A Reasonable price to pay for quality?

Or quality (and growth) at a reasonable price as we say in the investment world. This relates to the figures today from PayPoint (PAY) which I first wrote it up about a year ago when I felt it was looking too expensive to consider a purchase.

As you can see from the chart the shares have been poor performers over the last year or so in price terms despite continued steady delivery of earnings and profits. As a result we'll see later that this means the shares have de-rated. Technically the shares seem to have been building a base between 800p and 900p and the shorter term moving averages show some signs of turning up, although it will be key to see if they can get above the falling 200 day and turn that positive.

I expalined last year that this is a leading specialist payments company, processing consumer payments across a wide variety of markets through its retail networks, internet and mobile phone channels. It also offers something called Collect+ which is for consumers to collect parcels from shops to tap into the whole internet shopping / click and collect trend. You will probably seen their signs and terminals in your local convenience store.

So how do they look now after the final results they have reported today. In these they reported continued growth of 8.3% in their net revenues and beat earnings and dividend expectations with 57.4p v 56.2p and 38.5p v 38p respectively with 9.1% growth in both numbers year on year. They also reported higher cash on the balance sheet coming in with £43.9m and this is net of cash in the parking and on line payments business which they say they are planning to sell.

The cash gives me some reassurance on the finances although some are concerned by the low book value on this one. I am not unduly worried by that because this is essentially a service business based on its network, software and physical terminals. Thus the valuation is driven by and supported by the earnings and cash flow thrown off by these rather than the value of the assets.

I find it interesting that they are planning to sell the parking and on line payments business as they say:

"The mobile and online market has attracted a substantial amount of new investment, particularly last year. This investment has changed the competitive landscape, bringing pressure for both faster development and larger scale to support lower margins. The need for greater pace and scale has increased the execution risk and extended the timetable for returns for PayPoint. Positioned against the opportunities centred around our retail proposition, the board believes that there are likely better owners for these businesses and as a consequence has decided to sell the parking and online payment processing companies to realise their value."

Other Tweeps (term for people who Tweet apparently, Twits would be too derogatory I guess) are very keen on OPAY which operates in the on line payments space but trades more expensively than PAY and does not pay a dividend. Given my focus on income I therefore tend to prefer to look at PAY as a play on this area, but to be fair to the other Tweeps OPAY has certainly performed much better than PAY over the last few years, but the question is what will the future hold?

Well looking at the valuation of PAY post these results I think it is now looking reasonable while offering good quality given its high operating margins and returns on capital employed. Indeed Stockopedia gives it a 96 on quality and 82 overall while it gets 92 on the Compound income Scores. Given the beat today I would expect to see some upgrades to next years numbers of around 5% if they can continue this years growth trend so we might see something like 62.5p and say a 42p dividend. At the pixel time price of 912p this morning (+3.8%) this would put them on 14.6x with a decent 4.6% yield. If you adjust for the cash the PE would be nearer 13.5x so a fair kind of level I would say if not an outright bargain, but given the operating metrics and steady past delivery of dividends, that's why I say it now represents quality and growth at a reasonable price.

I'm sure others may well be more excited about OPAY but as I always say you pay your money and take your choice, I chose to pay my money by finishing accumulating my holding in PAY yesterday ahead of these numbers. It will be interesting to see what they get for the parking and mobile payments business, hopefully they will get a fancy price and maybe pay their shareholders some more money via a special dividend perhaps? This will help me to pay my bills and puts me in mind of a funny old song from my youth which seem appropriate to this post...