Monday, August 28, 2017

This could be a GEM in the Making



PAX Global what does it do?

Ever go to NTUC and you make a payment via your credit card? The system that reads and transact the payment is known as Point of Sale Terminal. This company is dealing in this industry. In Singapore most of the system are by Nets and Epoint

What is POS exactly?

POS is an advance level of cash registering system assisting to manage your business in an easy way. The system helps in sales no. customer analytics detail, purchase orders just to name some feature

Who are its competitors

In terms of market share, PAX is currently #4 in the world in terms of shipment. Its main competitors are Ingenico and Verifone with the smaller ones like Datalogic, Honeywell

What is the market future growth prospect

As the world shift payment from physical cash, POS terminal will grow in importance in years to come.

What got me interested

PAX global has always been on my watchlist since 2011 after reading an article on Nextinsight. https://www.nextinsight.biz/index.php/component/content/article?id=4400:pax-cashing-in-on-drive-to-cashless-society

I did not take a position at that time partly due to my ignorance on HK market and also I was very new to investing probably just into my second year and was exploring the different techniques.

Recently I was screening for stocks based on certain criteria and this name rings a bell in my mind when it pops up on my screening list. First thing I look at was the stock price and I find out that it went from 12 to 4+ at the time of screening. This pique my interest to find out more about the company.


From a techinical point of view an RSI less than 30 would mean the counter is oversold which also means it’s a screaming buy for me, Fundamental analysis aside. This is one positive for me.

What causes the Share price to tumble

  1. Increasing smaller players in the market challenging the big players
  2. Losing market share in China due to merchants adopting lower cost POS systems
  3. Regulation in China has also cause uncertainty due to PBOC implementing stricter rules “In 2015 ... the People’s Bank of China issued a paper to regulate or crack down on the unlicensed merchant acquirers in the market,” she said. “All these regulations point to the management of systemic risk in the payment value chain, protecting the shareholders.”
  4. Technology is evolving making traditional POS terminals becoming passe.

When was the last time a similar situation occur and how did the management react?

From 2011 Annual report:

“the Group would strengthen the expansion in the emerging markets such as South America, Africa Region and other BRIC countries next year, so as to achieve a greater international market shares and minimize the possible impact on our business by the global economy downside risk and maintain a fruitful growth.”
PAX plans to expand aggressively into other markets as it seeks to reduce its reliance on China. During that period, They went on a hiring spree, cost outpaced revenue hence impacting their profit for the year resulting in a lower EPS.


Selling and administrative expenses increase more than 50% for both segment.

After 2013, the company as stronger than it was in 2011 with a more diversified portfolio. This show that the management is able to not only plan but also execute its strategies well.

Is the Company worth investing and Valuing the Company

EPS in 2009 = 8.46c
EPS for 2016 = 53.5c

CAGR from 2009-2016 = 26%

TT12M EPS is not going to be better than 53.5c recorded in 2016. EPS for 1H17 is 0.237 which is a 14% fall from 1H16 levels. The interesting part is Rev increases by 20% but net profit is still down by 14%. This is mainly attributed to increase in hiring for RnD. Their hiring went from 714pax to 982pax. Research and development cost increase a whopping 92% from 62mil in 2016 to 119mil in 2017. Another department which experience such high hiring is the sales and marketing department. Headcount increases from 477 to 689 Had the company not go on this hiring spree, their net profit would have been flat.

Number of employes in 2017

Number of employees in 2016

Department
2016
2017
increase/decrease
Management
14
14
0
Sales and  after sales services and marketing
477
689
212
Research and development
714
982
268
Quality assurance
50
42
-8
Administration and human resources
54
75
21
Accounting
51
58
7
Production, procurement and inventory control
34
57
23

There is a lot of hiring going on in PAX between 2016 and 2017 as they seek to expand into markets out of China.

The hiring has bring out some positive effects when we look at their segment result. Sales department increase by 212 pax.

Analysing the Company

Growth

From their half year result, there is growth in revenue in all segments except China and Europe. Revenue increases by 20%. Reliance on China has dropped from 44% to 32%.

Pax has recently just penetrated into the USA ence growth in this area should be able to grow at double digit in the next few half year. The hiring spree has result in positive revenue growth for the company albit the growth has not grow as fast as wages.

In 2016, they was 477 sales staff hence revenue per staff = 1,332,715/477 = 2,793 Mil
In 2017, Sales staff incraese to 689 hence rev per staff = 2,330 Mil.

The sales efficiency per staff will need to go back to 2,793 for company to move back to their norm. New staffs will need to go through training get familiar to the operations and product knowledge of the company. We shall see the next few quarters. An upward revision in the number will be a positive. The staffs will also need to work harder as there are more RnD support staff as well. Hopefully with better products, the sales will improve as well.

Profitability

How much profit is the company generating relative to the business. We need to know how much economic profit the firm is able to generate per dollar of capital employed. 2 matrices to measure this will be ROA and ROE

ROA - measures efficiency, the ability to translate asset into profit


Since 2010, PAX has been able to convert a dollar of asset into around 0.7 in cash, an improvement from 0.45.

ROE - Measure profit per dollar of shareholders capital


PAX has been pretty solid in its ability to generate ROE in excess of 10 every year.

Free Cash Flow - PAX is able to grow its FCF over the years after investing in its business.







Financial Health


PAX has financial ratios that will not post any threat to the company to operate as a going concern in the short term.

Risk/Bear Case

Pax has been going on a hiring spree hence currently their revenue is not able to outpace cost. If they are not able to get more revenue for an extended period of time. This will be detrimental to the company in the long run.

From previous experience(2011-2012) , they have been able to execute it well.

Other Positives

In recent times, PAX has been doing share buy-back from the market. This can be seen as a positive as there will be less shares floating hence EPS will improve.

Historical PE

Aside from 2011 to 2013, PAX trade relatively above 10X PE

Peer Comparison  


On all fronts, PAX is trading at the lower end of ratios to Ingenico and Verifone.

Valuing the Company

Assuming PAX is able to grow other markets at a healthy rate, especially America as they seek to grab a share of the pie. EPS should be able to grow in line with revenue growth which should be around at their historical CAGR of 25%.

To be prudent I will use 20%

Using EPS model for valuation,

F = EPS ( 1+R)^N

EPS = Taking a 20% discount to 2016 EPS, of 42.5cents
R = 20%
N= Time horizon of 5 years

F = 0.42.5 (1+0.2)^5
  = 0.42.5(2.48832)
  = 1.057536

PAX has a PE ranging from 19 to 10.

Taking the worse scenario of 10

FP = EPS x FPE
     = 1.057536 x 10
     =  10.57

Taking the best scenario of 19

FP = EPS x FPR
    = 1.05736 x 19
    = 20.08

The intrinsic present value calculation is as follow:
I will be using R to be 15% as this is the rate of return on investment I will like to achieve

Worse Case
P = FP/(1+R)^N
  = 10.57/2.01135
  = 5.25

Best Case
P = FP/(1+R)^N
  = 20.08/2.01135
  = 9.98

PAX is currently trading at 4.15 HKD


Price
Margin of Safety

4.15

WCS
5.25
27%
BCS
9.98
90%




















1 comment:

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