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Aug
21
Posera shares offer investors both value and big upside potential
Posted by: Gerry Wimmer
8/21/2016
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TOP IDEAS: TSX-listed small cap tech turnaround Posera Ltd. (TSX: PAY) is focused on growing its recurring revenue base with US market expansion of its Point-of-Sale software solutions for the hospitality industry.




Over the last 12 months, Posera Ltd. (TSX: PAY - C$0.11) has undergone tremendous operational changes. Today a new CEO and COO are challenged with turning around a Company that lately has had a string of quarterly losses by generating new revenue growth to deliver profits. To get there, a major restructuring is well underway, including a recent divesture which has helped to recapitalize the balance sheet and the release of a new service offering called SecureTablePay, a Point-of-Sale (POS) software which the Management believes will be a major growth catalyst for the Company.

Ontario-based Posera has been supporting merchant business success in the hospitality industry for more than 30 years. The Company’s products and services facilitate all aspects of the payment transaction between the merchant and the consumer. The Company’s two marquee POS software solutions called Maitre ’D™ and Fingerprints™ are trusted by the top fine dining and quick-service hospitality brands around the world, including major chains like Tim Hortons. Posera’s POS system software solutions, associated enterprise management tools and debit / credit payment terminals have been deployed in 25 countries in over 30,000 merchant locations worldwide.

In addition to Posera’s two marquee POS software solutions, the Company’s full-service offerings include EMV compliant Pay-At-The-Table ("PATT”) applications, system hardware integration services, merchant staff training, system installation services, and post-sale software and hardware customer support. As such, historically, the majority of Company revenues are generated from the following sources: Revenue from the sale of software licenses for the use of Posera’s proprietary POS software and revenue from the sale of Posera’s POS hardware terminal and touch screens. The Company’s recurring revenue is generated from the provision of customer service contracts to merchants for ongoing support and maintenance of their installed POS systems and other equipment from Posera. Currently, approximately 40% of the Company’s total revenues are recurring.

A major catalyst for revenue growth was announced in April 2016 with the release of Posera’s POS SecureTablePay application, enabling safe, secure and stable "Pay-at-Table” capabilities for the US hospitality marketplace. SecureTablePay is the only semi-integrated EMV (Europay, Mastercard and Visa) and Contactless application allowing restaurant wait staff to totally manage payments, tips and tables remotely from a wireless payment terminal. SecureTablePay also incorporates Chip and Signature, with end-to-end encryption for the US market. SecureTablePay provides the extraordinary convenience of paying at the table for both restaurant wait staff and their customers. It also provides a secure solution to the enormous security challenges and financial risks that merchants now face due to the October 2015 liability shift imposed by the payment processors in USA. This liability shift imposes responsibility on merchants for chargebacks relating to fraudulent transactions. The Company’s SecureTablePay technology is market ready, integrated to 20 of the largest Point-of-Sale applications worldwide and already installed in several thousand hospitality merchants across Canada.

In April 2016, Posera announced it had entered into its first non-exclusive distribution agreement with a major US payment processing company for the SecureTablePay application in the USA. The distribution agreement will generate initial license fee revenues but the platform is based on a recurring revenue license model. The market opportunity for Posera’s solution is large, with over 635,000 fine dining restaurants in the United States that would benefit from the use of the SecureTablePay technology.

We recognize that Posera is in the late stages of a turnaround phase to achieve growth and profitability. The Company is currently streamlining the way its clients obtain support services, to operate its services arm more efficiently in addition to revitalizing its development team’s ability to focus on improving existing products and developing the next generation of cutting edge POS technology. The Company is still reporting restructuring costs this year to facilitate its turnaround.

Posera has an annual revenue base of about C$17-18 million and continues to build on its revenue model of stable, predictable recurring revenue streams. The aforementioned expansion into the USA should positively impact the growth of the Company’s recurring revenue streams beginning in 2017.

Today we feel Posera is at a compelling crossroad for investors. The restructuring is moving nearer to completion and a revenue growth phase is poised to begin. As-of-yet, the Company’s stock price does not reflect this opportunity. That said, Posera is recognized as one of Investorfile’s Top Ideas, as a small cap value stock.

We do not expect Posera will have a profitable quarter in 2016. Therefore we base our initial valuation of Company shares on a revenue multiple. We are comfortable in doing so given the Company’s strong brand, years of being in business and its sizable revenue base.

Today, Posera’s market capitalization is approximately equal to 50% of its total annual revenue base. This is a very inexpensive valuation given that 40% of the Company’s revenues are recurring. In a takeover situation, this Company could command a market valuation of at least 100% of its annual revenue base, a payout sum that equates to more than double its current stock price.

With that valuation metric in mind, we also look forward to 2017. By next year Posera’s restructuring should be complete and generating new operational efficiencies. At the same time we expect Posera will have earned new and growing recurring revenue streams from the release of its SecureTablePay application in the US marketplace.

Given this information we forecast at some point in 2017 Posera will reach a quarterly revenue base of C$5.5 million and generating EBITDA margins of 10%. At that point in time, this equates to a 12-month forward run rate of C$22 million in revenues and C$2.2 million of EBITDA. Based on this estimate, the Company’s stock today trades at Enterprise Value/EBITDA multiple of about 3 times which is extremely inexpensive for a growing technology company.

We recommend that small cap investors should accumulate shares of Posera from its current trading price of C$0.11 up to $C0.25. At a stock price of $C0.25 the Company would still be valued less than eight times Enterprise Value/EBITDA based on our 12-month run rate forecast.

Longer-term, the revenue growth impact from US expansion could be significant. If this occurs it would translate into big upside for shareholders of Posera’s stock, easily surpassing our accumulation price target of $C0.25 based on the Company’s current capital structure.

As of June 30, 2016, Posera reported first half revenues of $C8.75 million. In Q2, revenues were C$4.33 million with gross margins of 38%. The Company-defined normalized EBITDA in Q2 was almost at break even. Posera’s balance sheet is solid with a net cash position of approximately C$2 million, no bank debt and a current ratio over one.

Due to some changes in senior management and directors, insider ownership stake in the Company is less than 5%.

The Company has 75.8 million shares outstanding.

Posera website: www.posera.com

Author's share ownership disclosure: TSX: PAY - Yes


Read Disclaimer:

This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

Investorfile.com is not engaged in an investor relations agreement with Posera Ltd. nor has it received any compensation from Posera Ltd. the preparation or distribution of this article.

The author of this article has acquired and may trade shares of Posera Ltd. through open market transactions and for investment purposes only.

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Gerry: Thanks for small cap stock suggestions over the past 5-years. Your record is very impressive and your analysis has been excellent over the years. I think small investors (and fund managers) should pay much more attention to your work. I look forward reading your blog over the next 5-years!