UMT — Stepping out into B2C payments & blockchain

UMT has established itself as a major player in the European mobile payments (mPay) sphere with its successful launch of integrated mPay and loyalty point collection/spending services in Germany for the Amex-owned Payback scheme. Retailers in the scheme represent 45% of German retail market share and UMT has already rolled out services in businesses covering 25% of the German retail market. The scheme was awarded the Goldene Transaktion award in 2017 for best mobile payment solution. We see the potential for the group to make step-change gains in new mPay business if the Payback group or other major retail oriented groups adopt UMT’s white-label mPay services in other markets. Helped by recent agreements with solarisBank and know-how from blockchain expert Coinsilium, new products in the payments and blockchain sphere could also create new revenues streams. We also see significant potential arising from the expansion of B2C platform prelado into other markets and products, although we note low barriers to entry and thin margins in the sector.

The noteworthy aspects of UMT’s financials can be summarised as:

UMT shares have risen sharply on news of the Coinsilium MoU and now trade in line with the mPay small-cap sector on current year forecast EV/revenues and at a 29% premium on the FY2 metric. The current price implies free cash flow (FCF) growth of 13.6% from 2021 in our reverse DCF analysis.

UMT’s white-label mPay strategy gives rise to the potential to leverage data crossing the platform into big data products and also to widen market scope. Nevertheless, key sensitivities include thin margins in terms of the share of merchant fees, and potential for contract non-renewal risk vs branded services. At present UMT also has high customer concentration with regard to its major client, Payback, but also has the potential to win significant new mPay business in other regions as a Payback preferred supplier. mPay businesses are sensitive to ongoing pressure on interchange fees for credit and debit cards and competition for dominance from tech majors. The recent acquisition of the pre-pay mobile top-up platform prelado represents a departure from the core business and core management competence, and exposes the group to a fast-moving, low-margin environment that may result in increased earnings volatility. There is significant complexity and limited granularity in the accounts and currently low levels of recurring revenues reduce the reliability of earnings forecasts. We estimate the potential need for €1.5m equity funding by 2020.

UMT is a software house with a proprietary white-label mobile payment and loyalty platform. It took its current form in 2011 and listed on the Deutsche Börse’s Entry Standard segment in July 2012. The company launched mPay software in 2011, which in 2014 was rated “best mobile payment product” by PwC in a review of the German mPay market. In November of that year, the German arm of Payback, the Amex-owned loyalty scheme with 30 million members, awarded the company a contract to provide a white-label mobile payments platform in Germany as well as preferred partner status for Payback’s schemes in the US, Poland, Italy, India and Mexico, with c 90m members.

To date UMT has rolled out integrated mPay and loyalty services to nine major German retailers, in the Payback scheme, generating start-up, platform maintenance and volume-based commission revenues. The success of its platform was recognised with Payback’s scheme being awarded the Goldene Transaktion award in Berlin in 2017 for best mobile payment solution. UMT is also tendering to create more white-label B2C and B2B mPay platforms and looking to launch data products based on data crossing its platform.

In May 2017, UMT acquired a 51% stake in PEACHES Mobile GmbH, the owner of prelado, an online mobile top-up platform in Germany. In Q417, UMT acquired a 3.0% stake in blockchain venture builder and investment specialist Coinsilium. They signed an MoU to collaborate for a period of three months in applications for blockchain technology in mPay and B2C and exploration of the use of digital tokens as a medium of exchange for mobile payments with the aim of an eventual commercial agreement between the companies.

The group has five key subsidiaries/affiliates: UMS United Mobile Services GmbH (100%), the group’s tech innovator and developer of its mPay platform; Mobile Payment Systems Espana SL (70%), iPAYst Riga (100%) and UMT Turkey (26%), founded to sell the group’s mPay platforms in Spain, Italy, Central Europe and Turkey, respectively; and a 20% stake in the Spanish data-analytics company SEKS, with the right to increase this shareholding to 100%.

UMT’s key strategic objectives are:

CEO Dr Albert Wahl has extensive experience in engineering, banking and start-ups. Before founding the consulting and venture capital firm GCI Management in 1997, he was employed at BMW, IBM and Deutsche Bank. CIO Erik Nagel has extensive banking experience. CTO Robert Schmiedler joined UMT in 2010 and developed the iPAYst concept. Previously, he worked at gaming and travel websites bwin and HitchHiker. CBDO Alexander Franckenstein has experience and understanding of tech investments and financial markets via the fund management industry.

The rise of the smartphone is a key driver of digital commerce (e- and m-commerce). Transactions via smartphones comprised 15% of worldwide retail sales in 2016, up from 9% three years earlier. This year McKinsey has forecast a global digital commerce CAGR of 12% to 2020 at which point digital commerce should take 24% of the total retail pie.

McKinsey expects m-commerce to expand from 5% of global retail spending in 2015 to 12% by 2020, representing a real CAGR of 19% assuming flat retail sales. With this impetus, growth in m-commerce is expected to outstrip that of e-commerce, which has already started to slow to single-digit levels of c 6% in EMEA and North America.

A very encouraging statistic for mobile payments’ potential in Europe is a tripling in the proportions of Europeans who are regularly using mobile devices for payments to 54% between 2015 and 2016, according to Visa inc’s 2016 Digital Payments study.

Another positive for the potential for increasing payment volumes are the findings in the study that (a) older (and therefore typically wealthier) consumers are catching up with millennials in their use of mobile payments and (b) a high proportion of users seem as comfortable making large purchases over mobile devices as everyday payments. In the UK, over 40% of mPay users purchase high-value items such as holidays and electronics on mobile devices as well as paying household bills and buying bus or train tickets. Similar trends have been reported by Criteo (2017), which found that the average order value (AOV) on mobile apps was 27% higher than on desktop in Q216, while the AOV on mobile browsers was only 9% lower than desktop during the same period.

Germany has tended to lag other European countries in the uptake of new payment choices (preferring cash and debit cards). Nevertheless, Visa estimated in 2016 that 6% of the population already paid with mobile devices at least once a day, while 40% of customers were regular users of mPay. It estimated that by 2020, 40% of Germans would use mPay at least once a week.

Mobile payments market growth – and the place for UMT

We think it likely that Germany, and to a lesser extent the EU, will maintain pace with the US in mobile payments adoption in coming years, given similarities to date in the m-commerce share of e-commerce (c 29% in the US and Germany, and >25% in all major EU countries [source Criteo]) and the efforts being taken by the EU to create a more level playing field for payment service providers (PSPs). On this basis, assuming that in-store mobile payments grow to 4.5% of current GDP, as indicated by Business Insider for the US, Germany and Europe, mobile payments could rise to €136bn and €658bn, in Germany and Europe, respectively, in 2019. A similar treatment of Forrester’s mPay forecast implies a mobile payments market of €178bn in Germany and €863bn in the EU in 2019/20.

Helped by the enormous boost provided by the Payback program (our forecast of €8.9bn mPay transactions in 2019/20 is 5.0% of the above German market forecast), we believe that UMT has the potential to power an 8% share of the German mPay market by 2019. With the planned roll-out of Payback in other countries, we believe UMT has the potential to power a c 3% share of the EU market, or €26bn, in 2019/20 helped by growth at its existing operations in Spain and Central Europe.

The UMT platform

UMT’s platform has been designed to appeal to retailers and loyalty schemes by addressing consumer ease-of-use concerns and integrating seamlessly with loyalty programs:

It also has significant advantages for merchants:

A key part of UMT’s success in incorporating the above features into its platform has been its decision to undertake native integration of its software into the merchant’s IT infrastructure. By undertaking all the “heavy lifting” at the merchant end, it has enabled quicker processing times, a simpler staff and customer interface and uniform functionality across stores.

Before switching to its white-label strategy, UMT honed its mPay product with merchant deals in the DACH region (Germany, Austria, Switzerland) as well as Spain, Turkey, Italy and Latvia. Customers included luxury restaurant chain Kuffler Group; Loden-Frey, a Munich department store; and the Four Seasons Hotel, Munich. It is also worth noting that Ernst and Young rated iPAYst in the top three “best in class” mobile payments operators in June 2014, with iPAYst rated highest in terms of overall B2B and B2C functionality. The move to a white-label strategy reflected the realisation that creating a branded product would mean loss of control to a partner to fund heavy marketing spend.

We believe that a key advantage of UMT’s white-label platform is its ability to integrate fully with loyalty programmes, not just providing for points collection but also enabling customers to purchase goods and services with their points and use digital and paper coupons for payments. The recommendation to retailers by mobile commerce consultancy Criteo, in its 2017 report on m-commerce, cuts to the heart of the advantage of UMT proposition: “To capture rising mobile AOV, retailers must focus on consumer security and convenience in the mobile checkout process.”

PwC research in 2016 came to similar conclusions, citing a key barrier in the uptake of mPay has been the difficulty in convincing consumers that it is more convenient than a cash or card payment. As a result, the most famously successful mPay platforms, such as those used by Starbucks and Wallmart, have used loyalty schemes to incentivise customers to use them, with the most obvious tool being integrated and seamless loyalty program interactions.

The Payback loyalty scheme came into being in Germany in 2000 and was later rolled out in Poland (2009), India (2011), Mexico (2012) and Italy (2014). Amex acquired Payback’s parent company Loyalty Partners in 2011 and in 2015 it launched a similar loyalty scheme in the US owned directly by Amex, branded Plenti.

In November 2014 UMT won a tender to operate the mPay platform for Payback Germany as well as Preferred Partner status for expanding coverage to the rest of the Payback programme with its total 120 million active users. Being awarded the Payback Germany scheme was a major vote of confidence in UMT, given the importance of the scheme within the whole group. With 30 million active users, representing 36% of the German population. Payback’s scheme is by far the largest loyalty programme in Germany, number two Deutschland Card being only one-third the size, and bigger even than Nectar in the UK. Based on usage alone, Payback Deutschland reports that the Payback card is the “number three” card in German wallets.

The rollout of UMT’s white-label mPay platform commenced in June 2016. Since then UMT has signed on and rolled out the mPay and mobile loyalty points platform to eight large retailers: Galeria Kaufhof, ARAL, REWE, dm, Alnatura, real, TeeGschwendner and Thalia. This represents more than 13,650 stores with 66,500 retail outlets, which together generate approximately 25% of German retail sales volumes. The onboarding of the remaining companies in the scheme is likely to take several more years; while the individual firms are smaller, the 640+ retailers still to adopt the mPay solution represent a further 20% of the German retail market.

The service has been popular among Payback’s 30m members. The app, which combines the loyalty and m-Pay functions, has been downloaded 13m times, 3.5m of these since the mPay launch. In 2017 the Payback app was awarded the Goldene Transaktion award at the Payments Exchange 2017 conference in Berlin for best mobile payment solution.

Customers are able to choose to pay via debit or credit card or via their bank account by SEPA mandate. UMT’s software also enables payment by vouchers and promotion redemptions as well as enabling cash withdrawals at retailer cashpoints. Users can also keep track of their points on the app, rather than via in-store terminals, as required for users of paper coupons.

For the purposes of our forecasts (in the absence of a published breakdown of mPay use customers), we assume that 28% of the assumed YE 13m Payback app users (3.6m) had used mPay by end 2017 and this rises to 5.7m in 2018 based on our forecast of a 9% increase in app downloads to 14.2m, and an increase from 30% to 40% of app users who use mPay. We see this level of growth as being supported by the large number of retail outlets added to the scheme over the last 12 months, most particularly the addition of REWE branded stores in H117, which consist of 3,300 outlets across many cities and towns in Germany (out of a total 15,000 European stores in the REWE group), as well as the expectation of further Payback member stores starting to offer mPay during 2018, which should bring many people into their first regular contact with mPay facilities. Other factors we see as encouraging greater take-up of mPay in Germany than thus seen in markets such as the US are:

We also see good prospects for UMT to continue as Payback’s platform operator after the end of its current contract term. This is because in addition to the merits of its system, UMT is likely by then to have embedded its mPay technology into the POS systems of Payback’s partners worldwide.

In May 2017 UMT announced a cash and shares acquisition of a 51% stake in PEACHES Mobile GmbH, the owner of prelado, a leading German online vendor of digital pre-paid mobile top-up cards/transactions.

Prelado derives 85-90% of its revenues from mobile phone top-up cards for more than 50 German mobile operators, and the bulk of the remainder from payment services. Payment services on offer include Sofortuberweisung (a leading EU payment brand), Giropay, MasterCard, Visa, American Express and PayPal. Prelado’s website has attracted a Trustpilot rating of 9.6, which we believe supports the potential of UMT to successfully add new mPay services based on customer trust.

Prelado sources mobile phone top-up cards direct from Germany’s mobile operators, including Aldi and Lidl, as well as from card resellers. It is able to retail the cards for an average 5% mark-up as well as benefiting from a tendency of many customers to not use the last 10-20% of credit on cards purchased, which can be retained by the card seller after two years. The company has 203,000 customers in Germany with marketing largely via search engine optimisation. prelado also has advanced plans to launch sales of e-gift cards with retailers including Zalando, Amazon, Saturn, Media Markt, OBI, Douglas, Starbucks and Thalia.

According to Accenture Consulting (2017), more than a third of the world’s adult population make little or no use of formal financial services. The majority of these people are found in low and middle-income emerging markets but also according to Accenture even in high-income countries large numbers of people do not use banks to help meet their daily financial needs.

In this vacuum, given that the vast majority of the world’s population have mobile phones, mobile phone top-ups have become a key payment method in many populations. Accenture estimates that the banking sector loses $380bn per annum from not serving these populations and businesses, while communications firm IPsmarx estimates that 75% of mobile money transactions are made using airtime remittances, with global remittances totalling $414bn.

According to a GSMA Intelligence report of October 2016, the average cost of sending $200 using mobile money is 2.7% across 45 surveyed corridors, compared with 6.0% using global money transfer operators, giving rise to a strong incentive to use mobile phone top-up transfer as a money transfer tool.

The opportunity for mPay specialists such as UMT is to plug into this market and convert users to different mPay options, offering flexibility, etc, in return for taking more of the margin on transactions.

UMT made the purchase of PEACHES after the latter fell into insolvency in early 2016. We understand that this did not have a material impact on the business, which was supported financially by a major shareholder, which still has a 49% stake in PEACHES. The acquisition was undertaken by a merger with a UMT subsidiary, which was backdated to 15 September, enabling the consolidation of PEACHES from that date, including the consolidation of €780k in revenues. UMT has announced that it intends to increase its stake in PEACHES over the next 12 months and that it is looking to extend the group’s IP, licences and patents but as this does not appear to have been finalised we have not included such a stake increase in our financial forecasts.

The group also guided for revenues from Peaches in 2017 of €3.2-3.5m. UMT sees significant potential to boost earnings by the adoption of a strategy with the following planks:

UMT also envisions prelado applying for membership of the Payback loyalty scheme at some point in the future. This would enable Payback members to use their Payback points to buy prelado products, adding to its market reach. This strategy comes with Payback membership costs, so this is not likely to take place until the business has expanded its product range to the point where the benefits justify the additional cost.

Recent research from Allied Market Research projects that the global pre-paid card market will grow at a CAGR of 23% between 2016 and 2022. One potential headwind for the market is expected changes in money laundering legislation, specifically the EU Directives PSD2 and the fifth money laundering directive, but also under discussion in other jurisdictions. These are expected to enforce transparency on payments via the internet, and to crack down on the issue of anonymous gift cards, which in turn is expected to choke off demand for use in money laundering as well as black-market payments.

Other risk factors for B2C sites are low barriers to entry, and the potential for tech giants or retail to try to push into the space with higher marketing budgets or customer tie-ins.

In June 2017 UMT reached an agreement with Berlin-based solarisBank, which has a full banking licence and extensive experience in the payments as well as general banking sphere. The cooperation will enable UMT to become a full service provider to its clients, operating under the umbrella of solarisBank’s banking licence, and to create new services around mobile payments from payments processing and e-money solutions.

Another significant advantage of the cooperation is expected to be a reduction in mobile transaction fees (potentially falling to as low as 1-3bp) as a result of being able to deal directly with counterparties.

UMT is positioning itself to accommodate the growing demand for payments in cryptocurrencies as well as to develop its capabilities in blockchain technology for use with payments and big data applications.

During October, the company acquired a 3.0% stake in London-listed UK firm Coinsilium Group Ltd. On 7 November they announced the conclusion of a memorandum of understanding to collaborate for a period of three months in applications for blockchain technology in mPay and B2C and exploration of the use of digital tokens as a medium of exchange for mobile payments with the aim of an eventual commercial agreement between the companies.

At present payments specialist Terrastream, a wholly owned subsidiary of Coinsilium, is looking to provide funding to companies in the form of digital tokens sold directly to investors.

Coinsilium’s latest development is the creation of a blockchain-powered platform for the generation of alternative funding solutions.

While management considers the stake strategic, UMT is very interested in learning from Coinsilium’s blockchain expertise and gaining from its relationships and contacts with B2B businesses. If purchased at the share price of $0.07, we calculate that the 3% stake would have cost approximately $260k.

The key sensitivities for UMT are as follows:

UMT experienced substantial one-off revenue inflows from retailers in the Payback loyalty scheme in 2015 and 2016 as its m-Pay technology was incorporated into the payment systems of five major retailers. In July of this year, the company completed the addition of 3,300 REWE-branded stores (part of REWE’s supermarket group, which consists of 15,000 outlets operating under various brand names), TeeGschwendner and Thalia to the platform, bringing total retailers to eight. The company still has substantially more work to do to bring all the Payback members onto its mPay and loyalty platform. We estimate that it has only installed its systems on c 55% of the Payback members in terms of retail market share.

During 2016 reported revenues and other operating income including prior year development expenses rose 43% to €3.3m. Nevertheless, after adjustment to exclude recognition of prior year development expenses (which we have treated as an exceptional item) revenues fell 31% to €1.6m, despite the inclusion of €780k revenues from the consolidation of Prelado from 15 September 2016. With the group continuing to spend on efforts towards winning other business, normalised EBITDA declined from a €0.79m loss in 2015 to a loss of €1.1m, with a knock-on effect to the normalised bottom line. At the reported level the group ended 2016 with a €207k net profit assisted by the inclusion in income of prior year development costs.

During H117 group revenues trebled year-on-year to €3.1m, helped by the above-mentioned onboarding in the Payback program (adding three major retailers) and the full period of consolidation of revenues from prelado. Based on the implied annual revenues for Peaches/prelado of €2.7m from 15 September 2016, we estimate that revenues from each of these two streams are likely to have contributed approximately half of the reported revenues. During H117 the group gross margin (after stripping out exceptional from other operating income; see note on Exhibit 3) declined from the 95.0% of H116 to 49.9%. This arose principally from the inclusion of low-margin B2C revenues from prelado. Assuming a 5% gross margin for prelado (the region guided by management) gives rise to an estimated implied gross margin from the underlying mPay business of c 89%, down from the 95% gross margin of H116 (see Exhibit 3).

Management has guided for double-digit revenue and earnings growth for full year 2017. For the second half of the year we have assumed a lower level of revenues from the core mPay business (€0.7m after €1.7m in H117) as the H117 figure was boosted by the size and scope of the businesses brought into the Payback scheme. For the sake of our forecast, we have estimated prelado revenues at the same level as our H117 forecast at €1.45m, given that the company is yet to implement the planned expansion strategy. Following on from the trebling in revenues in H117, this translates into a 233% increase in full year 2017 group revenue to €5.2m. We note that this growth rate is substantially above management guidance but reflects the strong trend already evidenced in H117. We have assumed a full year gross margin of 90% in the core mPay business and 5% at prelado, giving rise to a 43% group gross margin and gross profit of €2.3m, translating into an adjusted EBITDA profit of €0.6m after a loss of €1.1m in 2016. Increasing interest expenses are nevertheless expected to push the group into a reported loss at the net level of €0.2m, rising to €0.4m after normalisation.

Looking further out, strong growth and transformation of the prelado business represents a significant upside potential for the earnings profile of the group. Forecasting the mPay business in the short term with its currently high non-recurring fee based streams carries much greater uncertainty, depending as it does on the pace of businesses in the German Payback scheme signing onto the mPay platform and also the attainment of new customers as discussed above. We have conservatively forecast a 5% increase in mPay revenues in 2018 and a 15% increase in prelado revenues, the latter reflecting the expected benefit of geographical expansion. We have kept the gross margins at around the same level (a slight increase from 5.0% to 5.2% for prelado from increasing customer fees) leading to a slight increase in the group normalised EBITDA margin to 11.3%. With lower finance costs arising principally from our assumption of the completion of the planned debt for equity swap in 2017, the result is an emergence into net profit of €44k in 2018 at both the normalised and reported level.

We forecast cash burn this year at €2.3m part funded by a €1.8m share issue in August. Debt at year end is forecast to fall to €2.9m assuming capex levels of €2.7m and the successful completion of a planned debt for equity swap, which is intended to reduce debt levels by €3.5m by end 2017. We note that UMT is considering a share buy-back totalling 0.9m shares (value €1.8m) by May 2018, despite the current relatively tight liquidity situation. Moreover, based on our cash flow forecasts we believe that the company may have to come to the equity market by 2020 for c €1.5m in funding in order to maintain a safe cash cushion.

Net debt fell from €6.9m to €6.7m during the first six months of 2017, with cash reserves at 30 June of €0.3m. Although the company did not publish a mid-year cash flow statement, we believe that cash balances were assisted by €0.2m in cash flow from the P&L (net profit plus D&A) during H117. As of 30 June 2017, UMT Group’s €7.0m in debt all derived from companies with which UMT has a shareholding relationship. Just under half at €3.3m had a maturity of over 12 months.

The group has a substantial weighting in its assets towards intangibles. As of mid-2017 80% of total group assets or €16.7m was comprised of intangible valuations of the assets of the B2C platform Peaches/prelado.

In August 2017 the company made a private placement of 1.22m shares at €1.5 per share, which raised €1.835m. The company also announced in July that it intends to make an issue of 2.33m shares for €1.5 per share, to effect a €3.5m repayment of a debt to SWM Treuhand AG. There has been no follow up statement to indicate that this has been completed, but for modelling purposes we have assumed that it occurs at end 2017. Helped by this we forecast the group ending 2017 with net debt of €2.9m, giving rise to net debt to equity of 17%.

UMT intends to acquire up to 900,000 shares (4.8% of outstanding shares) via stock exchanges by 30 May 2018, which at the current share price represents an outlay of €1.8m.

We see a number of value-driver milestones that we expect to have an impact on UMT’s valuation over the next two to three years:

UMT shares have risen sharply following the news of the MoU with Coinsilium to work together to create payments products using blockchain technology. Helped by this, UMT shares currently trade in line with its mPay small-cap peers on a current year forecast EV/revenue multiple of 7.7x, but a premium of 29% based on FY2 forecast metrics (see Exhibit 4).

Our reverse DCF shows that the current share price can be justified based on our 2021 forecast free cash flows and a WACC of 15%, if the terminal growth rate from that point averages 13.6%. Our calculation incorporates net debt at end-2016 adjusted for subsequent share issues.