associates within the meaning of the Corporations Act may hold securities in the companies referred to in this publication. PAC believes that the advice and information herein is accurate and reliable, but no warranties of accuracy, reliability or completeness are given (except insofar as liability under any statute cannot be excluded). No responsibility for any errors or omissions or any negligence is accepted by PAC or any of its directors, employees or agents. Any content is not for public circulation or reproduction, whether in whole or in part and is not to be disclosed to any person other than the intended user, without the prior written consent of PAC Partners.Disclosure of Corporate InvolvementPAC Partners has in the previous 12 months carried out work on behalf of the Company described in this report and received fees on commercial terms for its services. PAC Partners and/or their associates may own securities of the Company described in this report. PAC Partners does and seeks to do business with companies covered in the research. PAC may receive commissions from dealing in securities. As a result, investors should be aware that PAC Partners may have a conflict of interest that could affect the objectivity of this report.
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Recommendation CriteriaInvestment ViewPAC Partners Investment View is based on an absolute 1-year total return equal to capital appreciation plus yield.