Worldline: Upside Remains Attractive At Current Valuation (OTCMKTS:WWLNF)

Summary

Worldline (OTCPK:WWLNF) operates digital transaction processing platforms by offering solutions such as merchant services and terminals, mobility and transactional services, financial processing, etc. Readers may find my previous coverage via this link. My previous rating was a buy, as I believed WWLNF would see double-digit growth in the merchant services segment and that the guidance has de-risked consensus FY23 numbers. I am reiterating my buy rating for WWLNF as a long given that the business is performing well and the cheap valuation today continues to offer attractive upside.

Financials / Valuation

WWLNF’s organic growth in sales during 2Q23 was 9.5%, to €1.17 billion. Strong organic growth in the core Merchant Services [MS] business of 13.5% drove sales in the second quarter, supported by rising payment acceptance and healthy volumes in commercial acquiring. While the processing of credit cards saw gains, the performance of payments made from checking and savings accounts lagged behind. Finally, the Mobility and e-transactional services [METS] segment showed little change.

Based on my view of the business, it is unlikely that WWLNF can achieve the mid-point CAGR (10%) FY22–FY24 guidance laid out in CMD, as it would imply a steep acceleration in FY24. For my model, I am using the consensus earnings estimate as a benchmark. I put out 2 scenarios that suggest potential upsides for the stock. First, assuming WWLNF continues to trade at the current valuation of 13x forward PE, it implies an upside of 30%. Second, if WWLNF trades back to its peers’ average (refer to my previous write-up for a list of peers), the stock has a potential for 48% upside. Personally, I don’t see a reason for WWLNF to persistently trade at this level and not at levels similar to peers, as it has similar expected top-line growth (high single digits).

Comments

Overall, the results were good with revenue growth surpassing consensus estimates. The stock price, however, did not reflect my optimistic assessment of the results. So, in order to understand why this is the case, I have looked at the business’s past with fresh eyes. It’s management’s fault, I think, for setting goals that the company can’t meet. Management projected 9-11% long-term growth on FY21 CMD, looking backwards. Growth in the years that followed, however, fell short of the mid-point of that guided range. Given the weak macro environment, investors are likely to be more conservative on growth, and expect the business to perform poorer than the past 2 years. Even if we look at 1H23, the same holds true as growth was 9.5%, which is below long-term projections. The OMDA margin was also projected to increase by 400 bps at the CMD, bringing it to nearly 30%. After reviewing 1H23, it is obvious that we have a long way to go. Since the market seems to think the company isn’t making enough progress toward its stated objectives, and since there’s a chance that guidance/consensus will be revised if the business keeps underwhelming, this poses a substantial barrier to re-rating the stock.

Still, when I take an objective look at 2Q23 results, I see progress. Organic growth in MS increased to 13.5% year-over-year from 12.6% in 1Q23 as a result of strong momentum in the quarter, gaining market share by onboarding 40,000 merchants in 1H23, and a positive low-single-digit percentage pricing impact. What’s more, the company anticipates a further positive effect in 2H23. Which, when combined, lessens the possibility of failing to meet FY23 targets. I get that long-term projections still matter, but for now, “priority” goes to making sure the company meets its FY23 projections.

However, FS and METS were flattish organically compared to last year because financial institutions took longer to make decisions on outsourcing and renewing some contracts. There is room for improvement in growth rates in 2024, and I remain cautiously optimistic about this area heading into 2H23 because the pipeline with banks remains strong.

Positively, MS saw a margin expansion of 100 bps thanks to revenue growth, MeTS saw a surprisingly larger expansion of 50 bps despite flattish growth, and FS saw a contraction of 70 bps. The 2022 cost-cutting measures are obviously successful. Since management anticipates additional growth in offshore headcount, this should aid in margin expansion in 2H23, I anticipate that further cost optimization will structurally improve the business’ long-term margin.

Conclusion

I reiterate my buy rating for WWLNF, given the company’s strong performance and attractive upside potential at the current valuation. Despite a slight shortfall in meeting long-term growth projections, the recent results show progress in the core Merchant Services business, and the company anticipates further positive effects in the second half of 2023. Cost optimization measures like growth in offshore headcount should also aid in margin expansion.

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