As 2022 kicks off, I’m on the hunt for the best UK companies to add to my Stocks & Shares ISA. But sometimes, the best investment could already be in my portfolio. And when looking at PayPoint (LSE:PAY), I see some encouraging signs of long-term growth potential. Let’s take a closer look.
A rising financial payments company
PayPoint provides payment processing solutions to merchants across the UK. Store owners can accept both cash and card payments from customers using its terminals. All transactions are recorded and uploaded to a cloud platform that enables merchants to better manage inventories and analyse crucial sales data.
Beyond this core offering, the group also has a vast network of ATMs and a popular delivery drop-off service. So, what’s been going on with its share price?
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As the revenue is generated by charging small transaction fees on each sale, the pandemic has proven to be quite disastrous for its income stream. The retail sector saw a drastic drop in footfall during the height of the pandemic, which has yet to fully recover. As such, the shares of the UK payment processor fell drastically at the start of 2020 and have yet to return to pre-pandemic levels.
Can the share price of this UK stock make a comeback?
Despite what the share price indicates, 2021 has been quite a transformative year for this UK business. For a long time, there has been growing concern surrounding the group’s over-reliance on processing cash transactions. With many consumers opting to use contactless payments courtesy of the pandemic, the fall in cash payment volumes has impacted PayPoint’s bottom line.
But with the rising popularity of digital payment solutions, management has begun modernising operations and moving away from cash transactions. It started by selling off its Romanian business in April for a £30m profit. Using the proceeds, the company went on a mini-shopping spree and acquired RSM 2000 for £5.9m. The goal is to incorporate its mobile payment technology into PayPoint’s POS devices.
With its legacy products slowly being phased out and the retail environment improving, revenue for the first half of its 2021 fiscal year came in 15.6% higher than a year ago. And thanks to improving margins, pre-tax profits rose by 30%, excluding the proceeds from its Romanian disposal.
Time to buy?
As with any investment, there are always risks to consider. PayPoint is by no means the only company operating in this space. And its years of over-reliance on cash transaction has placed it somewhat behind the competition. Management has begun rectifying this problem. But whether the new strategy is enough to get the company back to pre-pandemic levels, only time will tell.
Personally, I’m optimistic. The recent actions taken seem to be prudent. Seeing a renewed focus on digital payment solutions, as well as increased interest in the e-commerce space, makes me believe these UK shares still have plenty of long-term growth potential. Combining this with a recently increased 5% dividend yield makes me tempted to buy more PayPoint shares today.
