Wirecard: Growth Continues At An Impressive Pace

Summary

• Wirecard published its quarterly figures for the first quarter of fiscal year 2019 on May 8.
• Wirecard continues its growth path - unrestrained by the latest allegations - with an impressive pace.
• While still having an attractive valuation, the newly-closed partnerships could further accelerate growth and, consequently, shareholder value.

You can lead a horse to water, but you can't make it drink.

A short review

Most recently, on April 29, 2019, I published an article about Wirecard (OTC:WRCDF, OTCPK:WCAGY) on Seeking Alpha with the title "A Gift Served On A Silver Platter?"

In the aforementioned article, I elaborated why Wirecard is a "Conviction Buy", from my point of view, by presenting my fair value calculations. I added that,

"the current stock price could be a good starting point for short and long-term oriented investors". In this context, I also presented the traceability of Wirecard's "Vision 2025".

Second, I mentioned that,

"from a qualitative point of view, Wirecard has a visionary management, great growth prospects, solid fundamentals and is potentially cooperating with SoftBank (OTCPK:SFTBF, OTCPK:SFTBY), which could open up additional markets and enable synergy effects with SoftBank's global and innovative investment portfolio."

Third, I wrote that,

"Wirecard will release its quarterly figures for Q1 2019 on May 8. The CEO has already announced in the earnings call that the first quarter was strong. This could also have a positive effect on the stock price. In this context, it is also worth mentioning that Wirecard raised its guidance three times last year. This year could also bring some positive surprises."

In this article, I will discuss the results for the first quarter of fiscal year 2019 and management's statements in the respective earnings call.

Furthermore, I will discuss some of the latest developments that could be relevant for future stock price performance and, consequently, shareholder value.

Results for Q1 2019

While market participants were afraid that growth might have suffered as a result of the latest allegations, management countered with again impressive results to the doubters.

Wirecard increased its revenue by 34.8% to €566.7 million (Q1 2018: €420.5 million). The transaction volume processed through the Wirecard platform grew by 37.4% to €36.7 billion (Q1 2018: €26.7 billion).

Meanwhile, the number of merchants connected to Wirecard's financial commerce platform increased from 279k at the end of 2018 to 293k at the end of March 2019. The following figure provides examples of recently acquired popular merchants and customers.

Examples of customer gains, business extensions, and new partners in Q1 2019. Source: Investor Presentation, results Q1 2019, May 2019.

EBITDA increased by 40.7% to €158.0 million (Q1 2018: €112.3 million). EBITDA margin increased to 27.9% in the first quarter of 2019, again confirming management's target for further scalability of the business (Q1 2018: 26.7%).

Free cash flow increased by a phenomenal 73.5% to €124.6 million (Q1 2018: €71.8 million). In the first quarter of fiscal year 2018, free cash flow increased by 44.3% from €49.7 million to €71.7 million. Thus, free cash flow growth has also accelerated in FY 2019. This should be the product of increasing global partnerships and scaling of the business model.

Meanwhile, the net cash position increased to €596 million as of March 2019 (FY 2018: €521 million).

Net cash position. Source: Investor Presentation, results Q1 2019, May 2019.

Earnings, after tax, increased by 50% to €106.3 million (Q1 2018: € 70.8 million), which corresponds to earnings per share of €0.86 (Q1 2018: €0.57, increase of 46.1%). Thus, in addition to the free cash flow, earnings per share also increased at a higher growth rate compared with the same period in the previous year.

The following figure summarizes the results for Q1 2019.

Key figures of Q1 2019 and guidance for FY 2019. Source: Investor Presentation, results Q1 2019, May 2019.

Furthermore, as I had already suspected in my most recent article, Wirecard raised the lower end and upper end of EBITDA guidance to €760-810 million for fiscal year 2019 (previous guidance: €740-800 million). This would correspond to an EBITDA growth rate of 36-45% compared to the previous year (previous year: €560.5 million).

As expected, the share price on Xetra climbed in a first reaction to the quarterly results by about 5% to €140 (Xetra closing).

I could imagine that management will increase the EBITDA guidance for the fiscal year 2019 at least one more time during the course of the year. Management may want to have a further ace up its sleeve if another negative article is published or another short attack is undertaken in the meantime.

In order to summarize the results for the first quarter, it can be said that management has once again delivered on its promises.

What else happened recently?

In this section, I will discuss some of the latest developments that could be relevant for future stock price performance and, consequently, shareholder value. For this purpose, I have divided this section into three parts:

1. New details about SoftBank deal
2. Cooperation projects with social media companies
3. New rumors in the case of allegations concerning fictitious transactions and money-laundering

Let's begin with new details about the SoftBank deal.

1) New details about SoftBank deal

While I would like to discuss the deal with SoftBank in detail in a separate article, CEO Markus Braun revealed further information in this context in an interview with "Vorstandswoche".

First, according to the interview with "Vorstandswoche", CEO Braun said that Wirecard does not need any additional cash, but SoftBank was only willing to cooperate if it received a stake in a €900 million convertible bond. The conversion price of the convertible bond is €130 with an interest rate of 1.9% and a maturity of five years.

According to the article, SoftBank has intensively reviewed the investment through due diligence. Nevertheless, SoftBank's economic and legal external advisors did not see any concerns in this transaction. Neither the allegations of the Financial Times, nor the events in Singapore and India bothered SoftBank.

Second, according to rumours in the hands of the editors of Vorstandswoche, SoftBank could imagine increasing its stake to at least 10-15%. The decision to increase its stake shall be made after Wirecard's annual shareholders' meeting in June. Further share purchases could then be made directly via the stock market.

Third, according to statements of the management in the earnings call, management intends to implement a share buyback program with "a substantial portion" of the proceeds of the €900 million convertible bond issue that SoftBank will buy as part of the partnership. This information was revealed by management in the earnings call on the results for Q1 2019.

My personal assumption is that Wirecard could, as a first step, implement a share buyback program in the amount of the net cash position amounting to approximately €600 million as of Q1 2019. Based on the Xetra closing price of €140 and market capitalization of €17.3 billion on May 8, 2019, this would correspond to approximately 3.5% of the current market capitalization.

While this share buyback program would not represent a substantial portion of Wirecard's market capitalization, it could serve to reduce a potential shareholder dilution caused by the convertible bond and replace current dividend payments with interest payments on the convertible debt.

Furthermore, the share buyback program could trigger buying pressure from short sellers, who, in light of the recent positive developments, are certainly trying to cover their positions at the best possible share price.

Until now, the CEO had opposed a share buyback program because he believed Wirecard was a growth company and could make better use of cash. Consequently, it would be interesting to hear from him personally at the annual shareholders' meeting what led to this change of mind.

Furthermore, CEO Braun added that Wirecard is in talks with six to eight companies in SoftBank's portfolio from Asia, Europe, and the United States in order to cooperate on digital payments.

He further added that Wirecard would share an analysis of the partnership's potential in invitations for its June 18 annual shareholders' meeting that will go out this Friday. During the annual shareholders' meeting, shareholders are being asked to vote on the SoftBank deal.

2) Cooperation projects with social media companies

Another exciting development with regard to Wirecard's future growth was the management's statement that Wirecard is involved in cooperation projects with several major social media companies.

In this context, Wirecard intends to benefit from the trend toward increasingly linking online platforms with payment systems.

As already shown by the examples of Facebook (FB), Instagram, Snapchat (SNAP) or Pinterest (PINS), social media providers are aiming for an increasing Integration of Shopping functions on their platforms in order to increase the user satisfaction and, more importantly, improve monetarization (see, for example, "Instagram Checkout" introduced by Facebook).

For example, Deutsche Bank thinks that Instagram Checkout alone could add incremental $10 billion to Facebook's revenue within a few years, just to illustrate the scale and potential of these collaborations from Wirecard's point of view.

In this context, Wirecard most recently announced a cooperation with Telegram on April 17, 2019. Telegram currently has over 200 million users worldwide. According to statements made by the CEO in the earnings call, the partnership with Telegram could be further expanded in the second half of 2019.

3) New rumors in the case of allegations concerning fictitious transactions and money-laundering

On 6 May, 2019, an article was published in the Philippine newspaper "Manila Standard", according to which a Philippine company has filed a cyber libel case against two journalists of the Financial Times.

According to the complaint, the article involving the Philippine company was founded on the witness statement of a Cabanatuan City resident and father of one of the company's directors, who had admitted to being paid to lie about his knowledge of the company and to provide Financial Times with documents which were used in the respective article.

In this context, it is also worth mentioning that Wirecard, Wirecard shareholders, the German Federal Financial Supervisory Authority (BaFin) and the above-mentioned Philippine company have meanwhile filed complaints against the Financial Times regarding their reporting.

While Wirecard's management repeatedly rejected the allegations and hired an external law firm to clear up the allegations, which also found no criminal conduct on the part of Wirecard, the outcome of this story remains very exciting.

Conclusion

Be greedy when others are fearful, and fearful when others are greedy - Warren Buffett

My last article started with the above quote and ended with the first quote. This time, I deliberately chose the reverse order. In my opinion, there are still enough skeptics regarding Wirecard, so that the share price can climb further along the "Wall of Worry".

Further developments in the share price will probably also be influenced by the investigations conducted by the public prosecutor's offices in Munich and Singapore. Nonetheless, all the above-mentioned positive developments indicate that Wirecard's business is unlikely to be (materially) affected.

With respect to the results for the first quarter, it can be said that management has once again delivered on its promises. Now, it will be up to the shareholders to give the management the trust they deserve and to believe in Wirecard's future.

Warren Buffett said at the latest annual general meeting of Berkshire (BRK.B) that he could make a 50% return on a million US dollars a year and that there are price anomalies on the market that one only has to find. In light of Wirecard's growth rates, the growth rates in the payment sector, the balance sheet and management quality, as well as the current valuation (compared to the peer group), in my opinion, Wirecard is such a price anomaly. This, of course, only applies on the condition that the allegations are untrue.

The stock has currently a buy recommendation from 19 of the 25 equity analysts covering the stock.

Finally, I reiterate my conviction buy rating with a (conservative) price target of €180.

Hope you enjoyed reading my article. Wish you much success with your investments!

Disclosure: I am/we are long WRCDF, WCAGY, FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.