 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
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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. |
