Global businesses should remain intact

  • PAX confirmed that the FBI searched its US office. PAX revealed that its US operation has resumed as normal and it is not charged by any US authorities.
  • PAX clarified on media articles. It found Krebs quoted unfounded information and unknown sources. FIS accounted for 0.25% of FY20 revenue.
  • Reiterate Add on PAX as we believe its global business will remain intact.

PAX confirmed that FBI searched its US office

PAX Global Technology (PAX) posted an announcement on 29 Nov 2021 (last Friday) confirming that the Federal Bureau of Investigation (FBI) and the Customs and Border Protection of the US executed a court-authorised search to seize certain items at PAX’s Florida office and warehouse and interviewed certain employees of PAX US (FBI’s actions) on 26 Oct 2021. PAX revealed that its US operations have resumed as normal. PAX said it has not found any published statement of those authorities in connection with FBI’s actions. PAX also confirmed that the company is not aware of any charges filed by any authorities in the US against PAX in relation to the FBI’s actions. The stock resumed trading today, with the share price up 7.4% today (1 Nov 2021).

PAX provides clarification on media articles in the announcement

PAX believe KrebsOnSecurity quoted some unfounded information and unknown sources on FBI’s actions. PAX said that Fidelity National Services (FIS) is the only US customer that has informed PAX that it will stop purchasing from PAX; however, FIS is not a key customer in the US market and only accounted for 0.25% of PAX’s FY20 revenue. PAX mentioned that its point-of-sales terminals (POS) and services are certified compliant with the Payment Card Industry (PCI) compliance standards and all relevant laws and mandatory regulations of countries worldwide. PAX confirmed that there have never been any reported cyberattack incidents, or breach of security protocols, against its products.

Cut c.5-12% FY21-23F EPS forecasts on lower US revenue growth

We do not expect the FBI’s actions to affect PAX’s global businesses given that PAX has built long-term business relationships with its key customers. More importantly, PAX’s POS and services are certified PCI compliant and all its products are tested by its
customers before delivery. We believe that revenue growth in the US market may slow down in the short term given that some potential new customers may hold their orders and existing customers may switch their new orders to Verifone (PAX’s key rival).
Therefore, we cut FY21F/22F/23F EPS forecasts by c.5%/11%/12% on slower revenue growth rate in the US market and keep our forecasts for non-US markets.

Reiterate Add with a lower TP of HK$8.74

We keep our Add call as PAX’s global business should remain intact. We think PAX is trading at a very compelling valuation of c.6x FY21F P/E, on the back of solid earnings outlook (18%/12% EPS growth in FY21F/22F) and strong financial position (HK$3.34bn net cash on hand). Our TP reduces to HK$8.74 on EPS cuts and is now based on 8x FY22F P/E (previously 10x), on par with its 3-year average, reflecting lowered US sales growth. Re-rating catalysts: US authorities halting its investigations and stable global operations. Risks: prolonged US authorities’ investigations affecting its US operations.