SafeCharge 3 Years After IPO

In this post we look at SafeCharge, a medium sized payment processor and recently formed acquirer. We look at the following items; history, the IPO, recent performance, drivers of growth so far, recent strategic moves and execution challenges.

SafeCharge History

SafeCharge began as an Israel based company focused on providing payment gateway services to mainly online gambling companies. The main founder and majority shareholder of SafeCharge, Mr. Teddy Sagi is also the majority shareholder of Playtech, a leading gambling software and solutions provider. This close relationship with Playtech gave SafeCharge access to gambling merchants and a good understanding of their needs. Until recently SafeCharge focused on providing the payment gateway layer only, leaving the acquiring services to acquirers such as Worldpay mainly but also Barclays, AIB and others.

SafeCharge IPO

SafeCharge listed on the London AIM exchange in 2014 with a strong history of past performance and an attractive path for growth. At the time of listing SafeCharge was processing $4.8 billion in annual volume with revenue of $43.18 million. The revenue to volume ratio of 0.9% healthy given acquiring was not being performed in house. At the time SafeCharge had gross profit of $24.89 million with a gross profit to revenue ratio of 57.6%. The company listed with an adjusted EBITDA of $11 million. With fully diluted ordinary shares of 154,938,000 and a list price of $2.67 (USD to GBP at that time at 1.65), the company listed at attractive multiples, a testament to the potential that investors believed could be unlocked.

SafeCharge Recent Performance

SafeCharge has posted positive recent performance for year ended 2016 on all fronts. Processing volume has grown to $8 billion per annum, nearly double the volume at the time of IPO three years ago. Revenue has grown to $106 million almost 2.5 times the revenue at the time of IPO. The revenue to volume ratio has improved from 0.9% to 1.33% perhaps driven by almost a billion of acquiring volume being brought into the Group’s in house acquiring. Gross profit has also more than doubled to $60 million. The gross profit to revenue ratio remains consistent at 56.6%. An adjusted EBITDA of $33 million is a three fold increase from the time of IPO. With a market cap just over $ 500 million the company is trading at an attractive TTM P/E of 15.

SafeCharge Drivers Of Growth So Far

A continued expansion into the company’s core market of gambling with organic growth from existing merchants but also the signing of large new merchants such as Ladbrokes and Paddy Betfair

Successful expansion from the core target vertical of gambling to the related and profitable verticals of Forex and Binary Options

Transfer of nearly a billion dollars of volume to own acquiring with the resulting increase in profit margins for the Group

Launch of own card issuing capabilities offered via the Pay.com brand and helped by the acquisition of 3V Transaction Services

Expansion of expertise in gambling, forex and binary options verticals to merchants in the Asian region including cross selling to gambling, forex and binary options merchants access to South East Asian consumers through the partnership with 2C2P

Expanding into card present payments through a minority investment in Nayax, providing acquiring services for card present transactions and launching a branded POS device

Signing on El Al, the first airline customer

Offering of white labelled banking services through the partnership with Saxo Bank

SafeCharge Recent Strategic Moves

Expansion into the US through a partnership with Chase for US acquiring

Opening of Southeast Asian offices and membership of UnionPay International (CUP)

Strategic divesting of merchants from high risk categories such as binary options

Focus on diversifying merchant categories by targeting Travel, Online Retail, Soft Gaming and Marketplace merchants

SafeCharge Execution Challenges

Growth into the saturated US market will be challenging. A strategic move could be the targeting of Fantasy Sports merchants in the US via Chase to obtain a foothold in the country. There are synergies between SafeCharge’s experience with gambling and Fantasy Sports. Chase competitor Vantiv controls most of the Fantasy Sport volume. Interestingly SafeCharge merchant Paddy Betfair made a bet on US Fantasy Sports recently through the acquisition of Draft.

Growth into the Travel market will also take time and investment. SafeCharge likes to grow through investments and partnerships. A strategic investment or partnership with a travel / airline services provider could likely be on the cards to overcome this challenge.

Conclusion

In conclusion SafeCharge has come a long way from being focused solely on the gambling vertical and being the payment partner of sister company Playtech to more than doubling volumes and profits in three years since the IPO. The company is making the right strategic moves in expanding geographically (US and Asia), channels (POS) and targeted verticals (Travel, Retail) while divesting itself of higher risk volume and merchant categories (Binary Options). Execution challenges exist but given its history the company should be able to tackle these successfully through a combination of strategic investments, partnerships and organic growth.

Disclaimer: This contents of this post are opinion and not investment or financial advise. Gropay does not have any relationship or dealings with SafeCharge.

Update 13 September 2017

SafeCharge released their H1 2017 results yesterday. The key point of note in our opinion was the declining rate of growth in almost all key metrics and negative growth in Gross Profits, EBITDA and Cash Flow. The reason provided for this decline in performance was the move away from high risk industry sectors begun by the Group in 2016.

The lower risk industry sectors that SafeCharge is now targeting generally deliver lower margins than the high risk sectors that the company has historically targeted (risk = margin). These lower risk sectors are however generally already well serviced by existing providers (e.g. Worldpay, Ingenico etc). Payment processing is an extremely sticky business as it requires the merchant to divert valuable development time which could be used to invest in the merchant’s own product into integrating with a new payment provider. Not to mention the impact on the merchant’s operations and accounting in having to adopt to the new payment partner’s processes and reporting. Most incumbents like Worldpay, Ingenico already have extremely strong products as a result of decades of investment so it is unlikely that SafeCharge is going to be able to convince lower risk merchants to switch based on product. One of the only tools available to the company then to entice these merchants to switch is cost. Hence the resulting impact on revenue and profit growth.

Worldpay also released their H1 2017 results and reported a strong rate of growth on all fronts fuelled mainly by its e-commerce division. Suggesting that once SafeCharge has completed its refocus from high to low risk businesses it could also enjoy the benefits of low customer churn and continuing growth of e-commerce.

SafeCharge has a strong and experienced management team and in our opinion it is not a question of whether they will be able to make this transition but how long it will take them. They have a strong balance sheet with a $113M cash balance so they have some room to complete this risk portfolio re-balancing. We believe that in time the company should also be able to increase volumes and margins through the newly acquired low risk businesses through a focus on cross selling ancillary products and through more efficient management of these clients.