Payments firm Worldpay (WPG), which listed on the stock market in mid-October at 240p a share, is a high class business by a number of measures.

Processing 42% of all UK in-store card payments it is more than twice the size of its nearest rival in the EU.

Worldpay also boasts a strong position in the processing of ‘card-not-present’ transactions - another name for card purchases over the internet.

Snippets like these, which were included in Worldpay’s pre-admission document, demonstrate why we were enthusiastic about the stock ahead of its initial public offering (IPO).

Its size, via its market capitalisation of £5.7 billion, also means the stock could one day feature in London’s FTSE 100 index once other listing criteria have been met.

Further detail contained within Worldpay’s prospectus, published alongside its listing in mid-October, indicates there’s also plenty of risk to go alongside the potential rewards.

These risks, which we cover in more detail below, as well as a higher initial public offering (IPO) price than originally anticipated, means any investor looking at the stock should do so with their eyes wide open.

First the bad news

Investor rewards at Worldpay hinge upon the success of an ongoing technology overhaul which has already cost the business at least £400 million.

Technology systems used by Worldpay were previously provided by RBS (RBS), which owned the unit until a private equity buyout led by Advent International and Bain Capital
in 2010.

Establishing itself as an independent business has required Worldpay to fund and build an entirely new technology platform, known as an ‘acquiring engine’, on which it can conduct its payment processing activities in the future.

‘Going forward, the company expects more modest capital expenditure requirements after completion of the migration of Worldpay’s infrastructure and subsequent migration to Worldpay’s new acquiring engine,’ the company says in its prospectus.

Progress so far has been good according to the company.

New technology has increased network bandwidth 20-fold from the old RBS system. Payment authorisation responses are 3.5 times faster and anti-fraud responses are four times faster, the prospectus says.

The final leg in this technological overhaul is the development of clearing and settlement engines. These systems ensure transactions are performed quickly and reliably. Currently, clearing and settlement facilities continue to be provided by RBS under an agreement extending to November 2017.

When these components are finished, scheduled for early 2016, the process of shifting its 400,000 customers from RBS to the new platform will begin.

Mishaps, for a business processing 31 million transactions per day in 126 different currencies, cannot be ruled out and would be predictably costly both in financial and reputational terms.

There are also other risks, notably around new rules on fees charged by banks to merchants (usually retailers) when they receive card payments and a host of other regulatory issues.

(Click on chart to enlarge)

Without a glitch

Opportunities for Worldpay, once the system is fully operational and assuming no major technical or regulatory glitches, are pretty compelling.

‘It [the system] is designed to be highly configurable, enabling Worldpay to go to market approximately five to 50 times faster than the comparable existing payment systems,’ says the company.

‘The directors estimate that the new acquiring engine’s features will help reduce the impact and cost of regulatory changes to less than one tenth that of existing payment systems.’

If all of this goes according to plan, Worldpay looks like it is reasonably valued relative to its main listed peer NASDAQ-listed Global Payments (GPN:NDQ).

Stripping out costs associated with the tech programme and other exceptional items, Worldpay trades on an underlying earnings before interest and tax (EV/EBIT) ratio of 22.4 compared to Global Payments at 22.3, according to Thomson Reuters data.

These calculations rely on investors believing that Global Payments itself is fairly valued. Analysts at data provider Morningstar are not so sure, giving the stock a two star rating (out of five) based on their most recent estimates.

Calculations of Worldpay’s value also depend on its ability to cut out exceptional costs once the technological transfer is complete. Separately disclosed items shaved £171 million off an underlying operating profit of £296 million in the year to 31 December 2014.

Another uncertainty is finance costs, which should fall following a reduction of debt associated with the IPO. But these are tough to calculate ahead of results for the 2015 financial year and private equity backed IPOs are often jammed full of expensive debt.

EV/EBIT multiples get around this problem because finance costs and tax are not included. But the actual value received by shareholders can differ significantly from this metric, particularly in businesses with high interest debt.

No analysts currently cover the stock, making forward visibility even lower for prospective shareholders.

(Click on chart to enlarge)

Visa stake

Worldpay has the added kicker of a 6% interest in Visa Europe, a non-listed unit operating the Visa card scheme on the continent which is to be bought out by US-listed Visa Inc. (V.:NYSE) in
a deal worth $23.4 billion (£15.2 billion).

As part of the rules of Worldpay’s initial public offering, its former owners retained the right to 90% of Worldpay’s proceeds on this stake. But Worldpay’s 10% should still mean a one-off boost of as much as £91 million, according to our calculations.

There’s not much room in Worldpay’s valuation for any mishaps with its tech transformation or underlying business performance but at 285p the long-term opportunity for the business is clear.