It’s no secret that the pandemic has accelerated the transition to contactless payments. After years of investing in Research and Development, Pax was perfectly positioned to take advantage of this situation. 

THE SAME ISSUES WITH INVENTORIES AND WORKING CAPITAL

I should mention that this transition has also brought some less desired issues, namely the write-down and provision for obsolete inventories that the company cannot sell (especially in China). They’ve said that this is a one-off, but I should be on the lookout for further impairment charges.

The company has also increased the levels of inventory due to expected increased demand after the lock-down and due to the shortage of chips that every electronics manufacturer is experiencing around the world. I still don’t like the high inventory level, and the Investor Relations department wasn’t very clear on explaining it when I asked them about this, but it seems to be a feature of the business, not a bug.

 

PAXSTORE

I’m slowly starting to understand where the company is going with the PAXSTORE. Not only have they opened the development of apps to everyone who wants to build an app (unlike Ingenico), but they’re also offering the Paxstore to terminals from other brands. 

This is a smart way to gain market share from Verifone and Ingenico. In fact, the company has hinted that they’ve been gaining market share from those two at an accelerated pace and that they want to become the biggest player in the world!

 

GROWTH AHEAD

Although the company grew its revenue in every region, Europe was the strongest due to the adoption of the contactless technology. The company says that Brasil – its largest market – has been slow on this front, but they actually see it as a plus, not a minus. It means that there’s still a lot of room to grow there.

In fact, guidance for 2021 is a 10% growth for the whole business. Given that the management is known for giving conservative guidance, I’m expecting it to be higher.

A couple of things that the management has also mentioned on the Conference Call was the fact that they’re working with a client in Ukraine to launch a facial recognition payment service and allow customers to pay without having to bring cash, bank card or smartphone. Spooky(!)

Another interesting tidbit was the announcement of a contract with a huge local fast food restaurant in the USA. 

 

SHARE REPURCHASES AND DIVIDENDS

In 2020, the company has repurchased approximately 20M shares which is about 1.8% of the total float.

It has also increased its dividend by 67%!!! By the way, I forgot to add the dividends to the Portfolio. I’ll be doing that today.

As I was saying, the company has shown time and time again that they understand capital allocation, hence the stock price rise in recent years.

CONCLUSION

I’m still suspicious of the long-term prospects of the business, but 3 things make me keep my position in Pax: First, the company has executed marvelously well, second, the management has shown great capital allocation skills, and third, the fact that I’ve bought it at such a ridiculously low valuation allows for some slack.