Stock Story

Stock Story: Smartpay

Roland Houghton

Investment Analyst, 8 February 2023

Roland Houghton

Investment Analyst

Roland joined Milford in May 2016 as an Investment Analyst, based in the Sydney office. His role at Milford is to research, meet and analyse a range of companies to identify potential opportunities. Prior to Milford, Roland worked as a junior Portfolio Manager at a boutique funds management company based in Sydney.

Roland graduated from Victoria University of Wellington in 2014 with a Bachelor of Commerce, double majoring in Finance and Marketing, and is a CFA Charterholder.

There are many successful NZ businesses but only a handful manage to disrupt the Australian market. One of these rare few, Smartpay, is beginning to make waves over here in Australia and competitors are starting to take notice.

Smartpay is a merchant acquirer both in New Zealand and Australia. They have a significant presence in the NZ market where they lease card payment terminals to merchants for a fixed monthly fee. This is a very steady business, however the excitement is across the ditch in Australia.

Here they are a true merchant acquirer, sitting between the consumer, the bank and the card issuers such as Mastercard and Visa. They process the transaction and then pay all the related parties their fees, retaining some of the fee revenue for themselves. So they are now clipping the ticket on every transaction they process rather than just receiving a fixed fee per month.

They have also introduced a clever product called SmartCharge or Zero Cost EFTPOS where the merchant surcharges to the consumer all of the bank and card issuer fees and Smartpay share in that surcharge – the product effectively becomes free for merchants. In addition, although it is a highly competitive market, the vast majority of the Australian market share of merchant terminals is held by the big banks, which are slow to move with outdated pricing and customer service models.

This opportunity for Smartpay became possible due to an Australian regulatory change in 2015. This allowed non-banks such as Smartpay the ability to apply for a merchant acquiring license. Smartpay’s product went live in October 2017 and since then installed terminals in Australia have risen to 14,500 and quarterly revenue in Australia has reached $17m – they now generate more revenue in a quarter in Australia, than they do in a year in NZ.

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Unlike many high growth companies, Smartpay is growing profitably with very attractive unit economics. They generally recoup the cost of acquiring a customer, including the cost of supplying the terminal, in about 6-7 months. This is an unusually fast payback period.

Milford has been invested in Smartpay since 2011. In 2019, Verifone bid $70m for Smartpay’s NZ division, and at the time of the announcement Smartpay had a market cap of $50m! We were always extremely positive on the underappreciated Australian business and this Verifone bid provided strong valuation support. The bid eventually fell away, largely due to Covid, but we used the ensuing weakness in the company’s shareprice to continue building our position. Over this time, Smartpay’s management team executed extremely well and continues to do so today. The market is finally taking notice as the share price has rallied 75% over the past 12 months despite volatile market conditions.

The future remains bright for Smartpay and we believe management will continue to take market share off the incumbent banks. We do, however, remain cognisant of the uncertain economic outlook which could mean a bumpy ride over the next 12 months for small disrupters like Smartpay.

1 Source: Australian Securities Exchange (ASX)