Worldpay shares fall as Jefferies downgrades to 'hold'

11th Aug 2016 09:52

(ShareCast News) - Worldpay shares dropped on Thursday as Jefferies lowered its rating on the stock to 'hold' from 'buy' and cut its target price to 325p from 340p.Jefferies said while the payment processing company's first half results on Tuesday were "strong", growth looks set to decelerate in the second half.Worldpay reported a 6% rise in first half pre-tax profits to £168.6m on the back of a 10% increase in revenue to £2.1bn.The group maintained its full-year guidance and said it was "well positioned to deliver a good performance" in the second half."While the UK's vote to leave the EU has resulted in increased uncertainty, we do not expect it to have a material effect on Worldpay's trading performance," chief executive Phil Jansen said.Looking ahead, Jefferies believes there will also be tough strategic decisions to be made, particularly in the US.Worlday's market share is less than 10% in the US. The company tried to sell is US business before its IPO last year but failed to do so."Management is now planning to invest in eCommerce solutions for its domestic US SME base, which is even more competitive than the UK, the latter having proved tricky for online penetration," said Jefferies."Our view remains that the SME offline base in the US should be divested."Global e-commerce renewals will also hold back divisional growth in the second half, Jefferies warned.The division posted a 25% increase net revenue, boosted by transaction volume growth."But, management stresses that these growth rates should not be extrapolated forward due to: (i) retention in first half 2016 of volume that was delayed in migrating off the WPG platform to lower-cost local acquirers; and, (ii) contract renewals in Global eCom, two global technology companies in particular, which are at lower transaction rates going forward," Jefferies said.While the company expects no further benefits in 2016 of interchange rates, Jefferies believes the guidance does not tally with the timing of fee changes.The group's guidance implies the rate changes were fully implemented months in advance of the EU legislation coming into force."Rate changes were phased in by Visa and MasterCard, but Visa's credit card interchange rate changes did not happen until 9 December 2015."Worldpay should, therefore, see an incremental benefit on its bundled contracts, which are about half of UK net revenue, while c.1/3 of UK transaction value is from credit card transactions. Management has been surprisingly unwilling to provide further disclosure on this point."Shares fell 1.73% to 306.10p at 1014 BST.