App developers put their faith in church donations and it paid off
Pushpay Holdings (PPH) is an innovative and exciting business with strong growth, great operating cashflows and growing margins. The chart is turning up and the valuation looks attractive. We're confident it's going to at least meet our earnings and growth targets in the medium term.
Pushpay. Sounds like a Buy Now, Pay Later company right? Well, it's far from it. Pushpay is in the payments facilitation sector, and like BNPL's it does connect consumers and organisations making it easier for both parties to get what they want out of a transaction. But in Pushpay's case, the consumers are members of various faith-based congregations and other not-for-profits, and the organisations are seeking donations instead of instalment payments for new dresses and big screen TVs.
The COVID pandemic has forever changed the way faith-based organisations raise money from donors. Out is unhygienic cash and coins, and in is a secure digital application. Enter Pushpay. It's the clear leader in the industry with over 11,000 organisations on its customer list. It handled an impressive $9.2 billion dollars of transactions in FY21, and derived just over $41 million in net profits from the fees it charged for its software and services.
Another key stat we really like about Pushpay is the company's strong and growing operating cashflows. Operating cash flow is like the lifeblood of a business in financial terms. When a company makes a sale, the value of the sale is instantly recognised as revenue which contributes to the company's reported profits. But, what's actually more important, is the timing of when the cash from this sale hits the company's bank account.
Investors should check that the cash coming into a business from day-to-day operations is greater than the cash leaving it. If not, then the company might have to tap other sources of cash, like financing and equity, to pay the bills. Additionally, dividends are best paid from free cash instead of either of those alternatives. Finally, positive operating cash flow empowers a company to be self-sustaining in terms of investing in its future growth. Pushpay reported $57 million in operating cashflow for FY21, a massive 147% increase on FY20.
The other aspect of Pushpay's business we really like is its software as a service, or SaaS model. SaaS is a model that provides a service, in this case Pushpay's collection application and accompanying donor management software, as a periodically renewable service. The cost of renewing is usually relatively small compared to buying the software under a lifetime license with an upfront fee. But, the small ongoing expense usually means a low churn rate in the client base, and in the long run, overall sales are usually significantly greater compared to an upfront fee-based model. SaaS model businesses also tend to have excellent profit margins. As Pushpay's R&D phase is mostly behind it, the cost to add another subscriber is very little, it's really just a numbers game from here. Pushpay's margin in FY21 was 68%, up from 65% in FY20.
Pushpay's revenue growth and net profit after tax (NPAT) trends look impressive, with our projections suggesting the strong track record of growth in each is set to continue through to at least FY24. The valuation of 32 times current earnings (i.e., PE ratio or PER) is quite reasonable, especially when one considers an average growth rate in the low 20 per cent range for the next three financial years. This brings Pushpay's PER down quickly to an attractive 19 times by FY24.
The price-to-earnings growth ratio (PEG) is a key measure of whether we are getting good value for a company's earnings growth. We calculate this by dividing a company's PER by its earnings growth rate. A value of one or less is typically considered attractive. Pushpay has an impressive average PEG of 0.77 over the next three financial years, so it appears we're not overpaying for the growth in this business.
Return on equity (ROE) is a measure of business efficiency, and it is usually high for companies with a SaaS model. But, with a ROE of 49% this financial year, rising to 78% in FY24, Pushpay's return on equity is outstanding.
The major brokers currently rate Pushpay a buy, with an average price target of $2.15. Based on our earnings and growth estimates for Pushpay, our fair value target is a couple of pips better at $2.17, which allows a comfortable upside buffer compared to current prices. We think execution risk is low on this one, and adding in the attractive valuation and chart trend, we rate Pushpay Holdings as a low-risk buy.
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