Global Payments Research Report

Security Global Payments

Ticket Symbol GPN

Market NYSE

Sector Financial

Sub-Industry Payments

Analysts Sam Jones

Lucy Herriot

Kate O’Neill

Monica Wadekar

Stanley Chong

Sector-Heads Azuolas Ciukas

Camellia Huang

Recommendation Buy

Target Price USD 67.00

Upside 8.7%

Stop Loss USD 52.00

Allocation 500GBP

Key Figures

Price $61.60 (27/2/16)

Market cap 7.97 bn USD

P/E 27.71

Div Yield 0.06%

ROE 34.51%

ROA 12.51

Net margin 11.10%

D/E 3.23

Edin

bu

rgh

Un

iver

sity

Tra

din

g an

d In

vest

men

t C

lub

Company overview Global Payments Inc. is a provider of electronic transaction processing services for merchants, Independent Sales Organizations (ISOs), financial institutions, government agencies and multi-national corporations located throughout the United States, Canada, Europe, and the Asia-Pacific region. Global Payments, a Fortune 1000 company, offers processing solutions for credit and debit cards, business-to-business purchasing cards, gift cards, electronic check conversion and check guarantee, verification and recovery including electronic check services, as well as terminal management.

Investment case 1. The company is growing through

acquisitions. With more deals announced for this year the company might continue to grow non-organically and dominate the market by doing accretive deals, making them more profitable.

2. Global Payments has a good size market share in its main regions.

3. The industry as a whole is regarded as relatively stable and a profitable area.

Catalysts

1. Future accretive acquisitions can grow the company, making it more profitable and increasing the stock price.

2. Increased consumer spending has increased revenues which can in turn increase the stock price.

Key risks

1. Currency risk - This is the result of cross border

transactions. However, the dollar is expected to remain stable relative to the pound, so this should not heavily affect investment.

2. Regulations - The company is subject to a variety of

regulations both within the US and based on the companies they work with, such as MasterCard and Visa, which may impact upon growth.

3. Slowdown in consumer spending - As revenues depend heavily on

consumer spending, a recession or macroeconomic shock may cause revenues to fall. Operating in North America, Europe and Asia, if there is a fall in demand in one market, it may be offset by growth in another.

Global Payments (GPN.NYSE) Buy

Research Report Financial 29-Feb-16

2

Valuation: Executive Summary

For the valuation we used the comparables method. All of the multiples showed that Global Payments is an overvalued stock. Due to the choice of 5 competitors the valuation is likely to be accurate to a certain extent from the bias perspective, however it would be more accurate if a greater number of multiples and competitors were used. Moreover, as most of the peers in the payment industry are not only doing payment services, there is a huge bias in terms of similarity of the comps. Therefore, this might be the case why the model shows that Global Payments are overvalued.

The valuation is not favourable, however as Global Payments is a large player in a growing market we would expect the share price to increase over the next 12 months due to the growth catalysts or bias in the valuation.

Multiples

Gross Margin Net Margin ROI EPS Growth Div yield P/E P/B P/S P/CF

Global Payments 63.14% 11.10% 11.12% 59.71% 0.14% 23.60 10.07 2.76 12.03

Euronet Worldwide 38.68% 5.39% 7.72% 183.80% 0.00% 38.97 4.58 2.00 14.53

CIT Group 38.36% 0.00% 70.60% 0.55% 4.75 0.52 1.94 4.27

Gross Margin 20.00% Ally Financial 13.14% 0.00% -31.14% 0.00% 0.61 1.82 1.69

Net Margin 30.00% Starwood Property Trust 56.12% 61.42% 0.43% 11.16% 11.03% 9.29 1.04 5.13 17.86

ROI 0.00% SLM Corp 84.52% 33.00% 10.35% -11.33% 1.78% 10.08 1.25 3.35

EPS Growth 30.00%

Div yield 20.00%

Total 100.00% Market Average 60.62% 27.07% 4.94% 47.13% 2.25% 17.34 3.01 2.83 10.08

Parameters

P/E

Weightings

P/E (currently) 23.60

Current Share Price 59.19

P/E (estimated) 16.87

Estimated Share Price 42.32

% difference -28.50%

P/B (currently) 10.07


P/B (estimated) 2.93



P/CF (currently) 12.03


P/CF (estimated) 9.81



P/S (currently) 2.76


P/S (estimated) 2.76


% difference -0.10%


3

Company Profile Description Global Payments Inc. is a provider of payment technology services and digital commerce solutions. Incorporated in 2001 and based in Atlanta, Georgia, USA, the company displays one of the fastest growing organic revenues in the global payments industry.

Service Base Global Payments Inc., a Fortune 1000 company, operates in two segments:

North America Merchant Services (71% of revenue)

International Merchant Services (29% of Revenue).

The company’s services include transaction processing for businesses including authorization processing, electronic drat capture, settlement and funding processing, chargeback resolution, industry compliance, payment card industry security and one of its largest functions is payment terminal deployment and management – in portable, static and mobile configuration.

The company currently services credit and debit card transaction processing for various international card brands including American Express, UnionPay, Discover Card, Mastercard and Visa.

In 2015 Global Payments processed over 7.2 billion transactions, settling more than $425 billion.

Customer Base Across 29 Countries in North America, Europe and Asia Pacific, Global Payments Inc. serves over 1.5 million customers:

1. Merchants 2. Value-added resellers 3. Enterprise software providers 4. Independent sales organisations (ISOs) 4. Government agencies 6. Multinational corporations

Both the International and North America segments of the organization target customers in various vertical industries including financial institutions, gaming, healthcare, retail, professional services, universities and non-profit. Global Payments is the primary card processing provider of HSBC Bank Plc in the UK.

The majority of merchant services revenue is generated by services priced as a percentage of transaction value or a specified fee per transaction, depending on card type. We also charge other fees based on specific services that are unrelated to the number or value of transactions.

Business Model

Sales streams: 1. Direct sales to key customers 4. Via trade associations 2. Enterprise software agencies 5. Value-added reseller (VAR) arrangements

3. Independent sales organisations (ISOs) 6. Telesales groups

Global Payments deploys one of the most technically trained and experienced operations forces available, providing a highly flexible service in the essential payment processing service sector.


4

Revenue Streams

Prospects In a modernizing world the importance of card and mobile payments is growing and such ventures as global payments will only grow as players in the global flow of money - we are ‘fast approaching a cashless society’ (Global Payments manifesto). Between 2014 and 2015 payment card purchase volume at merchants in the US alone grew by $1.64 billion ($7.23 billion to $8.87 billion). We believe therefore that the revenue of Global Payments has significant growth potential as the importance of its already prominent electronic payment services grows on the world stage.

Global Payments recently announced that they will be offering ApplePay, which is transforming mobile payments with an easy, secure and private way to pay among smartphone users who regularly use their devices to shop online – 18.3 million in the UK alone. Capturing this potential mobile revenue represents a tremendous opportunity.

The company in fact announced a few days ago that they will shortly launch an integration of their systems with Apple Pay in China via China UnionPay payments. This captures more of the crucial China market and offers opportunity for revenue growth in the Asia Pacific region.

Acquisitions Two most recent acquisitions by Global Payments was Fidelity National Payment Services (NYSE: FIS) gaming assets from Certegy Check Services Inc. and Heartland Payment Systems (NYSE: HPY). The former includes 260 gaming client locations and the latter is one of America’s largest payment companies.

Acquisition of Heartland Payment Systems by Global Payments creates the leading global provider of integrated payment systems.

The deal will see the company’s merchant base and vertical reach expand greatly and accelerates revenue growth, operating margin expansion and cash earnings per share growth. Global Payments’ recent acquisitions in both North America and International Merchant Services segments enhance their technological capabilities and extend their reach in North America, Europe and Asia Pacific.

The company is expanding greatly having completed 3 other acquisitions in 2015 and 4 announced for 2016.

FY 2015 Net Revenue: $2.78 billion – up 8.6% from $2.55 billion FY 2014

In terms of revenue, 71% comes from North America, 22% from Europe and 7% from Asia Pacific.

Revenue by Region


5

Industry Analysis Growth Factors The payments industry has been growing steadily over the past several years, and grew by 9% in 2014, compared with 4% in the preceding years. In particular, this was largely driven by transactions in the Asia Pacific region, with 55% of revenue growth coming from this region. Within this, electronic payments contribute $14bn to revenue growth (this is 55% of the industry’s revenue growth worldwide). While Global Payments Inc currently has only 6.8% revenue from the APAC region, the industry as a whole has been expanding internationally, and the company is also looking to expand their presence in Asia.

In addition to the industry growing as a whole, spending by card is also increasing. In 2013, UK consumers crossed £500bn worth of spending via cards, over 2x what it was in 2003, when card spending was at £244bn. Between 2012 and 2013 alone, there was an increase of 6.7% in card spending. It is also estimated that in the UK, debit and credit cards account for 3 in every 4 pounds spent. However, while frequency of card use has increased (digital commerce grew by 22% in 2014), the average transaction value for cards is decreasing. Revenue per transaction has been increasing since 2008, for credit cards (by about $0.4 per transaction), though revenue for debit card transactions has actually been falling (by about $0.14 per transaction).

Threats to Growth Additionally, there has been a large amount of card fraud, particularly in the US. As a result, it has been suggested that consumers switch over to EMV cards, rather than magnetic strip cards, as these are less susceptible to fraud. This is likely to increase revenue for companies such as Global Payments Inc. More specifically, the Eurozone already has an EMV adoption rate of 73.9%, and though Global Payments Inc’s presence there only accounts for 22.2% of revenue, the company is looking to increase their presence in Europe.

Future of the industry: It is expected that due to its relative stability and predictable transaction volumes, the payment industry will remain highly profitable. It is expected to grow between 6-8% annually through 2018, even with the slowdown in growth in China. It is also predicted that transactional revenues will increase by $340bn by 2018 due to higher transaction volumes. Furthermore, there is a trend towards electronic payments. Between 2012 and 2013, the average transaction value in e-commerce rose by £7.27. However, the convergence of online and offline payment methods may mean an increase in competitors in the industry. For example, companies such as Apple introducing Apple Pay may mean less of a consumer base for companies such as Global Payments Inc. However there are unlikely to be


6

too many new entrants due to the large amount of regulations present in the industry. Even if there were, Global Payments Inc is well established and so is likely to be able to maintain their market share.

In addition to growth in the industry, it is expected that interchange fees will fall; they are already at 2% but continued deflation of these is expected. This may mean increase in revenue in the industry. On the other hand, there seems to be a trend towards mobile payments, which may pose a threat to companies such as Global Payments Inc. However, if companies can stay up to date with technology, this should not have too large an impact.


7

Competitors Analysis

Key Competitors Global Payment’s key competitors include Euronet Worldwide and CIT Group. All three companies operate in many of the same areas; however, Global Payments has a better hold on the market as it has a higher market cap and net income than the others.

Global Payments Market Share by Region

Market Cap ($M) Revenue ($M) Net Income ($M)

Global Payments 6,790 2,770 278.04

Euronet Worldwide 3,630 1,664 98.8

CIT Group 5,370 3,930 26.7

22%

71%

7%

Global Payments % Revenue by Region

Europe North America Asia


8

Euronet Worldwide Euronet Worldwide is an American provider of electronic payment services. Euronet gets 31% of its revenue from RIA (money transfer, pre-paid debit and currency exchange services), 47% from epay services and 22% from their Electronic Financial Transactions division. It has 30 principal offices in Europe, 11 in Asia Pacific, 7 in North America, 3 in Middle East, 2 in South America, and 1 in Africa. 74% of their revenues are in currencies other than USD; this can be a risk when exchange rates change.

CIT Group CIT Group is an American financial holding company that has more than $65 billion in financing and leasing assets. They provide financing, leasing and advisory services. CIT Group generates revenue by earning interest on loans and investments. This in addition to collecting rent on the equipment they lease out and earning income from services they provide. CIT Group has a total market share of 7.07%.

CIT Group Financing and Leasing Assets by Country


9

Financial Ratio Analysis Revenues Global Payments Inc had a total revenue of $2,774,000 in the year up to 31st May 2015. This is divided as follows: 59.7% in the United States, 11.3% in Canada, 22.2% in Europe and 6.8% in the Asia-Pacific region.

Revenue grew by 8.6% in the FY 2015 despite unfavourable currency conditions. As shown in the graph, there has been steady revenue growth in the last 5 years (CAGR of 11%) which would be expected to continue as card payments become more favourable as an alternative to cash, between 2000 and 2012 debit card payments rose from 8.3 billion to 47 billion in the US.

Total Operating Expense As the graph shows, Global Payments has higher operating costs than the competitors highlighted. This is because as Global Payments is a service based company, the more clients it has, the greater the operating costs are likely to be.

When looking at costs of service, there was an increase of 7.3%, but as a percentage of revenue it fell from 37.3% to 36.8%. The same is true for Selling, General and Administrative Expenses, where an increase of 7.6% led to a fall from 47.1% to 46.7% as a percentage of revenue. This shows the increased operating expense is offset by growing revenues.

2011 2012 2013 2014 2015

Global Payment Inc 1860 2294 2376 2554 2774

Euronet WorldwideInc

1161 1268 1413 1664 1772

CIT Group Inc 1791 1192.4 2408.1 2438.6

0

500

1000

1500

2000

2500

3000

Rev

enu

e ($

Mill

ion

s)

Year

Revenues

Global Payment Inc Euronet Worldwide Inc

CIT Group Inc

2011 2012 2013 2014 2015

Global Payments Inc 1528 1896 2019 2147 2317


1083 1205 1295 1507 1567

CIT Group Inc 1008 2013 1068 759

0

500

1000

1500

2000

2500

Tota

l Op

erat

ing

Exp

ense

(£

mill

ion

s)

Year

Total Operating Expense

Global Payments Inc Euronet Worldwide Inc

CIT Group Inc


10

Net Profit Margin As the graph shows, Global Payments has had a stable net profit margin for the last 5 years, trending around the 10% mark. This is greater than the similarly stable net profit margin of Euronet and is far less volatile than the net profit margin of CIT Group.

This level is likely to be maintained in the future as Revenue and Expenses grow at a similar level.

Return on Equity As shown in the graph, Global Payments’ Return on Equity is consistently higher than that of Euronet and CIT. In addition over the last 4 years, the ROE of Global Payments has been growing at a steady rate.

This suggests Global Payments has a competitive advantage over its competitors and is able to invest to in expansion and new opportunities at a

greater rate.

2011 2012 2013 2014 2015

Global Payments Inc 11.24% 8.53% 9.09% 9.59% 10.02%


3.19% 1.66% 6.23% 6.13% 5.56%

CIT Group Inc 0.84% -49.65% 28.07% 46.34%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

Net

pro

fit

mar

gin

Year

Net profit margin


CIT Group Inc

2011 2012 2013 2014 2015

Global PaymentsInc

20.92% 14.59% 20.38% 24.50% 34.51%

EuronetWorldwide Inc

6.89% 3.80% 15.57% 14.50% 12.52%

CIT Group Inc 0.17% -7.03% 7.82% 12.75% 10.64%

-10.00%-5.00%0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%

Ret

urn

on

Eq

uit

y

Axis Title

Return on Equity


CIT Group Inc


11

Global Payments Inc Euronet Worldwide Inc CIT Group Inc

Income Statement

SG&A/Revenue 0.467 0.235 -

OPEX/Revenue 0.835 0.884 0.386

Tax Rate 0.259 0.305 -0.843

Net interest expense/Debt

0.013 0.0009 0.000009

Balance Sheet

Working Capital 0.099 0.128 -

Financial Leverage 0.916 0.799 -

Returns and prof.

ROA 6.39% 4.65% 1.85%

ROE 34.51% 12.52% 10.64%

Multiples

P/E 23.60 38.97 4.75

Capital Structure

Beta 1.24 1.40 1.57

Research Report Basic Materials 29-Feb-16

12

Key risks Risks Given that Global Payments Inc is a provider of electronic services, there is a large technological risk, such as software defects. However, this is also likely to be the case with competitors.

The slowdown in growth in emerging markets and China in particular may impact on the growth of the company. However, as only 6.8% of Global Payment Inc’s investment is in Asia, this risk may be limited to a small portion of consumer base.

Revenues of Global Payments Inc depend heavily on consumer spending. Therefore, if there is a recession or macroeconomic shock, revenues may fall. However, this is also the case with competitors. Furthermore, as Global Payments Inc operates in North America, Europe and Asia, if there is a fall in demand in one market, it may be offset by growth in another.

Global Payment Inc is subject to a variety of regulations both within the US and based on the companies they work with, such as MasterCard and Visa, which may impact upon growth.

There is a currency risk due to the fact that Global Payment Inc deals with cross border transactions. However, the dollar is expected to remain stable relative to the pound, so this should not affect investment.

Research Report 29-Feb-16

13

Disclaimer The information and opinions in EUTIC Research were prepared or are disseminated by EUTIC.

For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the EUTIC Research Disclosure Website at www.eutic.org

For valuation methodology and risks associated with any price targets referenced in this research report, please contact the EUTIC Fund Team at [email protected].

Important Disclosures EUTIC is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

EUTIC Research does not provide individually tailored investment advice. EUTIC Research has been prepared without regard to the circumstances and objectives of those who receive it. EUTIC recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. The securities, instruments, or strategies discussed in EUTIC Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. EUTIC Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The value of and income from your investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. If provided, and unless otherwise stated, the closing price on the cover page is that of the primary exchange for the subject company's securities/instruments.

With the exception of information regarding Morgan Stanley, EUTIC Research is based on public information. EUTIC makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in EUTIC Research change apart from when we intend to discontinue equity research coverage of a subject company. Facts and views presented in EUTIC Research have not been reviewed by, and may not reflect information known to, professionals in other EUTIC business areas.

EUTIC may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report.

The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. EUTIC Research may not be distributed to the public media or quoted or used by the public media without the express written consent of EUTIC.

EUTIC is not incorporated under PRC law and the research in relation to this report is conducted outside the PRC. EUTIC Research does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors shall have the relevant qualifications to invest in such securities and shall be responsible for obtaining all relevant approvals, licenses, verifications and/or registrations from the relevant governmental authorities themselves.

The trademarks and service marks contained in EUTIC Research are the property of their respective owners. Third-party data providers make no warranties or representations relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages relating to such data.

EUTIC Research or portions of it may not be reprinted, sold or redistributed without the written consent of EUTIC.

As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided exclusively to persons based on their risk and income preferences by the authorized firms. Comments and recommendations stated here are general in nature. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.

http://www.eutic.org/

mailto:[email protected]

Documents

Global Payments Research Report