Pax Global
all over again!
By Manuel Maurício
December 8, 2020
As mentioned on my second daily video, after Gabriel Castro texted me this morning nagging me once again about how Pax Global is dirt cheap, I’ve decided to look at it, again.
If you’re new to Pax, I encourage you to read my previous posts on the company HERE.
I’ve looked at it when the stock was selling for $3.52 and when it was selling for $5.02. As we speak, the stock price is at $5.97, but I suspect that, over night, it will shoot up.
I’ve been reading the e-mails that the company sends out periodically with the share buyback summaries, I’ve talked to Luca Franza – an analyst who follows the company – and I’ve been slowly reaching the conclusion that, at these prices, the business doesn’t have to be here in 10 years from now for this to be a good investment.
You see, when you buy something at 20x or 30x earnings you better be sure where the company will be 10 years from now. You may be paying too much. But Pax is trading for such a bargain that it’s as if Mr. Market thinks that the business won’t be here in a few years.
The company has raised its dividends, it has bought back shares, and on top of this all, on the 30th of November, the company issued a profit warning saying that for the full year of 2020, the profit will be 40% higher than in 2019 (!). That’s the kind of Profit Warning I like.
As if all of this wasn’t enough, today the company issued a statement saying that it will vote for a special dividend on an extraordinary board meeting that will take place on the 18th of December.
You know I’m not a fan of dividends, but the management has been doing everything in their power to increase shareholder’s value. Who knows if in a few years the shareholders haven’t recouped all their money through dividends?
Everyone who follows Gabriel on twitter is fully aware of this special dividend (he’s doing his job trying to raise awareness), and that’s why I say that the stock will shoot up over night. But, because this is just an announcement for a meeting, it won’t come out on the Bloomberg system – which is the software every financial institution works with – nor will it be published by the brokers. This, maybe, gives us the chance to scoop up some shares at what I believe is still a very undervalued price.
It’s time to look at some numbers. At the current price, the company is worth HKD$6.5 billion (roughly €690 million). At the end of August, it had $2.9 billion in cash (it will likely have more at the end of the year). This year, it will make, at least, $875 million in profit (40% more than last year). That means that the stock is trading at an adjusted Price to Earnings ratio of 4x. There’s no way around it, this is cheap as cheap can be.
The question that you should be asking is, will the company be making the same profit in the years to come? It is highly likely that it will. You see, this profit hasn’t come from a massive growth in revenue, but because of 2 factors. For the past couple of years Pax has been investing heavily in R&D. Going forward, those R&D costs won’t be as high AND the margin on the new products is higher, hence the huge profit growth this year. The company doesn’t have to keep growing as it has, although maybe it will.
I want to be perfectly clear here. I still don’t fully understand the payments industry, I still don’t understand the company’s competitive position in all of the markets, but there is a saying among investors…. I can’t remember the exact words, but it says something like “the price asks the question”. At such a low valuation, I don’t need to be an expert on the business, and I’m willing to devote some of my capital to this idea.
I’ll be buying €5.000 worth of Pax Global in the next trading session (over the night in Europe) as long as the price of the stock doesn’t go above $7.5, which would mean a Price-to-Earnings ratio of 6x.
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