Boku’s FY19 trading update confirmed that it met consensus expectations for revenue and EBITDA, albeit aided by recognition of one-off revenues of $3.2m in H2. The Payments business showed strong underlying revenue growth driving a 90% increase in adjusted EBITDA while the Identity business made progress in building out supply outside of the US. We continue to consider the Payments business as the engine for profits while we view the Identity business as a longer-term investment in growth.
Boku expects to report FY19 revenue of $50–50.5m and EBITDA of $10–10.5m, broadly in line with consensus. Excluding the one-off recognition in H2 of $3.2m revenue from the release of a customer provision, the Payments business grew revenues 14% to $40.1m, and EBITDA 90% to $12.0m, with TPV growth of 39% to $5bn. Good progress was made in increasing the addressable market, with the addition of several e-wallet providers in Asia. The Identity business saw pro forma revenue growth of 26% y-o-y with an EBITDA loss ($5m) marginally smaller than we expected. Several non-US carriers agreed to supply Boku’s authentication service and the business expects to sign additional international carriers in FY20.
We have rebased our Payments forecasts to reflect slightly lower than expected TPV in FY19 and slightly lower take rates. Based on FY19 adjusted revenues, we forecast revenue growth of 12% in FY20 and 11% in FY21. In Identity, we factor in revenue growth of 34% in FY20 and 33% in FY21 based off of lower revenues in 2019. As the Payments business has high operational leverage with gross margins of c 95%, the overall impact is to reduce group EBITDA by 40% in FY20 to $10.5m and 43% in FY21 and normalised EPS by 50% and 49% respectively.
At a group level, Boku is trading at a discount to peers on an EV/Sales basis and a premium on an EV/EBITDA and P/E basis. However, investment in the Identity business masks the performance of the Payments business. For example, if we value the group on a sum-of-the-parts basis, with Payments valued in line with peers on FY20 estimates and Identity included at cost, the group would be worth 108p per share. We believe progress in signing up multinational merchants for its silent authentication solution should improve the valuation of the Identity business, while evidence of e-wallets starting to make a material contribution to Payments revenues could be another driver of upside to estimates and the share price.