Venkata Velagapudi of Research Capital Corporation launched coverage on Sunday on Canadian payments company GIVEX Information Technology (GIVEX Stock Quote, Chart, News, Analysts, Financials TSX:GIVX), starting off with a “Buy” rating and target price of $3.20/share for a projected return of 310 per cent.
Givex was founded in Toronto in 1999 and has since expanded to include a Vancouver office, as well as offices in Dallas, Texas, the UK, Australia, Hong Kong, China and Brazil. The company provides a fully integrated technology platform offering services such as POS, payment processing, gift cards and analytics to merchants across over 100 countries with a major presence in North America.
“Over the last two decades, Givex evolved as a fully integrated technology services provider with an annual turnover of $60 million from a simple online gift card company,” Velagapudi said. “Our positive thesis on the company is driven by its ability to generate free cash flow consistently leveraging its growth outlook and asset-light business model.”
Givex has completed more than 300,000 installations of its platform, with a few notable clients being Swiss Chalet, Wendy’s, 7-Eleven, Fairmont Hotels and Resorts, Marriott International, Lone Star Texas Grill and Major League Baseball’s Philadelphia Phillies.
The most recent addition to the Givex family is Kalex, an IT service and consulting business that specializes in physical and digital retail enablement with over 15,000 locations in Canada.
Kalex, which brought in $4.5 million in revenue in 2021, has a number of high-profile brands in its portfolio including Burger King, Harry Rosen, Hudson’s Bay Company, KFC, Laura Secord, Pizza Hut, Pizza Pizza, Rexall Pharmacy Group and Taco Bell.
“I’m very happy with how quickly Kalex came on board,” said Don Gray, CEO of Givex in the company’s January 27 press release. “Our teams have already started going out on installations together and Kalex representatives are introducing us to their retail client base. We share a dedication to providing excellent service and are extremely excited to get to work for our clients.”
According to Velagapudi, the company’s biggest competitive advantages will come from on its brand name, technology and strong sales team, while he believes the company’s sound management will enable it to grow its customer locations. Velagapudi also identifies an opportunity to upsell its products, as he notes that 98 per cent of the company’s 96,000 customer locations do not use POS and payment processing services.
Velagapudi forecasts modest improvements in his financial projections over the next few years, with the minimal jump from $52 million in 2020 to a projected $54 million in 2021 marking a year-over-year increase of 3.8 per cent. From there, Velagapudi estimates a 13 per cent jump in 2022 to a projected $61 million before moving to a projected $65 million in 2023, implying a 6.6 per cent year-over-year increase.
In terms of multiples, Velagapudi projects the company’s EV/Revenue measure to be 1.1x in 2022, then dipping to a projected 1x in 2023 before dropping again to a projected 0.8x in 2024.
Meanwhile, Velagapudi expects the company’s gross margin to settle in at 70 per cent from 2021 ($37 million gross profit) through 2023 ($46 million), with the company’s EBITDA moving from a projected $8 million in 2021 (implied margin of 14.8 per cent) to a projected $13 million in 2022 (implied margin of 21.3 per cent), with a further margin expansion to 24.6 per cent ($16 million) in play for 2023.
From a valuation standpoint, Velagapudi forecasts Givex’s EV/Gross Profit to drop from a projected 1.5x in 2022 to 1.2x by 2024, while his EV/EBITDA estimates call for a drop from 5x in 2022 to 3x by 2024.
Looking ahead, Velagapudi believes the company’s topline will grow for several years driven by growth in locations and average revenue per user, and he believes the company is in a positive place as it is already generating positive free cash flow due to its profitability margins.
“The key challenge for investors in this environment is to identify the companies which grow faster than the pace at which shareholder dilution occurs,” Velagapudi said. “The probability of these companies turning out to be great investments is low mainly due to this challenge. On the other hand, some companies prioritize profitability and free cash flow generation rather than growing exponentially. We believe that the companies which grow consistently with a focus on profitability have a higher probability of turning out to be good investments over the long-term. Givex falls into this category.”
Givex’s stock price has taken a drop of 8.4 per cent since it began trading on the Toronto Stock Exchange on December 1, though it has rebounded nicely to begin 2022 with a 10.1 per cent return since the new year began. Givex’s stock price since listing on the TSE peaked early at $0.96/share on December 2, experiencing its low on December 17 at $0.63/share.