Boku
Dialling up profit in the payments world
Boku (LSE: BOKU) is a £500m market capitalisation payment network listed in the UK. I believe it presents an excellent secular growth story and an interesting play on the rapidly evolving payments ecosystem.
Company Description
Boku is a specialised payment network provider with a £500 million market capitalisation, headquartered in the UK. 80% of its revenue is from direct carrier billing (DCB), which enables consumers to pay for online subscriptions through their phone bills. Recently, Boku has expanded its offerings to include local payment methods (LPMs), such as e-wallets and account-to-account systems, leveraging its existing infrastructure to tap into a growing market segment.
Competitive Advantage
Boku has carved out a niche within the payments ecosystem. Boku's core DCB market requires a specialised payment network designed to handle the complexities of integrating with telecom companies' back-end systems, and the requirements of the large merchants, such as Netflix or Amazon, that make up the majority of the market. These requirements enable Boku to command a take rate that is 3.5 times higher than traditional payment processors like Stripe or Adyen. However, total payments volumes are relatively small. Boku for example processes payments of around $10bn per year versus $750bn for Adyen. A smaller market, combined with higher complexity leaves very little incentive for larger payments companies to address the DCB. market. Furthermore, Boku's extensive integration with over 300 local payment providers across 80 countries positions it uniquely to capitalize on the growing trend of local payment methods.
Key Investment Points:
Exposure to Local Payment Methods Growth: Local payment methods are becoming increasingly significant in the global digital payments landscape, currently accounting for 50% of the $16 trillion market and expected to reach 60% by the end of the decade. Boku's wide-ranging integrations with local payment providers make it well-positioned to benefit from this trend. The strategic value of Boku's LPM offerings is evidenced by major clients like Sony, Microsoft, Amazon, Netflix, and Spotify signing up for these services, with Amazon even taking an equity stake in Boku via warrants.
Strong Financial Growth Trajectory: Boku has set an ambitious yet achievable target to double its revenue over five years from 2022, representing a 14% CAGR. The company is currently outperforming this goal, having grown by 24% in the first half of the current year. Importantly, this revenue growth comes with minimal incremental costs due to Boku's overbuilt payment network, which can handle up to 2000 transactions per minute against current volumes of around 400. This scalability is expected to drive EBITDA margin expansion from the current 30% to 50% over the five-year period, significantly boosting profitability.
Experienced Management Team: Boku boasts a high-quality management team and board, composed of individuals with extensive experience in large payment companies such as Visa and PayPal, as well as those who have successfully sold smaller payment companies to larger entities. This wealth of industry knowledge and experience in scaling payment businesses provides confidence in Boku's ability to execute its growth strategy effectively.
Valuation
Boku currently trades at a premium to its global payments peer group, with a P/E ratio of approximately 32x, representing a 25% premium. However, this premium is justified by Boku's growth rate, which is nearly double that of its peers. A reverse DCF analysis suggests that the market may be underestimating Boku's growth potential. Additionally, Boku's strong balance sheet, with cash representing 15% of its market cap and annual free cash flow generation of around £35 million, provides downside protection and the potential for increased shareholder returns through buybacks or dividends.