Network International
Some markets are hot and some are molten. The excitement about the world of digital payment processing that helped to bring Network International to the stock market this year seems to have given London’s institutional fund managers a heat rash.
Network International was founded in 1994 as a subsidiary of Emirates Bank, owned by the government of Dubai. The first company to be certified to process payments for Mastercard and Visa in the Middle East, it provides services to both traders and card issuers in the region and is a dominant force in the same market in Africa. More than 65,000 merchants and 220 financial institutions are signed up.
It was listed on the stock market in April at 435p a share in a flotation that valued it at £2.2 billion and took place primarily as a means for its backers, Warburg Pincus and General Atlantic, the private equity investors, and the latterday incarnation of Emirates Bank, now known as Emirates NBD, to stage a partial exit.
After a six-month lock-up was waived early last month, the trio have reduced their holdings further. Emirates NBD remains the largest shareholder, with 11.9 per cent, while Warburg Pincus and General Atlantic own 10.8 per cent between them. Mastercard holds a stake of 9.9 per cent as part of a commercial arrangement around product development.
The follow-on share sales were priced at 580p, a 33 per cent premium to the float price and a discount to the prevailing value at the time that underscores how successful the early weeks of the listing were. The shares have subsequently settled and were down 4p, or 0.8 per cent yesterday at 521p.
The investment case for Network International is three-pronged. First, the market for processing payments digitally is growing rapidly, as consumers the world over increasingly use the internet, contactless cards and mobile phones to pay for goods.
Second, because there are clear cost benefits of scale, the sector is consolidating. This year, for example, Worldpay, once owned by Royal Bank of Scotland, was sold to an American group for roughly $35 billion, more than three times higher than its $10.4 billion value in a takeover deal only two years beforehand.
The third prong is that Network International’s main geographies represent possibly the most speedily developing markets for financial services — and specifically a transaction-based banking system for consumers — on the planet.
All are strong starting points. Network International is growing at a healthy rate, with revenues and underlying profit both up by double-digit percentages during the six months to the end of June and, at 47.2 per cent, it also has an extremely high profit margin. Within this, revenues at each of its two business lines, work for merchants and activities for card issuers, were also up by double-digit amounts.
There is little about what this company does and where it does it that is not pretty compelling. The question, therefore, must be one of value for money and profit potential for the share price and the dividend, which is set to equate to 15 per cent of underlying net income for the months of the year that Network International has been listed — so initially at least, pretty modest.
It’s racy. The new issue price of 435p equated to about 36 times JP Morgan Casenove’s forecast earnings, while at yesterday’s price the rating comes out at more than 43 times the broker’s estimate. That’s high for a share with an implied yield next year of only 0.77 per cent. The stock might be hot, but the valuation leaves this observer cold.
Advice Avoid
Why Exciting company in a dynamic market, but the high valuation is not an attractive entry point
Vesuvius
Vesuvius’s share price looks more like a crater than a volcano. Shares in the specialist in metal flow engineering have lost a third of their value since this column’s most recent assessment in February, when it recommended staying away and cited worries about the falling price.
The main drivers of the share price movement seem to be worries about the outlook for the steel industry that Vesuvius serves, hit by sliding wholesale prices and rising costs against a backdrop of cheap imports from China. That Washington included steel on its list of commodities incurring a 25 per cent import tariff as part of its attempts to protect its own industry will not have helped sentiment, any more than the frailties of the car manufacturing and construction sectors that are big buyers of steel.
Vesuvius was founded in 1916 in Pittsburgh, Pennsylvania, as the Vesuvius Crucible Company and was split from the Cookson Group in 2012. The company is a constituent of the FTSE 250, with a market value of just under £1.2 billion and annual revenues of almost £1.8 billion.
Its steel division, which accounts for about two thirds of the company’s trading profit, recorded marginally higher revenues of £614.9 million during the six months to the end of June. Efficiency improvements undertaken during a restructuring helped to lift return on sales by 0.3 per cent to 10.6 per cent. The decline in global steel production outside China was also an extremely modest 0.2 per cent, according to the World Steel Association.
Yet investors can see no let-up in the pressures in the wider market, even though over the long term the demand for steel as a commodity should prove resilient. Vesuvius itself has admitted that matters are unlikely to improve in the second half of this year. The group is doing everything it can — shutting plants, cutting costs — to try to trade its way through, yet the shares were down a further 22¼p, or 5.1 per cent, to 410p yesterday after a downgrade note from analysts at RBC Capital Markets. While the shares cost just 8.3 times RBC’s forecast earnings for a dividend yield of 5 per cent there seems nothing in the way of a catalyst to move them higher.
Advice Avoid
Why Brave but battling in the teeth of market declines
