Safecharge 3Rd January 2018 Place Your Bet on This Online PSP! TMT Fair Value 354P (Price 296.00P) BUY Coverage Initiated

INDEPENDENT RESEARCH SafeCharge 3rd January 2018 Place your bet on this online PSP! TMT Fair Value 354p (price 296.00p) BUY Coverage initiated

Price and data as at close of 29th Dec. 2017 We are initiating coverage of SafeCharge with a Buy recommendation Bloomberg SCH LN and a FV of 354p. We are playing the end of the group's transition Reuters SCHS.L 12-month High / Low (p) 315.0 / 197.5 period with the overhaul of its customer portfolio and the start of a Market capitalisation (GBPm) 454 phase of expansion and diversification beyond gambling and the search Enterprise Value (BG estimates GBPm) 367 for acquisitions. We estimate that with fewer risky merchants in its Avg. 6m daily volume ('000 shares) 133.9 customer base, a change in size and more liquidity, the group should Free Float 29.5% 3y EPS CAGR 4.4% enter the radar screens of more investors. We view SafeCharge as a Gearing (12/16) -72% fledgling Wirecard. The share offers upside potential of 20%. Dividend yields (12/17e) 4.09%

 SafeCharge is a UK software company active in the payments field YE December 12/17e 12/18e 12/19e Revenue (USDm) 111.12 124.12 139.01 (FinTech). It is an online PSP, historically present in the gambling EBITA USDm) 28.6 31.4 35.3 segment (uniquely for regulated online betting and gambling) and forex Op.Margin (%) 25.8 25.3 25.4 trading (currency purchases via Internet). The group's main activities Diluted EPS (p) 0.18 0.19 0.21 EV/Sales 4.47x 4.00x 3.57x today are processing (cashier and gateway) and acquiring (after selling EV/EBITDA 15.9x 13.9x 12.3x third-party acquiring capacity it is now ramping up its own offer). Sales EV/EBITA 17.4x 15.8x 14.1x are fairly-well balanced between the three business units: sports & P/E 21.9x 20.8x 18.7x ROCE 59.7 61.4 64.4 leisure (online gambling), financial services (forex), and others.

320.5  The group is reaching the end of the process to clean out its customer 300.5 portfolio (favouring less risky Tier ones and hence better quality 280.5 customers) and is continuing its diversification outside gambling (airline 260.5 companies, online market places, automatic food/drink dispensers etc.). 240.5 Like many payments players, it would like to increase the volume of 220.5 transactions it handles (the business is fixed-cost, meaning that size 200.5 counts) both via organic growth and of course, acquisitions. We expect the 180.5 15/06/16 15/09/16 15/12/16 15/03/17 15/06/17 15/09/17 15/12/17 group to look at European PSPs as a priority, even though we are not SAFECHARGE INTL.GROUP SXX EUROPE 600 ruling out opportunist purchases (on our estimates, it could buy EBITDA of USD10m maximum, at a multiple of 25x, or ND/EBITDA of 3x). In terms of acquisitions, the share could attract more interest (size effect, possible dilution of Teddy Sagi in the capital and more liquidity).

 In this buoyant sector, investors are looking for new ideas since the bids underway on PaySafe, Worldpay and Nets. SafeCharge therefore offers a buy opportunity (recurring sales, very profitable growth, high FCF and net cash accounting for 20% of it capitalisation). Analyst: Sector Analyst Team: Richard-Maxime Beaudoux Thomas Coudry 33(0) 1.56.68.75.61 Gregory Ramirez [email protected] Dorian Terral Frédéric Yoboué

r r SafeCharge

Simplified Profit & Loss Account (USDm) 2014 2015 2016 2017e 2018e 2019e Revenues 76.9 99.8 104.1 111.1 124.1 139.0 Change (%) 78.3% 29.7% 4.3% 6.7% 11.7% 12.0% lfl change (%) ns 20.4% 11.0% 6.0% 11.4% 12.0% EBITDA 19.0 25.4 30.3 31.3 35.6 40.2 EBIT 17.8 22.2 26.1 26.9 30.0 33.9 Adjusted EBIT 22.1 26.6 28.5 28.6 31.4 35.3 Change (%) ns 20.4% 7.3% 0.3% 9.9% 12.2% Financial results (1.5) 0.57 1.9 1.5 0.64 0.58 Pre-Tax profits 16.3 22.7 28.0 28.4 30.7 34.5 Tax (1.9) 0.1 (1.5) (2.0) (2.5) (2.9) Net profit 14.4 22.9 26.6 27.1 28.9 32.3 Restated net profit 18.2 27.3 28.8 28.0 29.5 32.8 Change (%) ns 49.9% 5.6% (2.8%) 5.4% 11.2% Cash Flow Statement (USDm) Cash flow 16.3 22.7 28.0 30.8 33.8 37.8 Change in working capital 1.1 2.0 (3.0) (0.2) (0.4) (0.5) Capex, net (4.1) (7.1) (6.6) (8.3) (8.7) (9.7) Financial investments, net 0.0 (33.5) 0.0 0.0 0.0 0.0 Dividends (4.4) (14.6) (21.2) (25.2) (25.1) (28.1) Other 2.6 (1.8) 9.5 10.0 1.0 1.0 Net debt (146.5) (114.9) (115.4) (116.9) (117.5) (118.0) Free Cash flow 13.3 17.6 18.5 22.2 24.7 27.6 Balance Sheet (USDm) Net fixed assets 7.8 52.5 44.3 43.9 46.2 49.0 Company description Investments 0.0 0.0 0.0 0.0 0.0 0.0 SafeCharge is UK company which is Deferred tax assets 0.0 0.0 0.0 0.0 0.0 0.0 part of the European independent Cash & equivalents 146.5 114.9 115.4 164.2 164.8 165.3 PSPs. It provides global omni-channel current assets 5.8 12.4 10.3 11.0 12.3 13.8 Other assets 1.1 2.4 2.9 3.1 3.5 3.9 payments services from card acquiring Total assets 161.1 182 173 222 227 232 to payment processing and checkout, L & ST Debt 0.0 0.0 0.0 47.3 47.3 47.3 all underpinned by advanced risk Provisions 0.1 0.2 0.3 0.3 0.3 0.3 management solutions. This fully Deffered tax liabilities 0.0 0.0 0.0 0.0 0.0 0.0 proprietary payment platform Others liabilities 9.8 14.6 12.2 13.0 14.4 16.1 Shareholders' equity 151.2 167.3 160.5 161.7 164.8 168.2 connects directly to all major payment Total Liabilities 161.1 182.2 172.9 222.3 226.8 232.0 card schemes including Visa, Capital employed 4.7 52.5 45.1 44.8 47.3 50.3 MasterCard, American Express and Ratios China Union Pay as well as over 150 Operating margin 28.68 26.61 27.38 25.75 25.33 25.38 local payment methods. Tax rate 11.41 -0.41 6.92 7.00 8.00 8.50 Net margin 18.76 22.90 25.50 23.80 22.74 22.71 ROE (after tax) 9.55 13.66 16.55 16.75 17.54 19.21 ROCE (after tax) 429 50.88 60.09 59.68 61.36 64.41 Gearing (96.90) (68.65) (71.88) (72.31) (71.29) (70.11) Pay out ratio 78.66 76.40 95.08 92.80 97.28 97.40 Number of shares, diluted 139,158 154,515 153,296 153,296 153,296 153,296 Data per Share (pence) EPS 0.10 0.15 0.17 0.18 0.19 0.21 Restated EPS 0.13 0.18 0.19 0.18 0.19 0.21 % change ns 35.0% 6.5% (2.8%) 5.4% 11.2% BVPS 1.09 1.08 1.05 1.06 1.08 1.11 Operating cash flows 0.12 0.15 0.18 0.20 0.22 0.25 FCF 0.10 0.11 0.12 0.14 0.16 0.18 Net dividend 0.08 0.11 0.16 0.16 0.18 0.21

Source: Company Data; Bryan, Garnier & Co ests.

2 SafeCharge

Table of contents

1. Investment Case ...... 4 2. An undervalued online PSP ...... 5 2.1. DCF: 372p ...... 5 2.2. Peer comparison: 336p ...... 7 3. SafeCharge: a pure online player ...... 9 3.1. From a PlayTech subsidiary to an online PSP ...... 9 3.1.1. Origins of the group ...... 9 3.1.2. Development of the offer and sector exposure ...... 9 3.1.3. Flotation and changes in shareholding structure ...... 10 3.2. Understanding SafeCharge today ...... 11 3.2.1. General presentation of the group ...... 11 3.2.2. Description of main businesses ...... 13 3.2.3. Example of an online card transaction ...... 15 4. SafeCharge: a Wirecard in the making ...... 16 4.1. Solid fundamentals ...... 16 4.1.1. Reporting similar to the majority of European PSPs ...... 16 4.1.2. Among the best fundamentals in the sector ...... 17 4.1.3. 2017-2020e prospects ...... 17 4.2. What themes can we play via SafeCharge? ...... 24 4.2.1. Growth in electronic payments ...... 24 4.2.2. Promising outlook for e-commerce ...... 25 4.2.3. Promising outlook in m-commerce ...... 26 4.2.4. The rising need for security, especially over the internet ...... 26 4.2.5. Appetite for omnichannel offers ...... 27 4.2.6. Outsourcing of banking payment activities ...... 28 4.2.7. Further consolidation in the sector ...... 28 5. Factors to watch...... 30 5.1. Change in degree of customer risk...... 30 5.2. Change in key shareholder's stake ...... 30 5.3. Obtaining an acquiring licence in the UK ...... 30 6. Appendix ...... 31 Bryan Garnier stock rating system...... 35

SafeCharge

1. Investment Case

The reason for writing now 1) SafeCharge fits perfectly with the payments/security theme (disappearance of cash/checks and ramp- up of e-commerce), 2) as a processor and online acquirer it offers another alternative to the European PSPs we already cover, 3) the group is reaching the end of the process to clean out its customer portfolio (the base effect should return to normal towards March 2018), and is continuing its diversification beyond online gambling, 4) the group intends to amortise its platform by ramping-up its own acquiring, 5) it is looking for one or more acquisitions that could help it change dimension.

Valuation The group's positioning (pure online player) and its excellent fundamentals (recurring and rising revenues, high EBITDA margin and strong FCF generation) make it a fledgling Wirecard. After a transition period, we estimate that the share could enter the radar screens of more investors. The current valuation does not yet price in this scenario, with EV/EBITDA of just 13.9x. At our FV of 354p, SafeCharge would trade on a multiple of 17.3x in 2018e (the very minimum for an online PSP).

Catalysts 1) The rise in the volume of transactions processed (disappearance of cash/checks in favour of electronic payments, regulatory changes, innovations, contract gains etc.), 2) increasing demand for

digital security, 3) growth of e-commerce in the sales mix, 4) acquisitions and partnerships, 5) the increase in the share's liquidity (for example via a dilution of Teddy Sagi in the capital), 6) ongoing consolidation in the sector.

Difference from consensus We advise investors to look at EBITDA rather than underlying EBITDA, which is not taken into account by the consensus. We consider that underlying EBITDA excludes a number of negative factors that should be adjusted for only at the EBIT level (to provide underlying EBIT), as for the majority of other European PSPs. Finally, our underlying EBIT is calculated after stock options. This is how we analyse the PSPs we cover.

Risks to our investment case 1) The group does not manage to obtain an acquiring licence in the UK post-Brexit (it operated Europe from Cyprus), 2) default by one of its major customers since the group is an acquirer 3) a failure in its strategy to direct more volumes towards its acquiring platform, 4) stricter regulations in one of its verticals, 5) a disruptive technology in which SafeCharge is not positioned 6) execution risk on a sizeable acquisition.

SafeCharge

2. An undervalued online PSP The share price rose 43.7% over 2017 and has gained 82.7% since it was floated in April 2014. We advise investors to play beneficial momentum on the SafeCharge share. The group's status as a pure player in online payments, the segment boasting the highest profitable growth, is not yet reflected in the share price. We estimate that the market's expectations for FY 2017 should be reached and that the group could make acquisitions enabling it to increase its EBITDA margin. We are initiating coverage of SafeCharge with a Buy recommendation and a FV of 354p (upside potential of +20%). Note that the group reports its accounts in USD but is listed in GBX (p).

Fig. 1: Overview of various valuation methods (price on 29/12/17) p Valuation/share Potential relative to last price DCF 372 26% Peer comparison 336 13% Equi-weighted average 354 20% Source: Bryan, Garnier & Co ests.

2.1. DCF: 372p Our DCF valuation is based on the following assumptions:

 A CAGR in 2018/2027e sales of 9.4% lfl (+11.9% over 2018/2023e and +7.0% over 2024/2027e), which is a cautious scenario in view of prospective growth in e-commerce.

 Average EBITDA margin of 29.7% over 2018/2027e, which is fairly stable over time. With no acquisitions, we estimate that pressure on gross margin (strategy of increasing coverage of larger- sized merchants where commission fees are lower, and management of the portfolio in favour of clients that are less risky and hence less profitable), is set to be offset by the rise in transaction volumes, changes in the mix in favour of the Collect offer, the addition of new value-added services, and above all the reduction in operating expenses.

 A change in WCR in line with sales growth.

 Net investments of 6.4% of sales on average from 2018e to 2027e (namely excluding new acquisitions), with a level of normative organic capex of 6.5% as of 2019e. We forecast capex of 7.5% of sales over 2017e (6.3% in 2016), namely a peak because of purchase of servers and change in offices. Note that some of SafeCharge's R&D is capitalised in the balance sheet and then amortised over a certain duration (five years). This practice is usual in the sector. All of these factors tend to boost profitability but weigh on FCF generation. As for Wirecard, we model a degree of value destruction in SafeCharge's DCF (structurally positive gap between capex and depreciation & amortization).

 A very low corporate tax rate since the company is registered in Guernsey (where the tax rate is 7%). We expect a group's tax rate of 7.0% in 2017e (5.3% in 2016) and this should gradually rise to 9.0% (the group is set to generate more profits in Singapore and the US, where it is opening offices to facilitate payments for European clients).

 A discount rate of 8.81%, with ß at about 1.0x (as the other PSPs under our coverage), a risk premium of 7.00% and a risk-free rate of 1.6% (data used by the Bryan, Garnier & Co research team).

 A growth rate to infinity of 3% since the payments market is growing strongly and steadily, especially in online payment services (SafeCharge's core business: 98% of its revenue).

SafeCharge

Fig. 2: Calculation of discount rate

Inputs % Risk free rate 1.60 Market risk premium 7.00 ß (x) 1.03 Return on capital 8.81 Source: Bryan, Garnier & Co ests.

Since the group has a net cash position, its discount rate is its cost of equity. Note also that its net cash represents around 20% of its market capitalisation.

Fig. 3: Discounted cash-flow model

USDm 2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e 2026e 2027e

Sales 124.1 139.0 155.7 174.4 195.3 212.9 229.9 246.0 260.8 273.8 Y/Y change 11.7% 12.0% 12.0% 12.0% 12.0% 9.0% 8.0% 7.0% 6.0% 5.0% EBITDA 35.6 40.2 45.2 51.3 57.7 63.9 67.8 71.3 74.3 76.7 Margin 28.7% 28.9% 29.0% 29.4% 29.6% 30.4% 30.3% 30.2% 30.1% 30.0% Underlying EBIT 31.4 35.3 39.5 44.9 50.3 55.6 58.6 61.3 63.4 64.9 Margin 25.3% 25.4% 25.4% 25.7% 25.8% 26.1% 25.5% 24.9% 24.3% 23.7% Tax rate 8.0% 8.5% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% 9.0% Underlying EBIT after tax 28.9 32.3 36.0 40.8 45.8 49.4 52.3 54.8 57.0 58.6 + Depreciation & amortization 5.6 6.3 7.0 7.8 8.8 9.6 10.3 11.1 11.7 12.3 Cash flow from operations 34.5 38.5 43.0 48.7 54.6 59.0 62.6 65.9 68.7 70.9 - Net financial & tangible investments -7.7 -8.7 -9.9 -11.2 -12.7 -13.8 -14.9 -16.0 -16.9 -17.8 - Change in WCR -0.4 -0.5 -0.6 -0.6 -0.7 -0.6 -0.6 -0.5 -0.5 -0.4 Free cash flow 26.4 29.3 32.5 36.8 41.2 44.6 47.2 49.4 51.3 52.7 Discounted free cash flows 24.2 24.7 25.2 26.3 27.0 26.9 26.1 25.2 24.0 22.6 Sum of discounted FCF 252.3 + Discounted terminal value 401.5 + Net cash 2017e 116.9 - Minority interests, 2017e -0.6 + Financial fixed assets 2017e 0 Valuation 771.3 Number of shares fully diluted 153.3 Value per share (USD) 5.0 Source: Bryan, Garnier & Co ests.

Fig. 4: Sensitivity to discount rate and growth rate to infinity

USD WACC Growth rate to infinity 7.81% 8.31% 8.81% 9.31% 9.81% 2.50% 5.3 5.0 4.6 4.3 4.1

2.75% 5.6 5.2 4.8 4.5 4.2

3.00% 6.0 5.5 5.0 4.7 4.4

3.25% 6.4 5.8 5.3 4.9 4.5

3.50% 6.9 6.2 5.6 5.1 4.7

Source: Bryan, Garnier & Co ests.

Our DCF valuation puts the share price at 372p (upside potential of 26%).

SafeCharge

2.2. Peer comparison: 336p SafeCharge's most direct rivals are players such as Worldpay, BarclayCard, Wirecard, BrainTree (belonging to PayPal) and Adyen among others. While the group has no peer with a profile exactly the same as its own (in terms of businesses, verticals and size), the PSPs that seem to resemble it the most are Paysafe and Wirecard. We have taken into account 2018e multiples for the various players, either exposed to online payment services, or with a similar business model.

Our sample of peers covers:  European payment services providers (PSPs: these help merchants facilitate electronic payments) that have all or some of their business online. These are Ingenico Group, Nets, PayPoint, Paysafe, Wirecard, Worldpay and Worldline. They are all positioned in at least one of the payment processing and card acquisition businesses.

 PayPal, which is a virtually equivalent service to SafeCharge's core business (online payment gateway), even if it is currently very focused on the exchange of small amounts of money between individuals.

 Card networks, such as Visa and MasterCard (which have similar business models to SafeCharge, namely commission fees per transaction).

Fig. 5: SafeCharge peer multiples (price on 29/12/17) x EV/Sales 2017e EV/Sales 2018e EV/EBITDA 2017e EV/EBITDA 2018e P/E 2017e P/E 2018e

Ingenico Group 2.8 2.2 13.4 10.4 19.1 16.1

Nets 3.6 3.4 14.9 12.6 21.5 18.3

PayPoint 2.7 4.2 9.5 9.7 13.5 14.8

Paysafe 3.3 2.7 11.6 10.6 16.3 14.8

Wirecard 7.8 6.1 26.5 20.7 41.0 32.2

Worldline 3.2 2.8 15.5 12.8 32.9 27.8

Worldpay 2.0 1.8 19.6 15.5 31.9 24.9

PayPal 6.4 5.4 24.5 20.4 39.3 32.5

MasterCard 11.5 10.8 16.4 15.1 32.8 27.8

Visa 12.6 11.2 21.6 19.0 33.1 28.0

Average 5.6 5.1 17.3 14.7 28.1 23.7

SafeCharge 4.5 4.0 15.9 13.9 21.9 20.8

Premium(+)/discount(-) -20% -21% -8% -5% -22% -12%

Sources: Thomson Reuters; Bryan, Garnier & Co est.

On a 12 month forward YoY basis (2018e), SafeCharge shows an average discount of 13% to its peers. Applying EV/sales, EV/EBITDA and P/E 2018e multiples, we value the SafeCharge share at 336p (+13%).

In coming years, we believe that SafeCharge: 1) will be larger in size (organically or via acquisitions) and that its margin will therefore rise automatically (leverage effect on transaction volumes processed by its platform). The PSPs have a business in which size counts due to their essentially fixed-cost structure, hence the importance of M&A. SafeCharge is looking at targets to strengthen its positions in its processing and acquiring businesses in Europe as a priority.

SafeCharge

2) will increase its mix in favour of acquiring, which should automatically increase its multiples (the business is not seen as a commodity, contrary to processing, and carries higher commission fees). 3) will see its beta fall, since it is continuing to diversify in sector terms. Gambling (entirely regulated) only represented 33% of the group's sales in 2016, whereas the group was born into this business 11 years ago. Note that the equities market tends to apply discounts to companies exposed to gambling (although SafeCharge's business is fully regulated), whereas the private market does not in general.

4) will change fast (culture very focused on innovation and the group's technologies are proprietary) and should benefit from fresh opportunities in coming years (e-commerce, mobile payments, PSD2, instant payments, European regulations on data protection etc.).

5) will make the most of the fact that banks will have to increasingly leave the payments business and entrust this to specialists, i.e. payment services providers (PSPs).

We are initiating coverage of SafeCharge with a Buy recommendation and a FV of 354p. Note that on our FV, the share price would be trading on 2018e multiples of: 5.0x EV/sales, 17.3x EV/EBITDA and 24.9x P/E.

SafeCharge

3. SafeCharge: a pure online player 3.1. From a PlayTech subsidiary to an online PSP

3.1.1. Origins of the group SafeCharge was created 11 years ago in Israel. Teddy Sagi (founder of Playtech, a supplier of software platforms for online gambling operators) provided both an asset and financial support to David Avgi CEO) to launch the company. Indeed, the group originated in a processing/risk management solution for a payments company belonging to Teddy Sagi. The activity was spun off in 2006 to create a fully-fledged company. The aim was to meet the need to secure online payment systems, which focus around 60% of global fraud in value terms (around 50% in Europe).

3.1.2. Development of the offer and sector exposure The group's business started with the supply of payments acceptation (processing) for the online betting and gambling industry. It was mostly built on the back of its connection with Playtech. Indeed, Playtech is the biggest supplier of gambling/betting software in the world and SafeCharge helps the same customers to collect their payments thanks to its online settlement system and its gateway (pre-installed on PlayTech's platforms). Given the strength of this technical integration between the two groups, it was often natural for customers to turn to SafeCharge for payments solutions (implying a very attractive customer acquisition cost for SafeCharge). Interest in the betting sector is two-fold since a PSP takes a commission fee on both the inflow (the bet) and the outflow (the payment and/or reinvestment of the gain). SafeCharge then expanded and ended up becoming one of the European specialists in payments and risk management for e-merchants. Its platform is connected to more than 15 acquiring banks, more than 150 suppliers of alternative payment means (in direct interaction with 15, and 135 through an aggregator), and accepts more than 100 different currencies. Note that all of the group's technologies are proprietary (to avoid breakdowns/failure points).

Since its creation, SafeCharge has created and developed relations with a large range of financial institutions, especially acquirers and suppliers of alternative payment means (digital portfolios, real-time bank transfers, mobile payments etc.). It therefore quite naturally ended up extending its services in the payments value chain to become a genuine online PSP, offering processing as well as acquiring. It then started to diversify as of 2015, to be less dependent on online gambling. This was partly possible, thanks to the acquisition of CreditGuard in early 2015 (sales of USD2.9m and EBITDA of USD0.5m) for USD8.4m. Indeed, this Israeli company not only provided it a white label gateway and tools to manage risk and fight fraud, but also provided new verticals (travel, insurance, telecoms and public sector, and played an important role in enabling it to win its first airline company El Al in mid- 2016). Note also that the group started an activity for binary option trading suppliers in 2013 but ended up closing it three years later. It was obliged to take account of stricter regulatory measures in this business and therefore preferred to cut off a significant source of profits (since customers had become risky). The clean-out of the client portfolio (to avoid reputation issues) was also encouraged by Visa Europe's stricter chargeback policy (recoverable amount) since its takeover by Visa Inc (chargebacks/transactions ratio down from <2% to < 1%) or the same level as that of MasterCard.

Like the majority of payment services providers, SafeCharge has no bank licence (however, it has an estimated stake of 2-3% in Saxo Payments, a subsidiary of Saxo Bank). We estimate that the ideal strategy for this type of player is to move towards a banking licence while keeping a distance in order to avoid overly strict rules (equity ratios etc.). SafeCharge Limited (100% subsidiary of the group) is an

SafeCharge

entity approved by the Central Bank of Cyprus as an electronic payments establishment (e-money licence for the acquiring business). It therefore supplies the various EU countries from Cyprus as a main member of MasterCard and Visa (received in 2013 and 2014 respectively). It also works directly with other payment schemes such as American Express, China Union Pay and WeChat Pay (SafeCharge is also the first group in the UK to integrate WeChat Pay in stores) and Alipay.

Fig. 6: SafeCharge positioning relative to various PSPs in Europe

Issuing Services to Automated Credit/debit Services to Acquiring Commercial Acceptance Services to Payment Bank

transaction cardholders clearing transfers merchants transaction acquiring POS / new digital scheme

processing and issuers house processing ecommerce businesses SafeCharge ○ ● ● ● ● First Data ● ● ● ● ● ● Global Payments ○ ● ○ ● ● Ingenico + Bambora ● ● ● ● NETS ● ● ● ● ● ● ● ○ ○ ● Six Payment Serv. ● ● ● ○ ● ○ ● ○ TSYS ● ● ○ Wirecard ○ ○ ● ● ● ● ● Worldline + Equens ● ● ● ● ● ● ● ● ● Worldpay ● ● ● ● ● Core offering ○ Non-core offering Source: Bryan, Garnier & Co.

3.1.3. Flotation and changes in shareholding structure SafeCharge was listed on the Alternative Investment Market (AIM) of the London Stock Exchange in April 2014. The flotation took place at 162p per share (market capitalisation of GBP242.6m, or around USD400m) enabling the group to raise GBP75.75m (USD125m). The money raised was destined to step up the group's growth strategy in both organic terms and via acquisitions. The Board also considered that an inscription on the AIM could increase the group's appeal with new customers. Before the operation, Teddy Sagi owned 97.1% of SafeCharge shares (via Northernstar Investments Ltd) while David Avgi owned the rest. Post-IPO, free float stood at around 31% (~30% today) and the stakes of Messrs Sagi and Avgi at 66% and 2% respectively (~68% and ~2% today).

Fig. 7: Shareholding structure pre and post IPO and on 15/11/2017

David Avgi 3% Free float Free float, 29.5% 31%

Directors (David David Avgi, Northenstar Avgi holds 90%) Northenstar 2% Investments Ltd 2.3% Investments Ltd (Teddy Sagi) (Teddy Sagi) Northenstar 66% 68.1% Investments Ltd (Teddy Sagi) 97%

Sources: Company; Bryan, Garnier & Co ests.

While Teddy Sagi remains the key shareholder in SafeCharge (68.12% of the capital) he has no involvement on the operating front. The Israeli billionaire became wealthy after floating his company Playtech on the LSE in 2006 (since then, he has withdrawn his majority position and now only has 6.3% via subsidiary Brickington Trading Limited). Note also that there are no direct capital ties between SafeCharge and Playtech.

SafeCharge

3.2. Understanding SafeCharge today

3.2.1. General presentation of the group SafeCharge is a software company present in the payments field (supplier of technologies and proprietary solutions), destined for professionals (e-merchants). It is more than 98% exposed to the online payment market (physical payments account for less than 2% of sales). In concrete terms, the company supplies payments solutions to online merchants including processing (a platform that offers a secure connection between merchants and financial institutions and a hosted payments page with personalised payment options) and acquiring (i.e. an insurance business: either by reselling third-party acquiring capacity or by using its own acquiring). Secondly, the group supplies tools to manage risks/fight against fraud as well as data analysis and optimisation services. Note that the group has a sole and unique platform, developed internally, and that its central element is its payment gateway (configurable and evolutionary). The average duration of contracts stands at between two and three years. The group is located in 11 countries in the world employing more than 344 staff (UK, Guernsey, Bulgaria, Austria, the Netherlands, Cyprus, Singapore, Hong Kong and the US), of which around 50% in R&D and technology support and around 15% in risk assessment and compliance.

Fig. 8: Breakdown of headcount by division in H1 2017

General & Administration, 6% Research & Finance, Development, 13% 26%

Ris k & compliance, 15%

Sales & Marketing, Technology 18% support, 22%

Source: Company Data.

SafeCharge has no customer concentration issues. In H1 2017, its leading customer accounted for 8% of revenues, but just 4% of gross profit. The top-five customers accounted for 30% of revenues, the top-10 40% and the top-20 53%. The breakdown of revenues is fairly equally balanced between three segments: 37% from regulated sports betting/online gambling (Sports & Leisure), 26% from currency operations (Financial Services) and finally, the remaining 37% (Others) from other activities that account for less than 5% of revenues (airline companies, meeting websites, market places, automatic food and drink dispensers etc.). As such, 63% of revenues are derived from regulated industries.

Fig. 9: Breakdown of H1 2017 revenues by major vertical

Others Sport & ~37% Leisure ~37%

Financial Services ~26%

Source: Company Data.

SafeCharge

In geographical terms, the breakdown of transaction volumes in H1 2017 is very highly weighted in favour of the UK (59%, given the weight of online gambling in this region), followed by continental Europe and the Community of Independent States (23%), and the rest of the world (18%).

Fig. 10: Breakdown of total transaction volumes in H1 2017 by region

Rest of the w orld 18%

Continental Europe and UK CIS 59% 23%

Source: Company Data.

Note that SafeCharge's revenues are made up of commission fees (fixed per transaction in processing, and a percentage of the transaction value for acquiring). While the group prefers not to communicate the names of its main customers for obvious competitive reasons, it is logical to think that the top-5 include a few of the major online gambling organisations (especially in the UK since it works with the six largest companies in this market: Paddy Power Betfair, William Hill, Bet365, Ladbrokes Coral, SkyBet, 888).

Fig. 11: Market share in online gambling in the UK

Paddy Pow er Betfair 14%

William Hill Other 11% 45%

Bet365 10%

Ladbrokes Coral 10% 888 SkyBet 3% 7%

Pro forma combination of Paddy Power + Betfair share and Ladbrokes + Coral share. Sources: Gambling Compliance Research Services; William Hill.

Note that in 2016, SafeCharge booked USD10.5m in revenues stemming from companies with joint control (10% of revenues), bearing in mind that Playtech alone accounted for 4% of this (this should no longer weigh over the medium term).

Fig. 12: SafeCharge current exposure to PlayTech

Exposure to Playtech In % of total Playtech stand alone 4% Playtech companies (such as markets, Sun Bingo etc.) 4% Other related parties 2% Total 10%

Source: Bryan, Garnier & Co ests.

SafeCharge

3.2.2. Description of main businesses

Fig. 13: The two SafeCharge offers "Connect" and "Collect"

Cashier Gateway Third-party acquiring (50%) Own acquiring (50%) "Connect" (60%) Acquiring (40%) "Collect"

% of total transaction value in H1 2017 Source: Bryan, Garnier & Co.

 "Connect" (cashier + gateway): this is the business that collects data and protects sensitive information for payments (tools to fight against fraud, store cards, currency operations etc.) and also undertakes online processing by SafeCharge. Since no interchange commission fees or payment scheme fees are levied in this part, gross profit is perfectly equal to revenue. Connect represents 60% of total transaction volumes at SafeCharge but just 10%e of its revenue. Indeed, the merchant only pays a small fee (fixed amount and by stages), which is on average 3- 5p/transaction (or 10bp of the total transaction volume).

 Acquiring: this business is like an insurance business since the acquirer "guarantees the quality of the merchant" (it takes the risk on the merchant's side in return for a commission fee and therefore sells trust). The acquirer shoulders the risk of the merchant's fraud and bankruptcy, and the risk of chargeback (i.e. rebilling if the transaction is cancelled). The group receives the funds from the transaction, which are held for the merchant in bank accounts. SafeCharge's commission fees (mostly a percentage of the value of the transaction) are directly deducted from these accounts before being transferred to the merchant's bank account. In this business, the difference between sales and gross profit is the sum of the commission fees due to the card issuing bank (interchange fees) and the card network (payment scheme fee such as Visa and MasterCard).

- SafeCharge can resell acquiring capacity belonging to other players and therefore charges a commission fee to the merchant (a percentage of the transaction value: around 2% which includes processing, interchange and payment scheme commission fees). When the group started out, it sold acquiring services of a subsidiary of the Royal Bank of Scotland (Worldpay), but has now widened its scope to include other partners (Barclaycard, Wirecard, etc.). In concrete terms, it has signed up e-merchants on the Collect side and sends the volume to third- party acquirers. It nevertheless takes some of the merchant risk, in the name of the acquirer partner.

- SafeCharge can also use its own acquiring capacity. For almost two years, partly following the clean-out of its merchant portfolio, the group has developed its own acquiring service since it has an e-money licence. Note that it receives the same commission fee whether it goes through its own acquiring system or sells on third-party capacity. However, gross margin is slightly higher when it uses its own acquiring (gap of ~+15-20bp since it gains the margin that it would usually pay to the third-party acquirer). The group is trying to direct more volumes to its platform to benefit from operating leverage (the cost of an additional transaction on its platform is marginal) and control the chain from end to end. That said, it will always require third-party capacity. Indeed, it would not be reasonable to have 100% of a merchant's volume (dual sourcing policy, i.e. large merchants generally use at least two service providers). We estimate that the ideal ratio would be three-quarters of volumes on its own acquiring platform and one-quarter reselling third-party acquiring capacity. In H1 2017, SafeCharge's directly-operated acquiring accounted

SafeCharge

for almost 50% of the payments volume in the Collect segment and we expect this to rise to 63% in 2018 and 75% further out.

Fig. 14: Ramp-up in SafeCharge own acquiring

USDm 2015 2016 H1 2017 Own acquiring 191 970 811 Total transaction value 6,934 8,082 4,200 Y/Y growth 22.1% 16.6% 5.0%

Source: Company.

SafeCharge can share the default risk with its third-party acquirer partners (on the principle of reinsurance). It generally sends the extra flows that it cannot take directly because of its cautious risk management policy (in order to have a portfolio primarily made up of merchants that respect Visa and MasterCard's chargebacks/transactions ratio of less than 1%).

Fig. 15: Calculation of 1% chargeback ratio at Visa and MasterCard

Visa MasterCard Number of chargebacks from the current Number of chargebacks from the current Calculation of the 1% month divided by the number of transactions month divided by the number of transactions chargeback ratio from the current month from the previous month Aim Merchants need to keep the ratio below 1% to avoid being fined or having a bad reputation

Sources: Visa; MasterCard.

The group may offer the Connect service only, i.e. simply the processing part. In contrast, if it takes care of the acquiring it is automatically also the processor. Consequently, the acquiring service for a customer (own capacity or stemming from a third party) is tantamount to offering the Collect service i.e. Connect plus acquiring. In concrete terms, this means that it handles authorisation of the transaction's flows, collection of funds that it then passes onto the merchant, and plays the role of electronic payments counterparty. The Collect offer represents 40% of its total transaction volume but 90%e of revenue. The Collect commission fee (300bp) is therefore 30x higher than the Connect commission fee.

Fig. 16: Average pricing of SafeCharge activities (basis points)

Main offerings % of total % of total Commission fees payment volume revenue (bps) 1) Connect (processing) 60 10 10 2) Collect: 40 90 300 - Connect 10 - Scheme 15 - Interchange 30 - Acquiring (from its own solution or from third parties) 200 - Forex 45

Source: Bryan, Garnier & Co ests.

Note that SafeCharge tried to break into issuing processing in 2013 via the acquisition of Irish company 3V (specialised in the development of tools for the issue, processing and management of prepaid cards), but this ended in failure. The company generated sales of around EUR3m with a net loss of slightly more than EUR3m, whereas it was bought for EUR14.5m. It is fairly difficult to split responsibility for the failure between SafeCharge (due diligence carried out at the time) and 3V (which

SafeCharge could have oversold the company in view of the quality of its portfolio of merchants). The group only held onto the digital wallet segment (MasterCard prepaid digital wallet) and the associated Pay.com brand, which is of value. Today, the business is insignificant on a group scale given that it has not benefited from any development or investment since 2016.

3.2.3. Example of an online card transaction

Fig. 17: Transaction journey for an online card payment

4 Commission fees 1p 3p 2% Gateway Cashier/ Acquring banks, Autorisation (payment End user 1 Merchant's website 2 3 Card issuing bank payment page acquirers schemes) Risk management 5 core business Source: Bryan, Garnier & Co.

1) The user (who pays for a product/service) provides the details necessary for the payment either via the merchant's payment page or via the SafeCharge online payment solution (cashier: customisable payment page in local language, where the user can choose their payment method and enter their personal details, the equivalent of a payment terminal on the internet).

2) The transaction and the payment details are processed online by SafeCharge (its gateway and its risk management solution).

3) The acquirer (which can be SafeCharge itself) receives the payment information and transfers them to the relevant card network (e.g. Visa, MasterCard), which transfers the information to the bank that issued the card. This bank approves or refuses the transaction and transfers the information to the card network, which passes the information on to the acquirer. Note that via its intelligent routing technology, SafeCharge is capable of identifying the most appropriate routing to increase the chances of a transaction being accepted (it processes and directs flows, depending on the case, towards its own acquiring platform or third-party acquiring platforms). a) the result (payment accepted or refused) returns to the gateway. Note that SafeCharge charges the customer even if the transaction is not conclusive (since its risk management platform is used, SafeCharge takes a low fixed amount, but this is pure margin). b) the gateway informs the merchant or the user of the result. If the transaction is accepted, the merchant honours the order, or otherwise the user is notified that the transaction has failed.

4) Assuming the transaction is accepted: the funds are transferred to the bank that issues the card (via the acquiring bank or the acquirer), or directly to the merchant's account (net of commission fees) or to one of SafeCharge's customer accounts in the major international banks.

5) When the funds are sent to a SafeCharge customer account, the group periodically transfers the funds (net of commission fees) to the merchant's account.

SafeCharge

4. SafeCharge: a Wirecard in the making 4.1. Solid fundamentals

4.1.1. Reporting similar to the majority of European PSPs Recognition of income from SafeCharge sales is similar to the majority of European players in our coverage, meaning that its revenues are indeed gross revenues. The group includes here all of its commission fees (processor/acquirer fees, interchange fees that go to the consumer's bank and the fees that go to the payments network). This indicator is therefore relevant to compare PSPs with each other. Only Worldpay and Nets focus on their net revenues (which only include their own commission fee, i.e. resembling more their gross profit) which is not published by all of the European companies we cover. It is not surprising that these two companies use the same accounting presentation since they were both floated by private equity funds Bain Capital and Advent International. This reporting style enables them to post the best face-value margins. We prefer to calculate the profitability of Worldpay and Nets based on their gross revenues and not their net revenues (the latter are lower and therefore artificially boost the margin rate). Indeed, this avoids false margin comparisons and the direct consequences of these on valuations that we noted among the consensus just after the two groups' respective IPOs in 2015 and 2016.

Fig. 18: Difference between gross revenue and net revenue at European PSPs

Gross revenue Net revenue Fee retained by the acquirer Merchant service fee + interchange fee (paid by the acquirer to the issuer) - Interchange fee + third-party card scheme fee - third-party card scheme fee (in the case of Nets) = Merchant service fee (i.e. standard revenue) = Own fee retained (i.e. gross profit)

Source: Bryan, Garnier & Co ests.

In contrast, even if SafeCharge (like Worldpay and Nets) communicates underlying EBITDA, we prefer to look at the genuine EBITDA published. In our view, underlying EBITDA excludes some negative factors (reorganisation/restructuring costs, acquisition/disposal costs and other non- recurring costs) which should be adjusted for uniquely at the EBIT level (leading to underlying EBIT). Finally, our underlying EBIT is calculated after stock-options given that these are recurring costs. This is how we habitually analyse European PSPs we cover.

Fig. 19: Comparison of European payments players on iso-reporting 2017e

FY17e (m – local curr.) Ingenico Nets SafeCharge Wirecard Worldline Worldpay Recommendation Buy Sell Buy Buy Buy Sell FV EUR119 DKK119 354p EUR94 EUR42 278p Revenue 2,490.8 10,754.6 111.1 1,395.7 1,606.7 4,904.1 LFL growth 6.8% 5.8% 6.0% 25.7% 4.1% 80%% EBITDA 515.6 2,636.1 31.3 410.1 333.0 489.4 Margin 20.7% 24.5% 28.2% 29.4% 20.7% 10.0% Underlying EBIT 440.9 2,485.6 28.6 357.1 254.3 420.8 Margin 17.7% 23.1% 25.8% 25.6% 15.8% 8.6%

Sources: Bryan, Garnier & Co ests.

SafeCharge

In all, SafeCharge broadly uses the same reporting systems as the majority of European payments players we cover. In order to compare margins or multiples, the only players requiring huge adjustments to their figures are Worldpay and Nets (concerning recognition of sales in acquiring and for the calculation of EBITDA margin).

Fig. 20: Comparison of European PSP multiples on iso-reporting basis for 2018e

FY18e (m – local curr.) Ingenico Nets SafeCharge Wirecard Worldline Worldpay Recommendation Buy Sell Buy Buy Buy Sell FV EUR119 DKK119 354p EUR94 EUR42 278p EV/sales (x) 2.2 3.4 4.0 6.1 2.8 1.8 EV/EBITDA (x) 10.4 12.6 13.9 20.7 12.8 15.5 P/E (x) 16.1 18.3 20.8 32.2 27.8 24.9

Sources: Bryan, Garnier & Co ests.

4.1.2. Among the best fundamentals in the sector As a PSP, SafeCharge has virtually entirely recurring revenues (~90%) since the revenues it generates in its main businesses stem from commission fees generated on transactions (online processing and acquiring). The payment services industry is a growing business (6-8% for physical payments and ~12-15% for online) and a mostly fixed cost base, enabling players to have good profitability levels (EBITDA margin of around 20% for physical payments and around 30% for online). As such, genuine operating leverage exists if the business outperforms the market, or in the event of acquisitions (scale effect and synergies placing transaction flows on the same platform). The transformation of underlying EBIT into FCF is therefore generally high (between 50% and 70% on average) and balance sheets are healthy (positive gearing). This does not even take into account the fact that governments are encouraging digitalisation (for the purposes of traceability and hence tax collection), that European regulations are putting an end to the monopoly enjoyed by banks (e.g: decline in interchange fees in the US at end-2015 and DSP2 in 2018), and that security issues (online fraud in particular accounts for half of global fraud) are prompting banks to outsource their payment activities to specialists.

Like Wirecard, we estimate that SafeCharge's excellent fundamentals are associated with its positioning. Indeed, it focuses on the online payments segment (high and very profitable growth) and a clear technological angle, which makes it one of the benchmarks in its field (high customer retention). It is therefore in an ideal position to provide more solutions to existing customers while addressing new customers or verticals (airline companies, online market places, automatic food/drinks dispensers etc.). SafeCharge is similar to Wirecard as it was slightly less than 10-years ago (when it turned to larger merchants and when it started to accumulate the functions of processor and acquirer), before it enjoyed the success that is now obvious since Wirecard is the go-to online payments player boasting the best fundamentals in the sector. SafeCharge only lacks issuing and banking services.

4.1.3. 2017-2020e prospects

4.1.3.1. Top-line growth Today, "Connect" (processing of payment flows) accounts for 60% of total transaction volumes but just 10%e of SafeCharge revenues. As such, "Collect" (processing and acquiring) represents 40% of the remaining total transaction volumes and 90% of sales. Further out, we believe the group no longer wants to have revenue stemming solely from the Collect activity. To achieve this, it needs to implement a strategy in acquiring that will depend on customer type.

SafeCharge

 Historical customers: the strategy consists of migrating these from a Connect contract to a Collect contract. And among the clients that are still in Collect, switching a large share of acquiring volume to SafeCharge's own solution (bearing in mind that it is not reasonable to have 100% of volume from a merchant, hence the resale of third-party capacity would still exist but would be in the minority). All of this will necessarily take time since it implies making the client sign another agreement, namely that 1) either SafeCharge succeeds in getting a merchant around a table to make them sign a new contract (for which there is no guarantee), 2) or SafeCharge is obliged to wait until the current contract matures before making the client sign another one. Potential growth in transaction volumes in these customers stands at around 5-10%.

 New customers: the strategy consists of making sure that new customers that have a traditional dual sourcing policy (generally working with two payment services providers giving 60% to the first and 40% to the second) end up bringing in a third player to limit risks (this new player could take between 10% and 20% of volume). We believe that this message can work, especially since the experiences caused by certain major hiccups (i.e. outage of the Worldpay platform, which lasted several days in Q3 2016 and obliged the merchant to switch all of its transaction volume to the second solutions provider, namely Ingenico). These new customers should be looked for beyond the Sports & Leisure (online gambling) and Financial Services (forex) divisions. This means that the aim to diversify into other sectors will help bolster the group's "Others" division (currently made up of airline companies, dating websites, market places, automatic food and drinks dispensers etc.). Potential growth in the volume of transactions in this type of customer also stands at around 5-10%.

Potential cumulative growth in volumes therefore stands at 10-20% or an average of 15%, from which 300bp can be deducted for possible pressure on commission fees during contract signings. Further out, we therefore expect normal average revenue growth of 12%. On our estimates, the average SafeCharge commission fee is currently 1.28% of the amount of the transaction processed. Clearly, the more the group accumulates the role of payment services provider and acquirer, the greater the benefits ("Collect" offer).

Fig. 21: Average commission fee and SafeCharge revenue over 2015 and 2020e

Years 2015 2016 2017e 2018e 2019e 2020e

Transaction volume processed (USDbn) 6.9 8.1 8.7 9.7 11.2 12.9

Y/Y growth 22.1% 16.6% 7.5% 12.0% 15.0% 15.0%

Average fee per transaction processed 1.44% 1.29% 1.28% 1.24% 1.21% 1.18%

Revenue (USDm) 99.8 104.1 111.1 124.1 139.0 155.7

Y/Y growth 29.7% 4.3% 6.7% 11.7% 12.0% 12.0%

Y/Y organic growth 20.4% 11.0% 6.0% 11.4% 12.0% 12.0%

Source: Bryan, Garnier & Co ests.

In the meantime, note that SafeCharge's accounts are subject to fluctuations in exchange rates. Indeed, the group publishes its accounts in USD (but is listed in GBX) and is sensitive to the USD/EUR and USD/GBP exchange rates. It generates revenue in almost 50 different currencies, the three main ones being the USD, the EUR and the GBP, representing around 65% of its revenue. Operating expenses are incurred in five currencies (note that around 32% is in ILS, i.e. Israeli shekels). In all, the impact of exchange rate fluctuations is virtually the same in value terms whether for sales or EBITDA. As such, there is no currency impact on margins, since the group benefits from natural hedging in its main currencies.

SafeCharge

Fig. 22: Sales and opex exposure to main currencies

BGN 13% USD USD 23% 27% Other 35%

ILS 32% EUR 18%

EUR GBP 22% 15% GBP 15%

Source: Bryan, Garnier & Co ests.

Fig. 23: Average forex impact in H1 2017

FX impact (USDm) FX impact (%) Revenue -0.4 -0.7% EBITDA -0.4 -2.5%

Sources: Company Data; Bryan, Garnier & Co.

4.1.3.2. Profitability We see two factors that could weigh on gross margin:

 In coming years, SafeCharge intends to accentuate its strategy towards average- sized/large merchants. Since the commission fee varies depending on the size of the merchant (i.e. the volume of transactions to process and negotiating clout), the larger the merchant, the lower the commission fee it pays.

 The group also needs to manage the quality of its merchant portfolio. Indeed, at one point, the group had a portion of its customer base that had become risky (for example following an overly aggressive marketing policy, or when suppliers of binary options trading were subject to strict regulations). The decision to clean out this portfolio was not simple since risky customers are very profitable. Indeed, when SafeCharge signs up a merchant to a Collect contract, it bills 5p and 2% per transaction. However, it is paid a commission fee even when a transaction is rejected since its system has been used. Admittedly the amount of the fee is low (around 1p per transaction rejected), but this is pure margin for the group since it concerns its own platform and hence costs nothing). The clean-out of the customer portfolio in 2016 in order to avoid reputation risks and also encourage by the stricter chargeback policy implemented by Visa Europe (chargebacks/transactions <1%) took a toll on the group's accounts (13% of revenue and 20% of EBITDA). These risky customers have no longer had an impact since March 2017, thereby implying that the base will return to normal in March 2018.

Following the two factors explained above, we expect pressure on gross margin of around 100bp a year. That said, we estimate that the group should make up for this decline by the increase in transaction volumes (associated with its coverage of larger merchants), changes in its mix in favour of the Collect offer (accumulation of processing and acquiring commissions, and especially in favour of its own acquiring), the addition of new value added services (e.g.: cross border transactions which have higher margins due to their complexity, and even GDPR the European data protection regulation that will enable the group to monetise customer data), and above all the reduction in operating expenses (especially wage costs: these should fall as a percentage of sales, since recruitments in 2015

SafeCharge

and 2016 destined to cover new verticals are now over). Consequently, its EBITDA margin should be relatively stable in coming years (growth in EBITDA in line with that in sales), to remain at ~29% (or ~30% in terms of underlying EBITDA). That said, we are not ruling out the prospect of acquisitions that could add a further USD10m in EBITDA (see the sub-section balance sheet below).

We expect financial items to be close to break-even since financial products associated with its cash pile are low (the majority is in dollars, in US treasury notes that generate small returns) and generally offset by bank account fees and other fees. Finally, the group's tax rate should remain low since the company is registered in Guernsey where the rate stands at 7%). The tax rate stood at 5.3% in 2016, we expect it to rise to 7.0% this year and it is likely to gradually move towards 9% (it is set to generate more profits in Singapore and in the US, where it opens offices to facilitate payments by European customers).

Fig. 24: Main P&L lines from 2015 to 2020 (BG vs cons.)

Years 2015 2016 2017e Cons. 2018e Cons. 2019e Cons 2020e 2017 2018 2019 Transaction volume processed (USDbn) 6.9 8.1 8.7 9.7 11.2 12.9 Y/Y growth 22.1% 16.6% 7.5% 12.0% 15.0% 15.0% Average fee per transaction processed 1.44% 1.29% 1.28% 1.28% 1.24% 1.21% Revenue (USDm) 99.8 104.1 111.1 111.2 124.1 124.5 139.0 138.8 155.7 Y/Y growth 29.7% 4.3% 6.7% 6.8% 11.7% 12.0% 12.0% 11.5% 12.0% Y/Y organic growth 25.3% 11.0% 6.0% 11.4% 12.0% 12.0% Gross profit (USDm) 57.7 60.7 62.4 68.6 75.2 81.9 Margin 57.8% 58.3% 56.2% 55.3% 54.1% 52.6% Underlying EBITDA (USDm) 31.1 33.3 33.5 33.8 37.5 38.2 42.0 42.7 47.0 Margin 31.2% 32.0% 30.2% 30.4% 30.2% 30.7% 30.2% 30.8% 30.2% EBITDA (USDm) 25.4 30.3 31.3 35.6 40.2 45.2 Margin 25.4% 29.1% 28.2% 28.7% 28.9% 29.0% Underlying EBIT (USDm) 26.6 28.5 28.6 31.4 35.3 39.5 Margin 26.6% 27.4% 25.8% 25.3% 25.4% 25.4% Restated net income (USDm) 27.3 28.8 28.0 29.5 32.8 36.5 Margin 27.3% 27.7% 25.2% 23.8% 23.6% 23.4%

Sources: Bryan, Garnier & Co ests; company’s consensus (from 5 analysts)

In all, SafeCharge is adopting a fairly similar strategy to that used by Wirecard in 2009 (shifting its customers towards medium sized/large merchants and accumulating the functions of both payment services provider and acquirer) and which was at the root of its fundamental success story. In the meantime, SafeCharge already had an EBITDA margin similar to that of Wirecard, but with lower organic sales growth. The group would like to focus on revenue growth (like all growth companies while maintaining its profitability levels at around 30%) before genuinely leveraging its margin, which seems to be the right strategy to adopt in the sector (technological focus, growth in transaction volumes and then margin leverage). Once the group has reached a larger size and reached the level of sales growth currently achieved by Wirecard (>20% lfl), it will be able to target an improvement in its margin to 35% (which is not yet on the agenda).

SafeCharge

Fig. 25: Change in sales and EBITDA margin from 2014 to 2020e

180 34% 160 140 32% 120 30% 100 28% 80 26% 60 24% 40 20 22% 0 20% 2014 2015 2016 2017e 2018e 2019e 2020e

Revenue EBITDA Margin

Sources: Company Data; Bryan, Garnier & Co ests.

4.1.3.3. Balance sheet We are forecasting capex of 7.5% of sales over 2017e (10% in H1 2017), namely an upper end of the range because of purchase of servers and change in offices. This should then be at around 6.5% of sales. Like many technology companies, a share of SafeCharge's R&D costs is capitalised in the balance sheet (including development in its acquiring platform) then amortised when the project enters production. This is common practice in the sector and is noted at rival groups also. The amortisation duration is five years at SafeCharge, three/seven years at Nets, is not longer than five/seven years at Worldline (three/five years in practice), three/five years at Ingenico Group, three/eight years at Worldpay and 10 years at Wirecard. All these factors have tended to bloat profitability somewhat, but in return weigh on FCF generation (positive difference between capex and depreciation & amortization), above all at Wirecard for which the duration is twice as long as average.

In all, FCF should stand at USD22.2m in 2017e. The transformation rate of underlying EBIT into FCF is 77.6% in 2017e, namely above our sample of stocks (vs Ingenico Group 72.1%e, Worldline 67.0%e, Wirecard 53.2%e, Nets 51.3%e and Worldpay 47.5%e). Over the year, we estimate a total dividend of USD0.16 per share, in line with the group's guidance for 75% of underlying EBITDA. As such, we estimate net cash at USD117m at end-2017e, or about 20% of the current market capitalisation.

Fig. 26: FCF and net cash position from 20115 à 2020e

USDm 2015 2016 2017e 2018e 2019e 2020e

Underlying EBIT 26.6 28.5 28.6 31.4 35.3 39.5 Margin 26.6% 27.4% 25.8% 25.3% 25.4% 25.4% Rest. attrib. net profit 27.3 28.8 28.0 29.5 32.8 36.5 Margin 27.3% 27.7% 25.2% 23.8% 23.6% 23.4% FCF 17.6 18.5 22.2 24.7 27.6 30.7 Net dividend per share (USD) 0.11 0.16 0.16 0.18 0.21 0.23 Net cash 114.9 115.4 116.9 117.5 118.0 118.2

Source: Bryan, Garnier & Co ests.

SafeCharge

SafeCharge is due to report full-year earnings on 15th March 2018 (before trading).

Fig. 27: Conclusions from H1 2017 and 2017 outlook

Conclusions Strong underlying revenue growth in H1 2017

Considerable progress in target sectors and verticals, and an increase in customer quality Outlook Good start to H2 2017 benefiting from the launch of new clients

Substantial pipeline of new business The Board remains confident that the outcome for the year will be broadly in line with market expectations, and the Directors look forward with confidence to the rest of 2017 and beyond

Source: Company.

At end-November, management published a trading update providing business trends and some outlook but with no figures. This indicated that business was solid and that the group is targeting a financial performance over the year in in line with the market's expectations. The group continues to make significant progress thanks to its strategy that consists of winning first class customers (low risk profiles) both in its traditional verticals and its new verticals and target markets. SafeCharge made the most of this occasion to announce the nomination of Nicolas Vedrenne as Chief Business Development Officer as of 1st December 2017 and is to focus efforts on continuing to expand into new verticals. Mr Vedrenne comes from the Merchant Risk Council (MRC), where he was Managing Director for Europe, and therefore boasts a large number of highly-placed contacts in the payments industry. Finally, he is based in Madrid, which could become a new office for SafeCharge. He is continuing to investment in technologies and innovation and was the first to launch WeChatPay in stores in UK, and is currently focusing on omni-channel (note, he has invested in several FinTechs including Yello, which is among the mPOS). In terms of future outlook, the Board of Directors is encouraged by the healthy performance posted in H2. The group is going into 2018 with a wider base of first-class customers and customers stemming from new sectors (including travel and retail sales) and new markets, with solid bases that provide it confidence for 2018 and beyond.

Fig. 28: Extension of SafeCharge customer base

Verticals Comments

Traditional Plus500, 888, Bet365, PaddyPower and EuroBet Bear in mind, for instance EuroBet is from Italy so even if it is a “traditional” vertical it is a new “jurisdiction” so it brings diversification New SafeCharge is now processing transactions for a growing number of online retail, travel and airline operators

Source: Bryan, Garnier & Co.

4.1.3.4. M&A policy As a priority, SafeCharge's M&A policy for coming years seems to target European PSPs in its main activities (namely processing and acquiring). The group could therefore implement a buy and build strategy, namely to make acquisitions, add additional services and benefit from synergies on a group level (fairly mechanical leverage in this fixed-cost business where size counts). Payment services providers generally aim to: 1) expand geographically (and not buy technologies since they are generally state of the art in this field), 2) acquire reasonably sized targets but with a strong regional status (i.e. add merchant connections to their platforms) and 3) acquire targets with solid fundamentals bearing in mind that they generally have similar top-line growth to its own and EBITDA margin probably lower before synergies.

SafeCharge

We estimate the ideal size target falls into a price range of USD127-137m (via USD117m in net cash at end-2017e, USD10-15m in treasury stock, USD10-15m in stakes in various companies, from which USD10m in cash should be deducted due to the acquiring business). Our simulation therefore shows maximum debt capacity of around USD255m (based on a normative net debt/EBITDA ratio in the sector of 3x) before potentially calling on the market. With these financial means and if the size of EBITDA we estimate is right, it could quite easily acquire PSPs specialised in online payments up to 25x EV/EBITDA (online multiples vary by an average of 15-25x). In Europe, the target countries that seem obvious to us are France, Germany and the UK since they alone focus 70% of European e- commerce. Thereafter, we are not ruling out the prospect of the group making opportunist operations outside its reference market, for example in south-east Asia or in the Americas (US or Latin America, both of which are interesting in online).

Fig. 29: SafeCharge maximum acquisition capacity

USDm 2017e EBITDA of the target firm 10.0 SafeCharge’s net cash at end-2017 116.9 Treasury shares 12.5 Participations in companies 12.5 Restatement from the cash in its balance sheet related to its acquiring business -10.0 Net debt capacity of the new Co (based of net debt/EBITDA of 3x) 123.8 Acquisition capacity in cash 255.8 Source: Bryan, Garnier & Co ests.

Note that in the event of a significant acquisition in view of the group's current EBITDA (i.e. more than USD10m in addition to the USD31.3m that we expect in 2017e), key shareholder Teddy Sagi (who owns 68.12% of the capital) could well make the most of the situation to start diluting his stake. This would be good news since the group would benefit from both a larger size, but in addition, the share will benefit from better liquidity (free float currently stands at 30%), and will use its cash (which currently represents around 20% of its market capitalisation). Thereafter, this could even lead it to envisage a listing on the main market in London (like PaySafe, ex-Optimal Payments, at the time of the takeover of Skrill), rather than remaining on the AIM (an unregulated market but controlled). As such, a virtuous circle could set in and the share could enter the radar screens of a wider number of investors.

Fig. 30: The virtuous growth effects associated with a significant acquisition by SafeCharge

Virtuous benefits following a significant acquisition

Implementation of additional services and synergies

Larger size in the European payment market

Better liquidity

Entry on radar screens of a wider number of investors (above all since the public offers on Paysafe, Worldpay and Nets)

Source: Bryan, Garnier & Co ests.

Indeed, investors could decide to enter SafeCharge into their portfolios to continue playing the payments and security segment, especially since the acquisitions underway of European players such as Paysafe, Worlpay and Nets.

SafeCharge

4.2. What themes can we play via SafeCharge? 4.2.1. Growth in electronic payments According to MasterCard, 85% of retail sales transaction volumes in the world (in-store on online) are undertaken by cash or by check, the equivalent of 60% in value terms. Governments are clearly pushing for the adoption of electronics payments for traceability and tax collection purposes. Finally, electronic payments cost far less than traditional payments in cash (handling cash at the sales point, payment service at the banking service provider, management of checks and other general costs etc.). The ratio is 1/10 between the two. Card payments, whether physical or online, therefore have attractive days ahead.

Recent figures provided by Capgemini Financial Services show that 472.7 billion transactions were undertaken in the world in 2016e and settled in other ways than cash. These payment methods have therefore grown by 9.1% over one year, driven by emerging markets. Annual growth in non-cash payments stands at 16.2% in these countries (vs. +5.8% for mature countries). In terms of market share, the most important regions are North America, followed by Europe and Asia. Credit and debit card transactions remain in the majority (more than half) and have continued to increase. Note that SafeCharge is agnostic to payment solutions that it includes in its platform and handles both cards and alternative payment methods.

Fig. 31: No. of non-cash transactions by region in 2016-2020e (billions)

725.9

644.1 181.7 577.0 522.5 174.9 472.7 167.8 139.3 161.1 153.9 130.7 65.3 122.7 115.4 61.3 55.2 108.1 57.3 51.4 72.8 53.3 48.1 66.7 49.3 44.9 41.9 60.5 54.9 211.5 48.7 159.1 120.6 70.7 92.8

2016e 2017e 2018e 2019e 2020e Emerging Asia CEMEA La tin America Mature Asia-Pacific Europe (including Eurozone) North America (U.S. and Canada)

Sources: Capgemini Financial Services Analysis; ECB Statistical Data Warehouse; Bank for International Settlements Red Book, Country’s Central Bank Annual Reports; Bryan, Garnier & Co.

Fig. 32: CAGR in number of non-cash transactions by region, 2015-17 and 2017-20

Non-cash transactions 2015-17 CAGR 2017-20 CAGR

Emerging Asia 29.9% 31.6% CEMEA 10.8% 9.9% Latin America 7.2% 7.1% Developing countries 17.8% 20.8% Mature Asia-Pacific 8.5% 7.0%

Europe (including Eurozone) 6.6% 6.5% North America (US and Canada) 4.5% 4.1% Mature countries 5.9% 5.4% Global 9.8% 11.6%

Sources: Capgemini Financial Services Analysis; ECB Statistical Data Warehouse; Bank for International Settlements Red Book, Country’s Central Bank Annual Reports; Bryan, Garnier & Co.

SafeCharge

4.2.2. Promising outlook for e-commerce Traditional e-commerce has enabled the payments industry in general to post high growth by supplying a new acceptance channel for online payments (despite the initial risk that this comes at the expense of sales in physical stores). The share of e-commerce is rising each year in the global retail trade mix on a global level, standing at around 10% this year and set to exceed the 15% threshold in 2021e (source: eMarketer).

Fig. 33: Share of e-commerce in the world, as a % of total retail trade

5 4.479 4.5 17% 4 3.879 15.5% 15% 3.5 3.305 14.6% 3 2.774 13% 2.5 2.290 13.1% 2 1.859 11.6% 11% 1.5 10.1% 1 9% 0.5 8.7% 0 7% 2016e 2017e 2018e 2019e 2020e 2021e

Retail ecommerce sales (USDtn) % of total retail sales

Source: eMarketer (June 2017).

This trend is the main growth driver at SafeCharge in coming years. Indeed, with no acquisitions, we estimate that SafeCharge should process a volume of transactions close to USD13bn at end-2020e (or a 2016-20e CAGR of +12.3%).

Fig. 34: Average SafeCharge commission fee (% of transaction processed)

Years 2015 2016 2017e 2018e 2019e 2020e Transaction volume processed (USDbn) 6.9 8.1 8.7 9.7 11.2 12.9 Y/Y growth 22.1% 16.6% 7.5% 12.0% 15.0% 15.0% Average fee per transaction processed 1.44% 1.29% 1.28% 1.28% 1.24% 1.21%

Source: Bryan, Garnier & Co ests.

The 2015-19e CAGR in the number of e-commerce transactions is estimated at +17.6% by Capgemini Financial Services (or ~+15% in value terms), given the adoption of instantaneous payments and growth in emerging markets. After +19.2% in 2016, growth is expected at 15.3% in 2019, or a slowdown explained by the ramp-up in mobile commerce (m-commerce).

Fig. 35: No. of e-commerce transactions (billion) in the world in 2015-19e

76.5 Industry estimates 66.3 CAGR (2015-19e): 17.6% 56.5 47.7 40.0

2015 2016e 2017e 2018e 2019e

Source: Capgemini Financial Services Analysis.

SafeCharge

4.2.3. Promising outlook in m-commerce In e-commerce, we believe the mobile or-m-commerce segment could get larger in size, which would also benefit SafeCharge's business. According to e-Marketer, this year, m-commerce should represent more than 70% of e-commerce sales in China and India, and 59% in South Korea. In Germany, the UK and the US, it is likely to reach at least one-third of e-commerce sales.

The 2015-19e CAGR in the number of e-commerce transactions is estimated at 21.8% by Capgemini Financial Services (or ~+20% in value terms). We believe that under the impetus of increasingly rapid and reliable network connectivity (5G…) as well as better performing terminals (smartphones, tablets etc.) and simplified payment platforms, mobile should end up becoming a fully- fledged online payment means.

Fig. 36: No. of e-commerce transactions (billions) in the world over 2015-19e

108.8

Industry estimates 87.6 CAGR (2015-19e): 21.8% 70.4 59.7 49.5

2015 2016e 2017e 2018e 2019e

Source: Capgemini Financial Services Analysis.

Growth is clearly stronger than for e-commerce since the start-point is lower. Indeed, while it is true that these channels are rapidly expanding, we should not forget that today the number of physical transactions per card remains four times higher than the number of online transactions by computer (e-commerce) and 10 times higher than those on mobile devices (m-commerce).

4.2.4. The rising need for security, especially over the internet All studies agree in saying that "card not present" payments (e-commerce and m-commerce) are those that generate the most fraud. They represent around 60% of the value of global fraud and 50% in Europe. The emergence of these distribution channels has shaken up the electronic payments market, but many sites still do not comply with security standards and regulatory restrictions. There is a genuine need for control and security solutions.

In-store fraud has fallen sharply in Europe and is in the process of falling in the US thanks to the deployment of EMV bank cards (with micro-chips). The UK for example (the latest EU country to have ended its migration) has seen in-store fraud statistics plummet by 70%. As such, fraud activity has naturally shifted towards the e-commerce and m-commerce segments. According to Javelin Strategy & Research forecasts and UK and Canadian data, the amount of losses associated with fraud on a payment terminal in the world is set to fall 4% on average per year between 2014 and 2018 (from USD6bn to USD5bn), whereas fraud in card-not-present transactions are set to rise 17% over the same period (from USD10bn to USD19bn). As such, card-not-present fraud is thought to have represented 48% of total fraud in 2014 and is set to rise to 59% in 2018 (63% and 79% respectively in 2014 and 2018, including account pirating and new forms of bank account fraud).

SafeCharge

Fig. 37: The decline in in-store fraud is reflected in higher fraud in other segments

10 8 6 5 5

Point of sale (POS) Card not present (CNP) Account takeover & New account fraud

2014 2018

Fraud losses projections (in USbn) are based on Javelin data and UK and Canadian card fraud data. Sources: Javelin Strategy & Research; Bryan, Garnier & Co.

While the level of fraud in online payments is at first glance a barrier to its adoption, things are in the process of changing. Indeed, the priority for merchants is to increase security for this payment channel and their customers' data. This tendency towards more security in online transaction services will be one of the factors supporting growth in coming years and is also set to be encouraged by regulations (e.g.: PSD2, in particular with the generalisation of "strong authentication"). Merchants are therefore set to call on players that respect the highest security standards in the industry such as PCI- DSS certification (e.g.: SafeCharge with its payment solutions and risk management and anti-fraud tools).

4.2.5. Appetite for omnichannel offers Merchants need to supply their customers a secure purchase experience that is as fluid as possible, irrespective of the payment method and the sales channel (physical, online and mobile). Interaction between the three channels is set to become a major challenge for merchants in coming years.

Fig. 38: Integrated omnichannel-style offers

Sources: Worldpay; Bryan, Garnier & Co.

SafeCharge

Only payment services providers will be able to offer a genuine secure omni-channel solution. When internet comes to stores, the SafeCharge multichannel offer will also naturally come to physical stores (today physical payments represent less than 2% of revenue).

4.2.6. Outsourcing of banking payment activities The structural regulatory and technological context very clearly favours electronic payments. Regulations announced in recent years have led to a change in the financial ecosystem and tend to break with the bank monopoly (the Payment Service Directive 1 and 2, SEPA transfers, the decline in interchange commission fees during bank card transactions, EMV standards in terms of tokenisation, mobile payments etc.). This should favour an increase in the volume of transactions and an outsourcing of payment processing (especially for banks, but also for merchants) to specialists, namely PSPs such as SafeCharge. Note that today, 50% of the payments market in Europe is still handled in-house by banks (vs. 20-30% in the US). We expect this percentage to fall drastically in coming years.

4.2.7. Further consolidation in the sector We would not be surprised if the argument developed above leads certain banks to spin off their payments activities. Indeed, more generally, we expect an ongoing consolidation in the payments sector in Europe and the US, especially in the online segment (and in particular e-commerce), similar to trends in recent years in the payments hardware segment. For example, in 2007, there were around 20 global manufacturers of payment terminals, whereas today Ingenico and VeriFone are the only ones really remaining. The robust growth witnessed in south-east Asia in recent years in online payments is due to arrive in Europe and the US in coming years. These merger moves are set to be caused by an increasingly complex and increasingly global market.

We estimate that all PSPs we cover should take part more or less in this consolidation, either as predator or as prey, or both. In the case of SafeCharge, the group is looking for acquisitions. While there is no speculative dimension in the short term given Teddy Sagi's stake in the capital (around 68%), this could change if his stake were significantly diluted further out.

Fig. 39: Positioning of PSPs we cover in consolidation moves

Predator Prey Ingenico Group ● ○ Nets ● SafeCharge ● ○ Wirecard ● ● Worldline ● ○ Worldpay ● ● short-, medium- and long-term ○ long term Source: Bryan, Garnier & Co.

In payment services over the past eight years, transactions have gone ahead on average EV/EBITDA multiples of 16.1x. Private equity funds have undertaken slightly more than a third of the operations, Bain Capital and Advent International being the most active in the payments field.

Until recently, operations on players in card issue processing only went ahead at 10-12x (multiples fairly stable over time), those on physical merchant acquirers at 12-15x (multiples fairly stable over

SafeCharge time), while those on online players have risen from 13x to 15x, then 17x and now to more than 20x (targets in online are very popular since the segment boasts the highest growth and best margins). Note that recent acquisitions by US players have gone ahead at multiples in the online segment, even in the case of mostly physical European PSPs. These prices seem to already anticipate the shift to e-commerce by target companies.

Fig. 40: Main transaction ratios in payment services

Date Target Acquirer Country EV (EURm) EBITDA multiple (x) Nov-09 Easycash Ingenico Group Germany 284 13.0 Apr-10 Mercury Payment Syst. Sylver Lake USA 726 14.8 Aug-10 DataCash MasterCard UK 520 19.5 Nov-10 Worldpay Bain Capital/Advent UK 2,030 8.2 Dec-10 Loyalty Partner American Express Germany 496 10.8 Jan-13 Ogone Ingenico Group Belgium 360 29.0 Feb-13 NetSpend Total System Services USA 1,400 14.6 Aug-13 Skrill CVC Capital Partners UK 600 12.0 Jan-14 PayPros Global Payments USA 420 19.1 Mar-14 Nets Bain Capital/Advent/ATP Denmark 2,300 12.4 May-14 Mercury Payment Syst. Vantiv USA 1650 17.7 Oct-14 DIBS Nets Sweden 790 17.9 Oct-14 GlobalCollect Ingenico Group Netherlands 820 16.4 Oct-14 TransFirst Vista Equity Partners USA 1,500 13.2 Mar-15 Skrill Optimal Payments UK 1,100 13.5 May-15 ICBPI Bain Capital/Advent/Clessidra Italy 2,150 11.0 Nov-15 Equens/Paysquare¹ Worldline Netherlands 1,931 11.6 Dec-15 Heartland Payment Syst. Global Payments USA 3,957 18.1 Jan-16 Total System Services TransFirst USA 2,196 15.6 Jan-17 Concardis Bain Captal / Advent International Germany 700 19.3 May-17 CardConnect First Data US 671 16.3 Nov-17 Bambora Ingenico Group Sweden 1,500 32.4 Jul-17 Worldpay Vantiv UK 10,300 19.0 Dec-17 Paysafe Blackstone/CVC UK 3,381 11.4 Jan-18 Worldpay Vantiv UK 10,300 19.0 Q1 2018 Nets Hellman & Friedman Denmark 4,450 15.0 Average 16.1 Median 15.0 ¹ full price estimated i.e. cash out and buyout of 100% of the JV (equensWorldline)

Sources: Companies; Bryan, Garnier & Co ests.

SafeCharge

5. Factors to watch 5.1. Change in degree of customer risk As an acquirer, SafeCharge can shoulder a more-or-less significant risk of contestation/reimbursement. This can happen if a merchant or settlement bank fails to meet its contractual obligations (this risk is all the higher in online payment activities since the purchase act is carried out before delivery) or to reimburse the associated payments. SafeCharge needs to find the right balance in its customer portfolio risk. Indeed, so-called "risk" merchants, who send rejected transactions are the most profitable since SafeCharge nevertheless receives a commission fee (low but fixed thereby representing pure margin). That said, the group also needs to manage its reputation risk and this has already allowed it to clean up its customer portfolio (negative impact of 13% on revenues and 20% on EBITDA on a 12-month basis). We would therefore be vigilant on an eventual new portfolio clean-up that could weigh on its figures, which could stem from stricter regulations in one of its verticals (63% of current revenue is derived from regulated industries), one of its key businesses or others.

5.2. Change in key shareholder's stake Teddy Sagi is SafeCharge's leading shareholder with 68.12% of the capital but has no operating role in the company and we therefore estimate that he intends to withdraw further out. We believe that any dilution in his shareholding that would increase the share's liquidity would go down well with the market (since its free float is currently reduced: ~30%). One of the reasons that could trigger a potential dilution would be a fairly-sizeable acquisition on the group scale (e.g.: >=USD10m in EBITDA). This opportunity would help both increase the company's size (in the high fixed-cost industry of payment services, size counts) and reduce the holding of this non-operating shareholder, thereby enabling more investors to enter the capital, and possibly even thereafter to envisage a listing on a larger market than the AIM (for instance, the FTSE 250 index).

5.3. Obtaining an acquiring licence in the UK SafeCharge is an entity approved by the Central Bank of Cyprus as an electronic payments establishment. It operates its acquiring activities in Europe out of Cyprus (where it has an e-money licence and is notably a main member of Visa and MasterCard). In a near future, the group will have to obtain a UK licence if it wants to continue serving this region in the context of a hard Brexit. As a payments specialist, we see no reason that would prevent it from obtaining a licence (it should settle this in 2018, probably during H1). Whatever the case, the risk is limited in terms of exposure. Indeed, in total revenue stemming from the Collect business (90% of the group's sales), customers in the UK represent less than 10% of the customer base. In this figure, a significant share concerns the digital services and goods sector, meaning that there is no problem for a merchant to base its company outside the UK.

SafeCharge

6. Appendix

Fig. 41: Presentation of all those involved during a transaction and their roles

Player Role Merchant When a customer makes a purchase with their payment card, the merchant swipes the card and enters the purchase information into a point-of-sale (POS) terminal, or payment is made online through a payment gateway (e-commerce application). Point-of-sale terminals are provided by the merchant’s acquiring financial institution (the “acquirer”) and payment gateway by a payment service provider – also referred to as the payment processor.

Acquirer The merchant’s payment terminal is connected to the network of the acquirer which is connected to the payment network of the payment organisation (such as MasterCard, Visa...). The details of the transactions are transmitted across the network in order to confirm the validity of the card and the availability of the funds to cover the purchase. The merchant will receive an authentication approval and in turn, will provide the goods or services the client is purchasing. In a separate process, the merchant’s acquirer will obtain the amount of the purchase from the cardholder’s payment card issuer and will transfer that amount to the merchant. To establish card acceptance in their business and to offset the cost of managing the payment system, merchants pay a merchant discount rate for each credit and debit card transaction.

Issuer The organisation (bank, retailer...) that provides a credit card is an issuer. It defines the features and terms of the client's card, and handles the billing of its transactions. When a client makes a purchase with its credit card, the issuer is contacted by the acquirer, verifies the transaction information against its records and provides confirmation that the funds are available. It is up to the issuer to flag a problem, like insufficient funds or a refusal of the transaction if the card has been reported stolen. This entire process occurs in only a few seconds every time a client pays with a credit card.

Card association MasterCard, Visa... operate a sophisticated and secure global network that handles billions of transactions annually. Their network connects acquirers with their merchant customers and cardholders with their card issuers.

Processor A technical operator providing infrastructure to support acquirer functions, such as authorisation, clearing and settlement services. In practice, acquirers outsource merchant acquiring services to processor.

Payment service provider A PSP offers shops online services for accepting e-payments by a variety of payment methods including credit card, bank-based payments such as direct debit, bank transfer, and real-time bank transfer based on online banking. It uses a software as a service model and forms a single payment gateway for its clients (merchants) to multiple payment methods. A PSP can connect to multiple acquiring banks, card, and payment networks. In many cases, the PSP will fully manage these technical connections, relationships with the external network and bank accounts. A full-service PSP can offer risk management services for card and bank based payments, transaction payment matching, reporting, fund remittance and fraud protection in addition to multi-currency functionality and services. Some PSPs provide services to process other next-gen methods (payment systems) including cash payments, wallets, prepaid cards, vouchers, and even paper or e-check processing. Some PSPs could be acquirers.

Source: Bryan, Garnier & Co.

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SafeCharge

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