Currently trading on the Toronto Stock Exchange, investor focus has locked in on Points International Ltd. (PTS) as a potential recovery play.
As a leading Canadian technology company tied to airline travel volumes, it has faced its share of difficulties since the global passenger travel industry ground to a halt. While COVID-19 was rapidly spreading around the world, shares were being sold aggressively, with the stock taking a major tumble since early 2020.
Since then, the stock has bounced off its March 2020 lows, doubling to current levels at around C$20. As travel restrictions are loosened in conjunction with accelerating global vaccination programs, the stock could see a strong recovery once the travel industry returns to normalcy. (See Points International stock charts on TipRanks)
An Underappreciated Business Model
Points provides a global technology platform that facilitates over 60 loyalty programs, whereby members can purchase or exchange loyalty points. This provides an important ancillary revenue stream to airlines and hotels.
The company operates through three segments: Loyalty Currency Retailing (LCR), Platform Partners, and Points Travel. LCR, however, typically represents over 95% of total revenue.
LCR operates by integrating into loyalty program databases of partners in order to execute direct, real-time transaction processing. This level of deep backend integration provides Points with strong customer relationships as well as high switching costs. Another boost to stickiness is the long-term nature of Points’ contracts. Partners will typically sign on to a three to five year term, with renewal rates in the 90% range.
In terms of competitors, there aren’t many. The main source of competition lies within the IT departments of airlines or hotels, and given the required resources to replicate Points’ offering, they manage to get a better return by working with the company rather than displacing it.
As Points grows its loyalty partner count, a strong network effect is created. This combined with high switching costs, long-term contracts with high retention, and minimal competition has built a defensible moat for the company, insulating it from competitive pressures.
Resilience to a Downturn
Points has also shown resilience during the travel downturn, driven by its capital-light structure and strong balance sheet. The company operates with low fixed costs since a significant portion of its cost structure is variable in the medium-term and can be managed according to the pace of the recovery.
Approximately 14% of Points’ cost structure is related to technology, leases, and other expenses that are fixed in the long-term. Around 16% is related to marketing, travel, entertainment, and professional fees, which can be reduced in the short-term. The remainder of the cost structure is related to employment expenses at 70%, but this can be reduced to manage cash burn should transaction volumes not recover.
The company carries no long-term debt, and on March 29, Points announced it had closed a C$31.6-million bought deal of 1.7 million common shares, at a price of $18.75 per share. As of Q1 2021, the company had over $84 million in cash available to deploy.
On top of this, management has been able to navigate the pandemic at near-breakeven levels of cash flow, without considering the benefit of working capital. Points typically receives cash from loyalty customers in two to three days (credit cards) and pays the loyalty programs (suppliers) in approximately 30 days. This provides ample downside protection and a source of capital as it grows.
Travel Recovery Expected in Near Future
Global passenger travel is considered one of the top secular growth trends long-term, as travel levels are expected to make a full recovery in the next couple of years.
The International Air Transport Association (IATA) predicts that global passenger numbers will recover to 88% of pre-COVID-19 levels in 2022, and should surpass pre-COVID-19 levels by 5% in 2023. Between 2019-2039, the IATA predicts an average annual growth rate of 3.2%, providing a long runway of growth for Points.
Prior to COVID-19, it is estimated that transaction volumes for the company had been increasing at a robust 13% compound annual growth rate from 2008-2016. Currently, the company is an outperformer in the travel sector, with volumes clocking in at roughly 25% of 2019 levels. Airlines and hotels, meanwhile, are at 0%-15% of 2019 levels. As the industry recovers, Points could continue to outperform the sector.
What Analysts are Saying About PTS
According to TipRanks’ analyst rating consensus, PTS stock comes in as a Moderate Buy. Out of three analyst ratings, there are two Buy recommendations and one Hold. The average Points International price target is C$24.87, implying an upside potential of 22.7%.
Bottom Line
While there is uncertainty regarding the path of the industry, air travel is expected to fully recover and resume near-historical long-term growth trends, driven by growth in the global economy.
Points represents an underappreciated business model that demonstrates resilience to a downturn and leverage to a recovery in travel markets. Downside protection with upside capture is an ideal scenario for long-term investors.
Disclosure: Sean Tascatan has a position in PTS stock.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
