Why I’d be wary of this otherwise promising 5%-plus yielder
I can see many reasons to like payment services provider SafeCharge International Group (LSE: SCH) and one reason for being wary of the shares.
Among its clients, the company operates as a payment service partner for some well-known blue-chip companies and some of the world’s “most demanding” businesses. The firm provides “global omnichannel payments services from card acquiring and issuing to payment processing and checkout.” All its services are “underpinned by advanced risk management solutions.”
A global enterprise
The company has offices “around the world” and its platform connects to “all” the big payment cards including Visa, MasterCard, American Express and Union Pay alongside more than 150 local payment methods. At first glance, the growth potential seems big, and since the firm arrived on the stock market in 2014 the financial record is quite good. Revenue, operating cash flow and normalised earnings have all been on an upwards trajectory, and City analysts following the firm expect earnings to grow around 20% this year and 12% in 2019.
Today’s interim results reveal a mixed bag of numbers. Revenue increased 26% compared to the equivalent period last year, but cash from operations only lifted 1%. Meanwhile, the diluted earnings per share figure slipped by 2%. However, the directors are optimistic about the outlook and pushed the interim dividend up by 15% pointing to an adjusted EBITDA rise of 15% as some justification for the move.
The company defines adjusted EBITDA as a “company-specific measure which is earnings excluding finance income, finance expense, taxes, depreciation, amortisation, acquisition costs and contingent remuneration, restructuring and settlement costs, and share-based payments charge.” Some critics would argue that such measures tend to show what a company would have earned ‘without all the nasty bits’, but I’m willing to give SafeCharge the benefit of the doubt and assume the measure really does show the underlying growth and performance of the company.
Strong growth with an elephant in the room
Indeed, the processed volume increased by a whopping 59% to $6.7bn, suggesting that business is truly expanding. And one of the measures I really like in the report is that the firm is free of borrowings and has around $86m in cash sitting on the balance sheet, which suggests that the incoming cash flow is real and serving the business well.
Chief executive David Avgi explained in the report that “the strong set of results” was driven by “intensified marketing efforts and a strengthened sales team.” SafeCharge’s “robust” infrastructure, advanced technology and innovative approach to payments “are gaining increased market recognition.” Because of that, the company enjoyed several Tier 1 customer-wins and has “a strong sales pipeline.”
He also asserted that “significant” revenue growth is coming from existing customers “who appreciate SafeCharge’s high quality of account management and customer support.” The outlook is for revenue in 2018 to be “at the top end of market expectations.” However, I’ll reserve judgement about the quality of the firm’s growth until I see the cash flow figure rising too.
To be honest I like the look of the firm’s growth potential and big forward dividend yield, but one thing makes me wary about holding the stock: almost 70% of the shares are in the hands of one dominant shareholder, Israeli-Cypriot businessman Teddy Sagi, who can more or less do what he likes with the company at any time.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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