Company Overview: Global Payments Inc. (NYSE: GPN) is a leading payments technology firm that offers software and services to small and midsize businesses worldwide. Its three revenue-generating segments are Merchant Solutions, Issuer Solutions, and Business and Consumer Solutions. It serves over 1,300 financial institutions and 3.5 million merchant locations in over 100 countries spanning North America, Europe, Asia-Pacific, and Latin America.

GPN Details

Key Takeaways from Q2FY21 (ended June 30, 2021)

• Growth in Revenues: In Q2FY21, the company's revenue amounted to USD 2.14 billion, representing a 27.84% increase year-over-year from USD 1.67 billion, primarily due to an increase in transaction volumes.
• Enormous Surge in Operating Income: Its operating income for the quarter amounted to USD 362.56 million, 2.37x more than USD 107.57 million reported in Q2FY20.
• Robust Increase in Net Income: The net income for Q2FY21 was USD 263.59 million vs. USD 37.33 million in Q2FY20, representing diluted earnings per share (EPS) of USD 0.89.

Revenues & Gross Profit Key Highlights; Analysis by Kalkine Group

Recent Developments

• On September 08, 2021, GPN announced that it would be the official Commerce Technology Provider to Mercedes-Benz Stadium, a well-known sports and entertainment venue in downtown Atlanta.
• Concurrently, on the same day, GPN and Virgin Money, a full-service digital bank in the UK, launched a strategic collaboration. GPN will provide merchant services to Virgin Money's extensive customer base.
• Also, on September 08, 2021, GPN signed an agreement to acquire MineralTree, an accounts payable automation solutions provider, in exchange for a cash payment of USD 500 million. The transaction is anticipated to be completed in Q4FY21, subject to closing conditions.
• During Q2FY21, GPN repurchased and retired 1,501,549 common shares for USD 290.0 million. In addition, the company increased the authorized amount under its share repurchase programme on July 29, 2021, bringing the total available amount to USD 1.5 billion.
• The company declared a USD 0.25 per share dividend on July 29, 2021, which was paid on September 24, 2021, to shareholders of record on September 10, 2021.

Segment Wise Revenue for Q2FY21 (ended June 30, 2021)

• Merchant Solutions: This segment includes the provision of payment technology and software solutions to customers globally. Total revenue for the quarter amounted to USD 1.43 billion, compared to USD 1.00 billion in Q2FY20.
• Issuer Solutions: This comprises solutions that help financial service providers manage their card portfolios, minimize technological complexity and expense, and give cardholders a consistent experience on a single platform. Total Issuer Solutions revenue for Q2FY21 increased to USD 505.93 million vs. USD 470.03 million in Q2FY20.
• Business and Consumer Solutions (B&C): Through Netspend and other brands, this segment provides US-based individuals and companies with general-purpose reloadable (GPR) prepaid debit and payroll cards and other financial services solutions. Total B&C revenue for Q2FY21 was USD 227.36 million vs. USD 216.72 million in Q2FY20.

Revenue by Segment; Analysis by Kalkine Group 

Balance Sheet & Liquidity Position

• Decline in Cash Balance: The company exited Q2FY21 with a cash balance of USD 1.80 billion, down 7.52% from USD 1.95 billion at the end of FY20.
• Cashflow from Operations: Net operating cash inflow during H1FY21 was USD 1.11 billion vs. USD 960.29 million during H1FY20.
• Increase in Debt: As of Q2FY21, GPN's total outstanding debt (including Settlement lines of credit) was USD 10.76 billion, 11.44% more than USD 9.65 billion reported total debt as of December 31, 2020.

Key Metrics: In Q2FY21, GPN's operating and net margins were 17.0% and 10.6%, higher than the industry median of 13.9% and 7.6%, respectively. EBITDA margin stood at 44.0% in Q2FY21 vs. the industry median of 18.5%. As of June 30, 2021, its Debt/Equity ratio was 0.40x, compared to the industry median of 0.48x.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 46.76% of the total shareholding, while the top 4 constitute the maximum holding. T. Rowe Price Associates, Inc. and The Vanguard Group, Inc. hold the maximum stake in the company at 14.77% and 7.98%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Risk of Chargeback Losses: When merchants reject or cannot compensate GPN for chargebacks resolved in its customers' favour, GPN has to bear these losses. Therefore, any rise in chargebacks not paid by the merchants might harm the company's finances and operations.
• Reliance on Financial institutions for Settlements: The company enlists the help of several financial institutions to offer clearing services in support of its settlement activities. If these financial institutions discontinue providing clearing services, GPN may be unable to offer processing services to its clients, thus impacting its financial situation.
• Competition Risk: The payments technology business is fiercely competitive, and some of GPN's rivals are large corporations with significant financial and operational resources and a larger capacity to create new technologies.
• Technological Risk: GPN computer systems, software, data centres, telecommunications networks, and the systems and services of third parties are critical to GPN's operations. Therefore, any system failure or data loss might harm its operations and cash flow.

Outlook

• Looking forward, GPN stated that the continued recovery from the COVID-19 pandemic is expected to boost its revenues during the remainder of FY21.
• It anticipates generating revenue in the range of USD 7.70 – 7.73 billion in FY21, representing a 14 – 15% increase year-over-year. 
• Its adjusted EPS is estimated to range between USD 8.07 and USD 8.20, representing a 26 – 28% increase over FY20.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last six months, GPN corrected ~26.51%. The stock is currently leaning towards the lower end of its 52-week range of USD 153.33 to USD 220.81. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low twenties (in percentage terms). We believe that the company can trade at a premium compared to its peer's average, considering the substantial profit margins, stable leverage, encouraging outlook, strategic acquisitions, and recent collaborations. We have taken peers like Fiserve, Inc. (NASDAQ: FISV), Fidelity National Information Services Inc. (NYSE: FIS), Square, Inc. (NYSE SQ), among others. Considering the robust top and bottom-line performance, strategic growth initiatives, strong profitability margins, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the current price of USD 154.26, down ~3.50% as of October 04, 2021, 11:04 AM ET.

GPN Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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