The company, once part of Royal Bank of Scotland, RBS -0.79 % builds and runs the systems that allow retailers to take a customer’s card details and ensure their transaction is captured, authorized, processed and settled.
Dull, right? Yet its initial public offering in London valued Worldpay at about 33-times net profits for 2016, as forecast in pre-IPO research. In its first day of official trading on Friday, the company’s shares rose more than 10%.
OK, so the bluster around financial technology companies and especially the advent of mobile payments makes this area more sexy. But, mobile could replace other, slower forms of card payment as much as cash. Indeed, cash remains stubbornly high even in countries like the U.K., where it accounts for almost half of transactions.
Worldpay is pushing other services using its data, which could help smaller businesses keep their books more efficiently, or work out where and when they can capture the most trade. The company also helps small businesses get loans from specialists who use Worldpay’s data in credit assessments.
These services could boost revenues and profitability over time. Still, they don’t yet seem to justify such a high multiple.
Investors in the IPO seem to be pricing Worldpay on profitability before the ongoing costs of building its own better systems, which it has been doing since being bought from RBS by private equity groups, Advent International and Bain Capital.
Strip these out and it still priced at 22-times underlying net profits forecast for 2016, or at an enterprise value that is 16 times underlying earnings before interest, tax, depreciation and amortization.
Those are high compared with U.S. payments company Vantiv, VNTV 0.39 % which trades at 12.5-times enterprise value to ebitda, according to FactSet, or next to KKR KKR 0.56 % -owned First Data which priced its U.S. IPO this week at less than 12 times.
Investors may want a piece of the “fintech” future, but they should remember not every prospect will be revolutionary.
Write to Paul J. Davies at pa[email protected]