Pax Global (0327.HK) 2023 results disappoint but show promise in some areas
Pax Global (0327.HK) 2023 results disappoint but show promise in some areas
Shares flat despite revenue and profit miss, while margins land at the top-end of guidance with management seeking to return more value to shareholders
Last week, Pax Global (0327.HK, “PAX”) hosted their FY23A earnings call, coinciding with the release of their results for the year. We wrote about the Company in November 2022, prior to the release of their results for that year, which were largely in-line with consensus estimates.
However, the Company has faced macro-related challenges in 2023. At the beginning of the year, management was conservatively guiding flattish revenue growth and gross margin, and operating margin of 17–19%. After 6 months of the year, management further tapered its full year guidance to -10% revenue growth, but with a gross margin improvement to 41–43% and operating margin to land between 16-18%. PAX’s FY23A performance resulted in the following:
Topline: -17% yoy vs -10% yoy guidance (miss).
Gross margin: 45% vs 41–43% guidance (beat).
Operating margin: 18% vs 16–18% guidance (in-line top-end).
The Company’s FY23A results have not quite met expectations, which were, in part, informed by high revenue-base in the previous year, coupled with a tougher macroeconomic environment and increased competition particularly in the LACIS market as more Mainland manufacturers went global owing to domestic market weakness.
Factors impacting the Company’s trajectory in FY23A
Challenging macroeconomic environment particularly due to inflation and exchange rate fluctuations, which has slowed the rollout of payment terminals.
Further focus on high-growth markets has offset some of the decline in sales in other markets.
Effective cost control, change in sales mix and Yuan depreciation have led to record gross profit margin.
Recurring revenues from Software as a service (SaaS) contribute a growing, albeit small, share of revenue and is a strategic focus for management (up 26% yoy, up to 4% overall revenue).
New industrial park to increase manufacturing capacity and allow for a shift away from outsourced manufacturing, enabling vertical integration and improved and sustained margins.
Investing in PAX to capitalize on the shift to cashless societies
According to industry reports, the global payment terminal market reached USD 15.7 billion in 2023, with an expected growth to USD 29.6 billion by 2030, a healthy compound annual growth rate of 9.5%.
Our fundamental thesis on the point of sale (PoS) market remains bullish and we still believe that PAX remains a viable route to capitalize on this growth. According to Nilson Report, PAX ranked third in total shipments behind Chinese peers Newland Digital (000997.SZ) and Tianyu (300205.SZ), but the majority of these two competitors’ shipments are largely within China (under APAC). PAX remains the top global payment terminal provider excluding APAC.
The shift to the cashless economy is well underway in developed markets, but we are only seeing the beginning of this in emerging markets, where PAX is particularly competitive. Throughout the world, the cashless trend is mostly driven by greater efficiencies in tax collection, combating crime, data collection, and as well in labor and accounting.
Growth expected to be more balanced with continued focus on emerging markets
PAX’s FY23A results indicate an increasingly geographically diverse revenue base. Management expects balanced growth across markets moving forward. However, for FY23A, all geographical markets recorded a decline on a yoy-basis, LACIS (-22%), EMEA (-16%), APAC (-20%), USCA (-1%). Changes affecting key markets include:
Latin America: Slowdown in main market Brazil due to stalling terminal adoption by merchants was partially offset by record high sales in smaller markets (Mexico, Chile, Argentina).
Middle East and Africa: Sales nearly doubled in the UAE and Kuwait, but offset by longer sales cycle in the larger Saudi Arabian market in 2023. Growth in significant Egypt market remained strong.
Europe: Sales weakened in Germany, but strong elsewhere.
APAC: Sales doubled in Japan and quadrupled in the Philippines, but a slower sales cycle saw revenues take a hit in India.
US & Canada: Sales flat, but notable growth in recurring revenues.
As we highlighted before, nascent payments markets like Egypt, for example, continue to hold promise given that the country has the highest growth rate for card payments and consumer spending in the Middle East with only around 4% of overall consumption being cashless. A similar story is playing out in markets like Mexico, Chile, Argentina and the Philippines, where PAX has recorded strong performances during the year.
We think temporary and structural slowdowns in mature western and bigger emerging markets such as Brazil and India, where terminal adoptions have stalled and competition is becoming deeper, will continue to play out in FY24e, thus growth recovery may remain tapered. PAX’s further focus on high-growth markets will continue to offset some of the decline and flat sales performances expected in certain markets. PAX’s new product lines this year have also been well received and are expected to contribute to revenue growth.
Further augmentation and upselling of SaaS is a key to stickier revenues
In our previous study of the Company, we also pointed out that one of the common misconceptions of a terminal provider like PAX is that they only generate one-off sales.
“PAX essentially operates as an R&D and wholesale outfit, primarily outsourcing manufacturing. This focus on R&D allows the company to keep abreast of the latest technological (e.g. contactless, QR codes, and biometrics) and regulatory dynamics (e.g. security, financial compliance, and data management) driving demand for payment terminals.
These developments mean that selling hardware such as payment terminals is by no means a one-off sale. In fact, merchants usually need to replace terminals every 3-5 years as the aforementioned technical and regulatory dynamics necessitate upgrades.”
While churn is inevitable during replacement cycles, merchants are generally disincentivized to make the change due to switching costs and system compatibility requirements.
One of the bright spots in PAX’s earnings is in the growing number of MAXSTORE (SaaS platform) connected devices from 8+ million in FY22A to 11+ million in FY23A, generating HKD 106 million in revenues. Recurring revenues from SaaS and maintenance and installation services contribute a growing, albeit small, share of revenue and is a strategic focus for management (up 26% yoy, up to 4% overall revenue). The further augmentation of MAXSTORE will lead to stickier customer relationships and enabling competitor (non-PAX) devices to connect to the platform should bode well for PAX payment terminal conversions as well.
Major capex cycle completed, improving dividend payout ratio and share buybacks
During the earnings call, management highlighted two major achievements: the newly built PRC Headquarters in Shenzhen and the completion of the Pax Smart Terminals Industrial Park in Huizhou. These projects not only free up cash but also enable increased manufacturing capacity and vertical integration, leading to improved margins. However, no significant working capital improvements are expected for FY24e. Inventory and receivables days were 213 and 137 days, respectively, in FY23A. While the former increase was due to reduced US advance purchases, the latter remains within its historical range. If the dollar weakens (with 3 cuts expected in 2024), we may see shorter customer repayment times.
A key question is whether we can expect improving shareholder returns vis-a-vis buybacks and increased dividend payout in FY24e and beyond. Although, as usual, management avoided discussing future dividend and buyback policy, the trend in this area has certainly been encouraging, particularly over the past four years. Despite a decline in sales in FY23A, the Company increased its payout ratio to 41% of net profit.
Over the course of 2023, PAX continued its share buyback program, repurchasing around 13.8 million shares valued at over HKD 84 million. Despite a less-than-stellar performance last year, we believe this, along with stable and/or growing dividend payouts, should continue to contribute to the stock’s stability and wider investor interest.
It is noteworthy that in PAX’s AGM last year, the Company issued a mandate and is authorized to repurchase up to 107,981,500 shares, representing 10% of its issued share capital. However, management did not comment on any specific targets for buybacks during the earnings call.
Strong long term prospects for PAX’s stock, underpinned by inherent value, buybacks, and dividend policy
PAX’s share price has remained flat since their results announcement, reflecting the long-term underlying value of the stock. Currently trading at a 7% historical dividend yield based on a share price of HKD 6.17 (as of 28 March 2024), PAX hasn’t seen the expected double-digit revenue and earnings growth lasting into FY23A. However, we believe that management is capable of restoring growth. Positive developments, such as increased dividend payouts and consistent buybacks, will further enhance stock and shareholder value.
Management’s guidance for FY24e includes 5-15% revenue growth with improved gross and operating margins (43-45% and 18-20%, respectively). Assuming a net profit growth of 10% per annum (historically averaged over 17% growth), a stable dividend payout ratio of 41%, and a forward exit yield of 7%, the estimated IRR over a 3-year horizon is 18%. This falls within our previous target range for the stock. PAX currently trades at a roughly 61% and 77% discount to (median) domestic and global peers, respectively (5.6x and 2.8x), on a blended 12-month forward P/E and EV/EBIT basis.
Full disclosure: Both me @TheAltraman and @Desertfox currently own the stock.
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There is a much bigger question at stake. Is there even a need for dedicated payment terminals? Why not simply use vendor and seller side apps on your phone - this is precisely how Alipay and Kaspi works at small shops. Also, there is a serious competition from generic PoS/integrated PoS/ERP suppliers that use a PC based hardware. Odoo is a good example of such solution.
Currently in Malaysia and unfortunately, if the payment doesn't go through with a phone tap ... it's because I'm dealing with a Pax pay terminal (at Decathlon, ... ), every single time. Verifone and brands I never heard of pose no problems. Of course I can just use my physical credit card in that case. I know it's super anecdotical but for me this is a red flag, I had a big position because of the insane multiple, but looking to sell now. Their product is not impeccable, it should be in a highly competitive market. Multinational clients like Decathlon will not put up with disturbances at their payment counters.