LML Payment Systems: A Growth Company Trading Near Net Asset Value

| About: Digital River, (DRIV-OLD)
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LML Payment Systems (NYSEARCA:LMLP) is a leading provider of financial payment processing solutions for e-commerce and traditional businesses in Canada and the United States. LML provides credit card processing, online debit, electronic funds transfer, automated clearinghouse payment processing and authentication services, along with settlement and check recovery services. Additionally, LML provides licenses to its intellectual property estate, which includes five United States patents.

LML recently completed a multi-year campaign to enforce its intellectual property rights from several leading commercial banks and now sits with over $30M in the bank, $1.07 per share in cash, and no debt to speak of. While the monetization of its intellectual property has been very lucrative, the real story with this company is its wholly-owned operating subsidiary, Beanstream Internet Commerce.

Beanstream provides payment, risk management and authentication solutions to some of North America's leading corporations. Some of its important clients include Shaw Communications, Best Buy, Future Shop, TD Bank Financial Group, Equifax, as well as universities and government municipalities. LML recently reported 4th quarter results to the tune of $10.7M in revenue and $0.09 EPS. Beanstream's growth was quite impressive at over 28%, with the addition of over 3,000 customers in fiscal 2012. As of June 18th, the company provided its services to over 13,000 businesses and organizations and processed over $8B (yes, with a B) in transaction volume in fiscal 2012.

Last year, First Data, a global technology and payments processing leader, serving more than six million merchant locations, selected Beanstream to provide web-based transaction processing services behind First Data's e-commerce products in Canada. Beanstream also partnered with Sage Simply Accounting as the technology provider behind the Sage Direct Payments solution for employee, vendor and customer bank payments.

As the payment industry continued to evolve, Beanstream stepped up to the plate with the addition of a multi-currency processing platform enabling support for over 150 currencies and 200 countries. This month, Beanstream's currency platform was ranked #9 for Best Multi-Currency Processing Company, just behind payment monoliths like WorldPay, PayPal, and First Data.

In March, Beanstream announced a product that would compete in the rapidly growing mobile payment industry with the introduction of a mobile card reader designed to fit iPhone, iPad, and Android enabled devices. According to company executives, the application will be out of beta testing within the next 30 days. LML's CEO, Patrick H. Gaines, called the mobile application, "the most comprehensive mobile payment service in the country."

In May, Beanstream was named as a technology partner in Mastercard's (NYSE:MA) new mobile payment venture, Paypass Wallet Services. Ryan Stewart, Product Manager for Beanstream was quoted as saying, "Beanstream is pleased to support the launch of this exciting new product. PayPass Wallet Services will remove friction in the checkout process and provide the end user with more choice to streamline and increase conversions. Beanstream's flexible payment platform allows us to move quickly in providing merchants with market-driven solutions such as this, and assisting in introducing Paypass to the hundreds of integrated solution providers who have chosen Beanstream as their processing partner."

LML's book value now sits at $1.82 per share. Earnings and revenue from the core business continue to increase at a rapid pace. Net of cash, LML's market cap is roughly $20M, quite shocking when you consider the profitability and huge growth prospects. Naysayers will argue that the majority of LML's revenue and earnings over the past year were the result of non-recurring intellectually property settlements. While that is, to a certain extent true, it doesn't change the fact that LML's largest operating subsidiary grew at 30% in fiscal 2012 and is profitable - and becoming more so.

It is likely that a substantial portion of Beanstream's top line revenue growth will start to fall to the bottom line in fiscal 2013 and beyond. Those who are familiar with the payment industry know that multiples of both earnings and book value are typically much higher than other industries due to the fact that payment processing is profitable in almost any environment and doesn't have large capital outlays. Obviously, this begs the question as to why LML is so cheap. Let's look at some financial metrics for other industry players.

Planet Payment (NASDAQ:PLPM) provides international payment processing and multi-currency processing services. Its market cap is around $230M ($220M net of cash). Revenue for Q1 came in at $11.7M, compared with $9.6M in Q1 2011, an increase of roughly 22%. Earnings growth is also improving, but the valuation is fairly rich for a company only averaging about $0.01 EPS per quarter. Planet Payment currently trades at a trailing P/E of 100 and over 11x book value. It's hard to say whether this is expensive, given the room for growth. Planet Payment, like Beanstream, is signing lots of new contracts and developing new products. The growth prospects are very good and many leading financial firms are positioning themselves to take advantage.

Heartland Payment Systems (HPY) delivers credit, debit, and prepaid card processing along with payroll, check management and payments solutions. HPY is a well established company serving more than 250,000 merchants nationwide. It is currently the 5th largest payment processor in the United States by transaction volume. HPY trades at a market cap just over $1B. Quarterly revenue growth has moderated significantly to just under 1%, but quarterly earnings growth has increased an impressive 76%. HPY currently trades at a trailing P/E of 22 and a forward P/E of 16. It also trades at slightly under 5x book value. The company is scheduled to report earnings next week, so we should get some more color on how the company is progressing.

Vantiv (VNTV) offers a comprehensive suite of traditional and innovative payment processing and technology solutions to merchants and financial institutions in the U.S. The company finished its IPO in March and now trades at a market cap of just under $3B. Quarterly revenue growth (year over year) is at about 17%, impressive for a company of Vantiv's size. The company currently trades at a trailing P/E of 67 and a forward P/E (fye Dec 31st 2013) of 17. Vantiv trades at just under 5x book value.

Global Payments (NYSE:GPN) processes payment cards, checks, and e-commerce transactions annually for over one million merchant locations worldwide. GPN currently trades at a market cap of about $3.2B and sports quarterly revenue growth of about 17%. Quarterly earnings growth is also at an impressive 21%. GPN currently trades at a trailing P/E of 14, a forward P/E of 11, and about 2.5x book value.

As you can see, all of these companies trade at significantly higher multiples than LML, and in many of the cases, the growth is not even as impressive. LML is more than just its intellectual property. It is a company with a rapidly growing subsidiary, Beanstream, and when discovered, could trade at multiples that rival or exceed its competitors.

*Financial figures from CapitalIQ

Disclosure: I am long LMLP.

Additional disclosure: I am not a financial advisor. You should consult your own financial advisor before acting on recommendations to consider its suitability for your investment circumstances.