Cuscal (ASX: CCL) is the leading payments infrastructure provider in Australia, outside of the major banks. Established in 1966 by a group of credit unions, it has grown from its mutual roots into a key player in the payments industry and evolved with banking technology, over time. Crucially, Cuscal is not itself a retail banking company, so it does not compete with its customers, who are companies (often smaller banks or credit unions) that need to access Australia’s payment infrastructure.
Generally speaking, competition is quite effective at driving margins lower when it comes to payment infrastructure, often called “payment rails.”
Payment rails refers to the underlying infrastructure and systems that facilitate the transfer of funds between parties, such as individuals, businesses, and financial institutions. To quote one of Cuscal’s main competitors, Indue:
“The rails for electronic payments in Australia include the card rails (Visa, Mastercard, Amex, eftpos), the rails for direct entry and direct debit payments known as BECS (Bulk Electronic Payment System), the real-time payments rails operated by New Payment Platform Australia (NPP) and the international bank to bank transfer rails (SWIFT).”
The most valuable insight I can give you about Cuscal revealed itself only after significant research, including interviewing an industry expert. While I cannot confirm this categorically, my understanding is that important stakeholders like the Australian Prudential Regulatory Authority, Mastercard and Visa do not want to deal with hundreds of smaller companies that want to access the payment rails in Australia.
Instead, they want to deal with fewer, larger, creditworthy and competent organisations that are a known quantity and can be incentivised to deny fraudsters and money launderers access to the payments network. While Cuscal can’t necessarily grow particularly quickly, there are definite reasons to believe it will have sufficient pricing power to remain profitable over the long term, given it is the strongest independent provider of payment rails connectivity, and the big banks aren’t generally inclined to partner with upstart rivals.
One way to understand Cuscal’s position is as one of three wholesale payment service aggregators (ASL, Cuscal and Indue) that are directly collected to the New Payments Platform (NPP), which will eventually end up taking the lion’s share of the money that is currently processed by batch systems like BPay.
Managing Director, Craig Kennedy, has been in the role for 16 years. Long serving leaders sometimes become personally invested in the long term success of a company, incentivising long term decision making. CFO Sean O’Donoghue has also been in his role for over a decade. However, overall, I would say alignment between the board and shareholders (per market index) is poor, and that is the main reason I’ve decided not to make Cuscal an official recommendation at this point in time.
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Cuscal Financials
The pro forma prospectus numbers are in no way the perfect guide to understanding the sustainable earnings power of Cuscal. I would be more focused on statutory profit for valuation purposes, but I still think the pro forma numbers are useful for monitoring the trajectory of the business.
One important driver of profit is net interest income, which is generated from regulatory capital held by the RBA and the spread on funds Cuscal holds clients as part of its role in facilitating payments activities. The prospectus said net interest income was “not a major driver of operations.” I don’t exactly know what that means, but I’m not sure I agree, because the net interest income increased drastically from FY 2022 to FY 2023, as you can see below. In any event, the current behaviour of the US president is casting some doubt over how much further central banks will cut interest rates, so I wouldn’t want to be scared away purely because of that risk.
Still, it must be said that lower interest rates will lead to lower profits, all else being equal; and this is somewhat of a risk to profits.
Is The Cuscal Share Price Attractive?
I believe the last couple of years show that Cuscal should be able to make a sustainable profit of around $25m or more, assuming interest rates stay around current levels. Indeed, the pro forma profit for FY 2025 is expected by analysts to be a whopping $36.6m, and even the far more conservative statutory result is expected by analysts to be over $27m. I can’t confidently predict Cuscal’s growth, but I do think it should get some overall system growth (as Australia grows), plus a little organic market share growth, over time.
Cuscal has around 192 million shares on issue, so at the current share price of $2.45, the business is valued at about $470m. Assuming my profit estimate of $25 million is correct, that is a P/E ratio of about 19. For that price, I should be getting top line growth of around 5% or more, and with any cost discipline at all, profit growth should be a bit higher. In that scenario, profit might reach around $35m in 5 years. At that stage, this “clip the ticket” style company would be trading on just 13x earnings, at the current price.
In November 2024, Cuscal debuted on the ASX through a $337 million IPO, with Ord Minnett, Bank of America, Bell Potter and MST Financial serving as joint lead managers. The offering included a massive sell-down by existing shareholders worth over $290m, and a raising of $40 million to bolster the balance sheet. At listing, just under 30% of the shares were escrowed until the day after the release of the FY 2025 results.
That means, in a few months, a whole bunch of Cuscal shares might come onto the market. My gut feeling is that might be the best time to buy.
Before then, I think the prospects are sufficient that I could also justify a nibble at the current Cuscal share price of $2.45, or even up to around $2.50. However, I note on Monday the Cuscal share price fell as low as $2.21. I strongly considered buying around $2.25 all day, on Monday.
Since I hadn’t so much as mentioned the prospect to readers, I decided to hold off buying Cuscal and publish an article about the stock first. While I do like the current price, my main interest in Cuscal would be to try to buy shares during a panic day.
For example, the latest Trump announcement simply delayed tariffs for 90 days, and Winnie the Pooh doesn’t take orders from Ooopa Loompas, so my base case is that markets continue to take us on a bumpy ride in 2025.
At the end of the day, Cuscal is an Australian company providing something that is vaguely akin to infrastructure. That makes it a fairly defensive business, even if the poor board alignment, upcoming escrow release, and recency of its IPO do add some layers of risk that concern me.
Overall, I consider it an attractive speculative opportunity, and I am strongly considering adding it to my portfolio in the future, especially if we get another panic day.
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Disclosure: the author does not own shares in CCL and will not trade CCL shares for 2 days following this article. This article is not intended to form the basis of an investment decision. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544)..
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