Which ASX small cap is becoming a truly Trans-Tasman payments provider?

Small businesses remain the lifeblood of daily life and the backbone of every economy. Despite the dominance of tech giants like Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN), millions of everyday transactions still occur outside their reach. Consider the simple acts of buying a coffee or a beer - the ubiquitous tap of a phone or card is a testament to the ongoing digital revolution in payments.

This transformation towards digital transactions, significantly accelerated by the COVID-19 pandemic, has opened doors for companies like SmartPay. Excelling in this digitised landscape, SmartPay (ASX:SMP) is capitalising on the new era of electronic transactions, particularly in the bustling small business sector.

A pioneering player in the payment solutions industry, Smartpay has emerged as a key facilitator for small businesses seeking to integrate EFTPOS seamlessly into their operations. Its mission: to be recognised as the most reliable, capable, agile and innovative omni-channel payments provider in Australia and New Zealand.

The business

Smartpay designs, develops and implements innovative payment solutions for customers in New Zealand and Australia.

The company is a profitable and growing business, boasting approximately 17,700 active terminals in Australia and commanding a significant 25% market share in New Zealand with around 30,000 terminals. As the largest non-bank merchant terminal provider, SmartPay competes effectively with Tyro (ASX:TYR) and major banking institutions.

The company's growth in Australia is propelled by its acquiring model, where it levies a merchant service fee on each transaction. This model taps into the vast market opportunity presented by over 1 million terminals predominantly under bank control. Focusing on smaller businesses, especially in hospitality and beauty, SmartPay distinguishes itself in this competitive landscape.

Although the banking sector's involvement in this area is more peripheral, emerging challengers like Square (ASX: SQ1), Stripe, Lightspeed, and Tyro present a dynamic competitive environment. Furthermore, SmartPay's revenue stream is closely tied to consumer spending trends, as transaction volumes directly influence its fee collection.

The opportunity

TAMIM Head of Australian Equities Ron Shamgar recently spoke on auzbiz how SmartPay could potentially see it’s earnings surge to quadruple it’s FY23 result over the next 5 years. The growth lever is in the New Zealand market. As mentioned above, the company has a solid foothold of roughly 25% of the terminal market in New Zealand. Until recently, the company’s revenue model in New Zealand has been a monthly rental rather fee per unit than a per transaction fee like the Australian division (along with ancillary services fees, the company terms this its “acquiring model”) .

This is set to change with the new Cuscal partnership readying to transform the New Zealand market. The upside is not just in new customer acquisition for SmartPay, but where the company can convert its existing New Zealand client base to the acquiring model. That opportunity could result in $120 million revenue upside at 50% margin.

Over the long run, the SmartPay share price has provided an exceptional return for shareholders. 

Smartpay is in a net cash position with funds in the bank at the end of September 2023 of $19 million.

Should the company reach the levels we feel it is capable of the current price could be a very attractive opportunity for long term investors. Alternatively, if Smartpay continues to make waves we see it as a potential takeover target from the banks or a potential international acquirer looking to get a foothold in New Zealand and Australia.

Recent Financial Results

Smartpay released their half year results to little fanfare from the market.

The interim result showcased impressive financial performance. Revenue increased 33% on the prior year to $46.9 million. The primary driver of this revenue growth remains the Australian acquiring transaction revenue, resonating strongly with merchants navigating a challenging retail landscape.

The Company reported normalised Earnings Before Interest Tax Depreciation and Amortisation (EBITDA) of $10.6 million, growing 31%. This was despite ongoing operational investments, including preparations for the New Zealand venture.

Additionally, the normalised Profit Before Tax has seen significant growth of 68%, reaching $4.8 million. This flowed through to a 64% growth in normalised Net Cash, reaching $2.2 million. The improving profitability reflects the robust operating leverage and successful execution of Smartpay’s Australian strategy, while at the same time making significant strides toward the entry into the New Zealand acquiring market.

Strategic Shifts and Future Outlook

SmartPay’s value proposition extends beyond competitive pricing to an enhanced software platform. Its SmartCharge plan and flat-rate offerings provide unique advantages to merchants. Additionally, the company's tech offerings, including SmartConnect and its open API architecture, position it as a tech-savvy player in the payments industry.

The TAMIM Takeaway

SmartPay stands at an exciting juncture, with the potential to quadruple its earnings over the next five years, especially in the lucrative New Zealand market. Despite a recent dip in its share price, the fundamentals of SmartPay remain strong, with a clear strategy for growth and a significant opportunity in the shift to the acquiring model in New Zealand. For long-term investors, SmartPay represents a blend of resilience, innovation, and potential for sustained growth in the trans-Tasman payments market.

Disclaimer: SmartPay (ASX: SMP), Google (NASDAQ: GOOG), and Microsoft (NASDAQ: MSFT) are currently held in TAMIM Portfolios.