Company Overview: WEX Inc. is a provider of corporate payment solutions. The Company operates through three segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. The Fleet Solutions segment provides customers with payment and transaction processing services designed for the needs of commercial and government fleets. The Travel and Corporate Solutions segment focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs. The Health and Employee Benefit Solutions segment provides healthcare payment products and software as a service consumer directed platforms, as well as payroll related benefits to customers in Brazil. The United States operations include the Company and its subsidiaries WEX Bank, WEX FleetOne, Electronic Funds Source LLC and WEX Health.
 

(ROE* Figure for 1QFY19)

WEX Details

Further Organic Growth Through Acquisitions: WEX Inc. (NYSE: WEX) is a US-based company that makes the complex processing of payment & information simpler & easier and mainly caters to the fleet, travel, and healthcare sectors. The business growth in the past many years has been primarily organic and supplemented by acquisitions in each of the business segments. Acquisitions of Discovery Benefits, Chevron’s existing customer portfolio, Noventis, certain assets and assumed certain liabilities of AOC, EFS, etc in last four years augured well for the growth. The company enjoys a strong competitive position in each of the segments, supported by the breadth of features offered, functionality, servicing capability, and price. The performance of the company was driven by capturing organic growth opportunities, product excellence, marketing capabilities, distinctive set of technologies across the segments, operational efficiencies, sales force productivity, and revenue management practices, etc.

For the first quarter of 2019, WEX reported a 5% rise in the total revenue to ~$382 million from $354 million in 1QFY18. The increase in the revenue during the period included the negative effect of a $4.5 million on the back of fall in the fuel prices. The company's adjusted net income attributable to shareholders, fell to $74.8 million during the quarter from $82 million (pcp). The cash position of the company declined to $387 million at the end of 1QFY19 from $541 million as on 1QFY18. On the corporate cash side, the cash balance stood at $96 million at the end of the first quarter of 2019. The company is increasing the borrowing capacity for funding the Discovery Benefits and Noventis acquisitions. As a result, the available borrowing capacity came in at ~$547 million, which means that WEX can access the capital of more than $625 million. At the end of 1QFY19, WEX had a total balance of $2.9 billion for a revolving line of credit that comprises of term loans, and notes. WEX’s leverage ratio stands at approximately 4 times, which is up from 3.1 times at year end of 2019. This is on the back of the acquisitions that the company had completed in the first quarter of 2019. In addition, total financing debt comprised of deferred payment of $50 million meant for the acquisition of DBI which will be paid in Jan 2020. The company also raised the capacity of Term A and Revolver during the quarter and the interest rate hedges were in place with a market value of $5.8 million.



A Quick Look at Segment-wise Performance in Q1FY19: There are three main business verticals, i.e., Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefits Solutions which contributed revenue around 61.0%, 21.3%, and 17.7%, respectively in Q1FY19. With respect to Fleet Solutions segment, the company reported 1.0% growth in the total revenue due to increase in the volume growth and rise in the late fees, which was partially offset by the fall in fuel prices and fewer business days. On the other hand, Travel and Corporate Solutions segment witnessed a robust growth of 22.3% in the topline. This was on the back of strong performance seen in international markets and corporate payments. Further, the segment grew due to the additions from the acquisition of Noventis. WEX posted a 6% growth in the Travel and Corporate Solutions purchase volume to $8.4 billion during the quarter from $7.9 billion reported in 1QFY18. However, during the quarter, Travel specific volumes declined more than the company’s expectation driven by unfavorable FX rates. There has been a strong growth of 48% in North American corporate payment volume.

When it comes to Health and Employee Solutions segment, the company saw an 18.6% growth in the total revenue, year on year. On a standalone basis, the healthcare business in the US posted the topline growth of 31%, mainly due to the addition of the staff accounts from the acquisition of Discovery Benefits.


Revenue Breakdown - Q1 2019 (Source: Company Reports)
 
Operational Performance for the first quarter of 2019: The company reported a 14% rise in the average number of vehicles serviced to approximately 13.1 million, from 1QFY18. There has been a 7% rise in the total fuel transactions processed in the first quarter of 2019 to 140.5 million on a year-on-year basis. The company posted a growth of 5% in the transactions related to the payment processing to 115.4 million. In the quarter, a decline of 4% was seen in the U.S. retail fuel price to $2.67 per gallon from the corresponding period last year. Moreover, the company completed the transition of Shell portfolio in the quarter as the company had converted all the accounts, and now the old program has been discontinued, effective from 01 April. The conversion of the Chevron portfolio is progressing well with more than 50% of the accounts already converted to WEX’s platform. Going forward, the company expects the remaining accounts to be fully transitioned by the end of the second quarter.

During the quarter, the company acquired Discovery Benefits and Noventis and announced the plan to acquire the European fuel card business (Go Fuel Card brand) from EG Fleet. The company intends to strengthen its position in the European market with this acquisition, which has ~200,000 cards in circulation in the EU countries like the Netherlands, France, Belgium, and Luxembourg. WEX expects to close this deal in the second quarter of 2019 after fulfilment of required approvals. Further, the company continued to rollout the Clearview Snap analytics, which is currently having over 6,000 customers. The company is testing the Driver Dash mobile payment app with another major oil player. The company witnessed a growth of ~50% in the corporate payments volume. The company during the quarter witnessed a strong enrollment season that led to excellent revenue growth in the US Health business. WEX is currently focusing majorly on onboarding new employees from the company’s recent acquisitions.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 54.43% of the total shareholding. Wellington Management Company, LLP and The Vanguard Group, Inc. hold the maximum interest in the company at 9.45% and 9.22%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)
 
Key Metrics: The company posted healthy margins in the first quarter of FY2019. Gross and EBITDA margins for 1QFY19 stood at 62.4% and 38.5%, above the industry median of 46.3% and 18.1%, respectively, however, remain below on sequential and year on year basis. Net margin at 4.2% came in below the industry median of 5.5%.


Key Metrics (Source: Thomson Reuters)
 
Recent Developments: WEX and ChargePoint, which is the world’s leading charging network of an electric vehicle, recently, entered into an agreement. The agreement has been made for the expansion of electric vehicle charging to fleets all over the U.S. As per the contract, both the companies, WEX and ChargePoint have developed and deployed an Electric Vehicle (EV) payment system. This will allow ~11 million WEX Fleet card holders to pay for charges at over 66,000 places on the latter’s network. Moreover, the company, on 04 Jun 2019, appointed Daniel Callahan, who was previously the global head of operations and technology at Citigroup, to its board. Additionally, the company plans to make changes in the credit facility, which includes the extension of the maturity date of the tranche B term loans by three years.
 

Key Valuation Metrics (Source: Thomson Reuters)
 
Valuation Methodology:
Method 1: PE Based Valuation Approach (NTM):

Price to Earnings Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Outlook for 2019: For the second quarter of 2019, WEX estimates the topline to be in the range of $438 million to $443 million. The Q2 2019 adjusted net income is expected to be in the range of $97 million to $100 million and the diluted earnings per share is expected to be in the range of $2.22 to $2.28. The company has projected the 2QFY19 forecasts based on the assumption that the average U.S. retail fuel price will be around $2.85 per gallon. In the forecast, WEX has assumed that it will incur the fleet credit loss in the range of 11 to 16 basis points.

For the full year 2019, the company expects the topline to be in the range of about $1.71 billion to about $1.75 billion. The FY19 adjusted net income is expected to be in the range of $399 million to $416 million and the diluted earnings per share is expected to be in the range of $9.10 to $9.50.The company expects the full year 2019 guidance to be at the retail fuel price of $2.78 per gallon prevailing in the US. The company refers to the fuel prices on the prevailing New York Mercantile Exchange (NYMEX) futures price. The company expects the full year 2019 fleet credit loss to be in the range of 13 to 18 basis points. 

The company’s forecasts for the second quarter of 2019 and full year 2019 has also assumed the total shares outstanding to be approximately 43.8 million.


2QFY19 and FY19 Guidance (Source: Company Reports)
 
Stock Recommendation: At the current market price of $207.49, the stock has support at ~$184 level and is trading at PE multiple of 67.59x. Fundamentally, the company has witnessed strong performance over the last few years. WEX reported the total revenue of ~ $382 million during the first quarter of 2019 and expects the total revenue for the second quarter to be in the range of $438 million to $443 million, depicting a decent growth in 2Q. The company also expects decent growth in the net income for the current quarter. Further, the Chevron and Shell are expected to significantly contribute to the growth and profitability of the company’s fleet business going forward. Based on the foregoing, we have valued the stock using Relative Valuation Method, price-to-earnings multiple, and arrived at the target price in the lower double-digit range (%). Hence, we recommend a “Buy” rating on the stock at the current market price of $207.49 per share (up 0.68% on 19 June 2019).


WEX Daily Chart (Source: Thomson Reuters)

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