With profits set to hit $300m, is Paysafe Group plc oversold?

Roland Head asks if Paysafe Group plc (LON:PAYS) shares are too cheap after today’s new guidance from the firm.

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Payment services provider Paysafe Group (LSE: PAYS) said this morning that it expects 2016 results to be “ahead of market expectations”. The group’s revenue is set to “exceed $1 billion”, while adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) are expected to reach $300m for the first time.

The bullish tone of this morning’s update was probably also a response to December’s short-selling attack, which wiped 16% off Paysafe’s share price in one day.

Doubts about potential

Paysafe’s only response to the allegations made in December was that the information in the report, issued by an organisation called Spotlight Research, was either “factually inaccurate” or had “been previously disclosed”.

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The group’s share price has since recovered, and is now trading about 5% above the level reached before December’s bear attack. One reason for this is that the group announced a £100m share buyback in the wake of the attack.

In today’s update, Paysafe said that the buyback programme would not compromise the group’s ability to pursue “bold M&A opportunities”. Payment processing is a business that responds well to increased scale. I wouldn’t be surprised to see Paysafe make another major acquisition, following last year’s deal to buy US peer Skrill.

Despite this optimistic tone, Paysafe’s share price hasn’t responded to today’s news. This suggests to me that investors may still have some doubts about the longer-term durability and growth potential of the group’s profits.

The outlook for 2017

Paysafe’s statement today included a summary of guidance for 2017. Management expects “low double-digit organic revenue growth” this year. The group’s adjusted EBITDA profit margins is expected to be flat or higher.

This guidance broadly corresponds to the latest consensus forecasts for the group, which indicate that revenue of about $1.1bn and earnings of $0.46 per share are expected in 2017. These figures put Paysafe on a 2017 forecast P/E of 10.4, which seems undemanding.

Despite this, I’m not tempted to invest. This company has never paid a dividend, and I’m not sure I really understand the business well enough to take a view on its future. I believe there are better options elsewhere.

Cheap + a high yield

One financial stock that I have invested in over the last year is insurance group Aviva (LSE: AV).

This may seem a conservative choice, but the group’s operating profit rose by 13% to £1,325m during the first half of last year, while cash generation rose by 51.9% to £752m.

Consensus forecasts for Aviva’s 2016 and 2017 earnings have also risen over the last three months. This suggests to me that market sentiment towards the firm is finally starting to recover after the shares’ Brexit slump.

Although the shares have risen strongly in recent months, I think Aviva still offers significant upside potential. The shares currently trade on a 2017 forecast P/E of 9.0, and offer a prospective yield of 5.3%.

In my view that’s an attractive package from a company that has delivered a steady turnaround over the last few years. I’ve no intention of selling my shares, and would be happy to buy more at current levels.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Aviva. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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