This small cap stock was recently added as a member of the US Small-Cap Russell 2000® Index.
Repay Holdings Corporation (RPAY)
From Canaccord Genuity Research
Things could not be more interesting at the intersection of B2B payments and FP&A (financial planning & analysis) business processes. Software players are becoming gatekeepers of payments rails, while payments players are extending their value proposition into software; and all the while solutions get easier to implement.
Though the acquisition of cPayPlus is relatively small, we still see it as a timely business model extension, adding recurring software revenue to Repay’s payment volume-based business model. This dual revenue model has proven to take valuations higher than peers in software and FinTech. Also, with CpayPlus, Repay can build holistic solutions focused on accounts receivable, and now accounts payables—both wrapped around Repay’s proprietary payment ecosystem. Finally, we still believe Repay is also one of the best plays in middle market payments consolidation. Payments is currently “barbelled” between mega caps on one end and a few smaller public players on the other.
Last night, Repay announced its acquisition of CpayPlus, a Saas-based accounts payables automation solution. AP automation is currently at the vortex of B2B payments revolution, especially as the Covid pandemic accelerates the push to electronic payments. While relatively small, the CpayPlus solution set should fit well with much of Repay’s mid-market customer base from a technology and functionality perspective. Repay paid $8M for cPayPlus at closing with another $8M in earnout payments.
While still small, cPayPlus is a 100% grower and positions Repay to derive both payment volume- and software subscription-based revenue. While growing triple digits, cPayPlus’ impact on Repay’s financial performance this year is not expected to be material. But over time, this deal could help to reposition RPAY shares more as a hybrid player with a revenue model driven both by payment volume and recurring software fees. We have seen this hybrid revenue model drive leading valuations at the intersection of FinTech and Saas. This, combined with Repay’s position as a consolidator in middle market payments creates an attractive medium-term investment case.
cPayPlus’ AP solution a great complement to Repay’s AR offering. Repay’s strength historically has been on driving debit-based AR payments. With this acquisition, Repay can now offer its clients a solid AP payments solution as well. Cross sell opportunities should also emerge. For instance, Repay’s biggest vertical is auto. cPayPlus is integrated with leading auto platform Dealertrack, while Repay’s business model to date hasn’t extended to this platform. cPayPlus’ core target markets also include property management and field services, which can serve as new vertical target market for Repay. Net, net, we think the unique but highly complementary combination of both AP and AR payments solutions could drive competitive advantage over time.
COVID has been an accelerator to Repay so far, but the pandemic’s duration an increasing short-term risk. Clearly COVID has accelerated adoption of electronic payment. Still, the majority of Repay’s revenue is derived via payment volumes coming from loan repayments. To date, borrowers have prioritized loan repayments. But in a drawn-out pandemic scenario, default rates on lender loan books could increase, creating headwinds to Repay’s payment volumes.
Joseph Vafi, CFA and Pallav Saini, Canaccord Genuity Research, canaccordgenuity.com, July 24, 2020