Questor share tip: Optimal Payments shares jump on acquisitions

Aim-listed online payment processor sees shares jump more than 6pc on two deals worth over $225m, says Questor

Optimal Payments
425½p+25½
Questor says BUY

OPTIMAL Payments [LON:OPAY] yesterday agreed two acquisitions that will accelerate the company’s rapid growth profile. The announcement sent shares in the Aim-listed technology company up by more than 6pc.

The first deal will see Optimal Payments pay $210m (£123m) for Meritus Payment Solutions. Meritus currently handles online payments for more than 8,000 small and medium businesses in the US which generated pre-tax profits of $1.1m on revenue of $74.4m in the year ended December 2013.

Joel Leonoff, Optimal Payments chief executive, said: “Meritus is a great stepping stone into the largest e-commerce market in the world.”

Mr Leonoff explained that, when considering the price paid for Meritus, investors should focus on the $13m in earnings before interest, tax, depreciation and amortisation (Ebitda), rather than the profit figure. He added that because Meritus was a private company the majority of profits were paid out in cash bonuses which greatly distort the reported profit figure.

The other reason that Optimal paid 16.1 times adjusted earnings for Meritus, a company that only started in 2008, is because of its rapid growth profile. The company more than doubled its earnings while revenue increased by 94pc last year as online shopping replaced the high street. The deal is expected to complete during the third quarter of this year.

The acquisition will be funded with a $150m cash payment and the issue of Optimal Payments shares worth $60m. Around 9m shares will be issued at a price of £3.93 in four equal tranches. The first issuance of about 2.25m shares will take place a year after the deal closes.

The majority of the cash will come from a $100m loan that has been agreed with the Bank of Montreal which is repayable over a three-year period. Mr Leonoff was confident that debt levels would fall sharply following the completion of the deal as the company generated free cash flow of $81m last year.

A smaller deal worth $15m for online payment company Global Merchant Advisors (GMA) was announced alongside the much larger acquisition. GMA generated revenues of $8.3m and adjusted ebitda of $4.6m in the year ended December 2013.

The two deals combined will increase Optimal Payments’ handling of merchant transaction and reduce the company’s reliance on online gambling. The majority of the company’s Ebitda in the past year comes from the NETELLER online gambling product. Players deposit money into an online account on gambling websites through an Optimal Payments product called NETELLER before they can play and the company earns fees on every transaction.

House broker Canaccord Genuity said the acquisition was “highly beneficial” as it diversified Optimal’s revenue away from gaming, its largest client and into native US Merchants.

Questor also likes the more balanced revenue. An over-reliance on US gambling when new legislation made it illegal in 2006 caused the share price to crash. If this deal completes then Mr Leonoff believes he can achieve more than $400m in revenue and $100m in Ebitda within the next 18 months. Canaccord Genuity estimates Ebitda of $101m and adjusted earnings per share of 41c (24p) by December 2015.

There is plenty of risk here from the transaction, exposure to small and medium US traders and US gambling legislation. However, there is also plenty of cash flow and the potential for the most populous state in the US, California, to legalise online poker. All of which could see the shares take off. So, we tentatively upgrade to a buy ahead of an exciting year.