Turnaround Execution And Digital Payments Shift Will Shape Revenue Mix And Margins

Catalysts

About Worldline

Worldline is a European payments provider offering merchant acquiring, payment processing and digital transaction services.

What are the underlying business or industry changes driving this perspective?

• Although the migration to Android terminals and next generation e-commerce platforms should eventually support higher value added services, execution delays and supplier dependencies are likely to keep hardware sales volatile and limit near term recovery in Merchant Services revenue and margin mix.
• Despite the structural shift from cash to electronic payments and growing card volumes across Europe, elevated churn in the higher margin SMB segment and slower MSV growth suggest that competitive pressure will cap pricing power and weigh on net revenue growth and EBITDA expansion.
• While the announced disposal of MeTS and other noncore activities will simplify the group and release liquidity, the loss of stable cash generative businesses and execution risk around carve outs could offset benefits, constraining free cash flow and slowing deleveraging.
• Although large, long duration processing contracts in account to account payments and issuing should provide volume visibility, reinsourcing by key clients and the need to reinvest in platforms to stay competitive may depress Financial Services revenue and keep segment EBITDA margins under pressure.
• While cost programs like Power24 and the additional EUR 50 million cash savings plan are beginning to offset inflation, sustained restructuring charges, system upgrades and leadership changes may consume a sizable portion of operational gains, limiting improvement in net margins and free cash flow conversion.

Assumptions

This narrative explores a more pessimistic perspective on Worldline compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Worldline's revenue will decrease by 4.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Worldline will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Worldline's profit margin will increase from -98.6% to the average GB Diversified Financial industry of 28.3% in 3 years.
• If Worldline's profit margin were to converge on the industry average, you could expect earnings to reach €1.1 billion (and earnings per share of €3.92) by about December 2028, up from €-4.5 billion today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 0.5x on those 2028 earnings, up from -0.1x today. This future PE is lower than the current PE for the GB Diversified Financial industry at 46.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.3%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The management team is framing Worldline as a multiyear turnaround with strong multi local assets in core European markets and new leadership across finance, technology and Financial Services. If execution on this plan is successful, investor confidence could recover and rerate the shares upward, improving the valuation multiple and lifting earnings expectations.
• Structural growth in digital and account to account payments is being underpinned by long duration contracts such as the 10 year BFF deal in Italy and renewed partnerships with schemes like Visa. If volumes ramp up on these platforms, Financial Services revenue and segment EBITDA margins could rise over time rather than staying flat.
• New products and payment methods such as the refactored e commerce solution, expansion of Android terminals and the Wero payment method rollout across Germany, Belgium and France could capture incremental transaction volumes in secularly growing digital channels, supporting a return to positive net revenue growth and higher group EBITDA.
• Ongoing cost programs, including Power24 and the additional EUR 50 million cash savings plan, are already offsetting inflation and lowering CapEx and operating expenses. If these savings fully materialize while revenue stabilizes, free cash flow conversion and net margins could expand beyond current low levels.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Worldline is €1.5, which represents up to two standard deviations below the consensus price target of €2.47. This valuation is based on what can be assumed as the expectations of Worldline's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €4.2, and the most bearish reporting a price target of just €1.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €3.9 billion, earnings will come to €1.1 billion, and it would be trading on a PE ratio of 0.5x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of €1.4, the analyst price target of €1.5 is 6.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.