VersaPay keeps “Buy” rating at Haywood after “mixed” quarter

Following the company’s second quarter results, Haywood Securities analyst Daniel Rosenberg has maintained his “Buy” rating on VersaPay (VersaPay Stock Quote, Chart, News TSXV:VPY).

On Wednesday, VersaPay reported its Q2, 2019 results. The company lost $3.45-million on revenue of $2.18-million, a topline that was up 88 per cent over the same period last year.

MasterCard deal highlights VersaPay’s second quarter

Management recounted the quarterly highlights, including a deal with MasterCard on a Virtual Card Receivables Service, what it regards as a strong quarter for ARC sales, and a high conversion of its backlog or ARC, wherein 85 per cent all sales came from the United States.

“I’m pleased to announce that VersaPay continued its strong growth for a third consecutive quarter, with total revenues increasing 88 per cent year over year to $2.18-million,” CEO Craig O’Neill said. “ARC continues to be our primary growth driver with growth of 156 per cent year over year to $1.66-million. Our recurring business (ARR) is approximately $7.50-million at the end of the quarter with ARC representing approximately 73 per cent of this figure. As a result, our gross margins were positively impacted, growing to 81 per cent this quarter, up from 75 per cent in Q2 2018.”

Better things are on the way, the analyst says

Rosenberg says this was a “mixed” quarter that he nonetheless thinks will set up a strong 2020 for VersaPay.

“VersaPay reported revenue of $2.2M in Q2CY19, an increase of 88% compared to revenue of $1.2M in Q2CY18 and slightly ahead of consensus $2.1M,” the analyst says. “VersaPay reported an Adj. EBITDA loss of $2.6M in Q2CY19, which was better than last year’s Adj. EBITDA loss of $2.8M but worse than consensus Adj. EBITDA loss of $2.2M. Revenue growth was driven by strong U.S. activity with 15 new ARC clients signed in the quarter. Product mix with ARC helped improve gross margins north of 80% but higher expenses due to timing of marketing activities negatively impacted profitability.”

In a research update to clients today, Rosenberg maintained his “Buy” rating and one-year price target of $2.30 on VersaPay, implying a return of 29 per cent at the time of publication. He categorizes the risk factor on the stock as “Very High”.

Rosenberg thinks VPY will post Adjusted EBITDA of negative $9.6-million on revenue of $9.3-million in fiscal 2019. He expects those numbers will improve to Adjusted EBITDA of negative $4.4-million on a topline of $16.5-million the following year.

VersaPay slightly cheaper than its peer group…

The analyst says the stock remains cheap when compared to its peers.

“VersaPay is currently trading at 4.7x EV/Revenue of our CY20 estimates vs. the peer group average at 5.0x EV/Revenue multiple of CY20 estimates,” he notes.

And while some investors may be spotting a trend of softness from VPY, Rosenberg says better things are bubbling beneath the surface.

“Following a few soft growth quarters, VersaPay is now showing signs of improvement with a strong backlog, ARR growth and new customer wins,” he writes. “We maintain our target price of $2.30 and believe VersaPay offers an attractive return to investors at these levels.”