Network International Holdings PLC (LON: NETW) – Proposed acquisition of DPO to be completed by Q2 FY21

Network International Holdings PLC (LON: NETW) is an FTSE 250 Index listed leading provider of digital commerce across the middle east and Africa region. Moreover, the Company operates under two broader business divisions – Merchant Solutions & Issuer Solutions. Furthermore, NETW provides a robust suite of payment products and services based on cutting edge technology development. The Company had processed more than USD 35 billion in TPV for approximately 80,000 merchants. It has also processed 758 million issuer transactions for more than 200 financial institutions during FY20.

On 18 August 2021, NETW will release interim results for the six months ending 30 June 2021.

 (Source: Company presentation)

Technological developments

(Source: Company presentation)

NETW had recently collaborated with Mastercard in the B2B payments space. Moreover, it had become a part of the Mastercard Track Business Payment Service, which would facilitate merchants to get business payments directly into their bank account through a virtual card, where Network is acting as the acquirer. Furthermore, the Company had also collaborated with PayMate in the UAE to facilitate the settlement of commercial card payments and towards the advancement of PayMate’s B2B payments platform. Also, the Company had licensed and integrated technology from Fabrik to provide white label apps for customers to improve the payment system between consumers and merchants.

Growth Prospects and Risk Assessment

• Encouraging new business momentum - The Company would continue to focus on the fast-growing SME merchant customer base. Moreover, NETW had signed several new merchants that include Point-Of-Sale acceptance for clients like Hilton Hotel, Shaklan Supermarket Group and Carrefour Hypermarket. The Company had also added Dubai Racing Club for POS and e-commerce services.
• Accelerated progress of N-Genius^TMPayment Solution – NETW had supported Smart Dubai with the 100 million meals campaign during Ramadan month through donations made using the N-Genius^TM Payment Solution. Moreover, NETW had signed over 1,600 UAE merchants to the N-Genius^TM payment gateway during 2020, and the Company remained on track to enter Sudan as a new market in 2021.
• Leveraging partnerships - The Company would aim to enhance the digital capabilities through strategic partnerships. NETW had recently partnered with Stripe and provide support in launching online merchant payment services into the UAE. It had acted as the sponsor for the Visa and Mastercard schemes.
• Proposed acquisition of DPO – NETW would complete the proposed acquisition of DPO by Q2 FY21 for the total consideration of approximately USD 288 million. NETW would consolidate its presence in Africa through this acquisition and aim to generate 40% of revenues from Africa by 2024.

(Source: Company presentation)

 Key Risks

• Increasing sophisticated cybersecurity threats – The Company had anticipated an increase in the level of sophistication of cyber-related attacks due to shifting geopolitical tensions in the markets of the Middle East & Africa.
• New & Emerging Regulatory changes – The proposed acquisition of DPO would expose NETW to several regulatory regimes focused on payment services & data governance.
• Increasing competition – The Covid-19 pandemic had triggered an accelerated shift from cash to digital payments, which resulted in an increased competitive landscape in the Middle East & Africa region.
• Project Execution –The failure to deliver strategic projects on time and budget would increase operational & capital expenses.

Subsequently, we will analyse the Key Fundamental Statistics & Key Shareholders Statistics of Network International Holdings PLC. 

Capital Research Global Investors is the most significant shareholder as it holds nearly 89.20 million shares as of 31 March 2021.           

Q1 FY21 Trading Update (for the three months ended 31 March 2021, as of 28 April 2021)

(Source: Company result)

• The Company had witnessed a slight increase of 1% in total revenue during Q1 FY21 as compared to Q1 FY20. Moreover, the total revenue also remained 1% higher when compared with Q1 FY19.
• Furthermore, the Q1 FY20 was the strongest quarter during FY20 as it was least impacted by the Covid-19 pandemic.
• With regards to segmental performance, the merchant solutions revenue dropped by 3%, and Issuer Solutions revenue went up by about 5% during the period.
• Meanwhile, NETW had witnessed a continuous rise of online TPV from e-commerce merchants, as it had demonstrated a robust growth of around 55% year-on-year during Q1 FY21. 

Financial Ratios (FY20)

Share Price Performance Analysis

(Source: Refinitiv, Thomson Reuters)

On 21 May 2021, at 08:00 AM GMT, NETW’s shares were trading at GBX 382.60, down by around 1.24% from the previous day closing price. Stock 52-week High and Low were GBX 503.00 and GBX 178.10, respectively.

On the weekly chart, the stock is trading in a rising channel formation for the past six months and currently, taking the support of the lower band of the pattern that indicates the possibility of an upside movement. The prices are trading above 50-period SMA and 21-period SMA, acting as crucial support levels on the lower side. The momentum oscillator RSI (14-period) is trading at ~42 levels, suggesting a positive direction for the stock.

In the last six months, NETW’s stock price had delivered a positive return of ~39.48%, while the FTSE 250 index (benchmark index) had produced a return of about 14.19%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company had witnessed a decent business performance during Q1 FY21 as revenue grew when compared with the similar period of the last two years. Moreover, NETW had anticipated the acquisition of DOP by the second quarter of 2021. NETW would like to carry positive trading momentum throughout 2021 and expected FY21 total revenues to reach the levels recorded during FY19. However, the Company had raised concerns regarding several headwinds caused by the rising number of Covid-19 cases in the UAE. Furthermore, in Merchant Solutions, NETW expected directly acquired domestic TPV to remain higher during FY21 as compared to FY19 and anticipated Issuer Solutions based revenue in FY21 to remain more than FY19 levels. The Issuer Solutions based revenue would get benefitted from increased new card issuance, transaction volumes and new business activity. Also, the Company would emphasise efficient cost management as it had forecasted a low double-digit year-on-year underlying expenses growth during FY21. Overall, NETW has several growth catalysts supporting the business, which will drive the business in the long term.

Considering the accelerated shift towards digital payments, new contract wins, decent revenue growth, impressive strategic partnerships, lucrative acquisition of DPO, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Network International Holdings at the current price of GBX 382.60 (as on 21 May 2021 at 08:00 AM GMT), with lower-double digit upside potential based on 63.85x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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