The company can benefit as the Middle East and Africa transition to digital payments
Thursday 06 Jun 2019 Author: Tom Sieber

Buy payment services firm Network International (NETW) as a fascinating growth story and a near-term candidate to join the FTSE 100.

Don’t be put off by the premium rating of 33 times 2019 forecast earnings as that is justified by the growth potential on offer and the current share price could look a bargain in the longer term.

The company joined the stock market in April 2019 but has been operating in the Middle East since the mid-1990s and in Africa for the past decade.

It facilitates digital payments in these regions in a similar way to a larger peer like Worldpay, taken over in a $43bn deal earlier this year, does in other parts of the world.

Investment bank Berenberg says: ‘We believe that Network International’s regional exposure is unique because it has leading positions in markets which 1) are protected by the government, 2) attract limited international competition, 3) are very relationship and reputation focused and 4) are underpenetrated in terms of digital transactions.’

This last point is key as the proportion of digital transactions as a percentage of total transactions is as low as 14% in the Middle East and Africa, compared to 21% in Latin America, 22% in Asia Pacific, 51% in Europe and 74% in North America.

The former figure looks likely to grow as these economies mature and with governments introducing policies to support a transition to a more cashless society as they look to bring their countries up to speed with their developed peers.

The company has more than a third of the current addressable market in the Middle East with the UAE dominating. Saudi Arabia currently only makes a small contribution for the group but is a sizeable opportunity as it opens up to independent operators like Network.

In Africa, which delivered 25% of 2018 revenue, its main markets are Nigeria, Egypt and South Africa.

There is obviously a risk that the larger operators in this market might look at this opportunity and attempt to gain market share for themselves but the relationships the company enjoys, its scale and the $100m-plus it has invested in its platforms in recent years creates significant barriers to entry.

A more logical scenario is that the company might be targeted for a takeover by one of the industry heavyweights. The company does have $367m net debt although strong cash generation should enable this to be paid down rapidly.

A point to consider is regulatory and political risk in parts of the world which are not necessarily known for their stability, although we take comfort that Nework has been operating in these regions for some time.

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