Triumph Bancorp’s (NASDAQ: TBK) acquisition of HubTran, announced late last week, has been a Wall Street winner, tacking on as much as $16 to Triumph’s share price in just three days and garnering an analyst report that called the deal “transformative.”
Triumph’s stock, which had been strong since the start of the year — rising to more than $81 pre-deal from about $47 at the start of the year — hit a 52-week high Tuesday at $96.74. That’s a 272% gain in the past year and roughly 57% in the past three months.
The rise Tuesday may have been propelled in part by the report from analyst Steve Moss of B Riley Securities. Triumph is not a company that generally draws a great deal of analyst interest; there were six analysts on the company’s most recent earnings call, a relatively small number.
Triumph Business Capital is the traditional factoring business at Triumph Bancorp. But it is the growing presence of TriumphPay that will benefit from the HubTran acquisition, according to Moss.
The $97 million acquisition of HubTran brings together one of the largest factoring companies in the trucking sector with a company that can provide clients of the TriumphPay unit with a cloud-based settlement function. HubTran, in the announcement of the acquisition, said it uses “automation to process invoices, bill customers, and manage documents efficiently … with enterprise-grade software using optical character recognition and artificial intelligence.”
By owning HubTran, Moss said, TriumphPay now has the capability to “finalize the amount of an invoice and handle all three steps required to facilitate orderly payment flow for freight shipping.” Those three required processes, Moss said, are “presentment, settlement and payment.”
Companies that make large acquisitions sometimes see their stock price decline initially, with analysts often taking a wait-and-see approach toward whether the deal is a good one. That isn’t the case with Moss’ analysis, which raised its price target for the company to $110 from $85, a number that is far in the rearview mirror already.
Moss said he currently forecasts TriumphPay to have a valuation of $54, or roughly half the highest estimate he’s putting out there for the company as a whole. That would put the value of Triumph Pay well in excess of $1 billion, a significant achievement for a division that was launched just in 2017.
Combining HubTran with Triumph will create a company that in the longer term has the ability, Moss said, “to generate several hundred million in revenue, that is balance sheet light and warrants a sharply higher multiple in our view.”
In an earlier earnings conference call with analysts, the company’s director of investor relations, Luke Wyse, described Triumph Business Capital and TriumphPay as “two sides of the same coin.” On that call from October, Wyse had said of TriumphPay that its service “embeds itself with the broker to pay all the broker’s carriers and offer a revenue share with the broker for those quick pays that are selected by the carrier.”
By adding HubTran, Moss wrote, TriumphPay will be able to “service invoices and settlement payments between shippers, third-party logistic companies and their carriers, and those who factor invoices.” That latter group does include Triumph Business Capital.
By bringing in HubTran, 230 brokers and 50 factoring clients are coming into the TriumphPay customer base, Moss said. That includes 17 of the 25 biggest clients, he added. The end combination for TriumphPay will be more than 500 brokers and 55 factoring clients.
The combined run rate is $33 billion in annual payments, Moss said. But “with growing adoption and acceptance of a model that improves back-office efficiency and provides greater security, we believe $50 billion to $100 billion in payment is possible in the next couple of years,” Moss wrote.
TriumphPay’s annual run rate now is $12 billion, according to Moss. That comes after it added two “tier-one brokers” in the first quarter. That $12 billion is part of the $33 billion figure. It is about one-fifth of the “addressable market,” Moss said.
He also suggested that TriumphPay and Triumph Business Capital might be headed in opposite directions. The TriumphPay combination with HubTran’s capabilities will allow greater “automatization of back office payments [that] should create meaningful efficiencies for shippers and brokers.” But the parent corporation will need to guarantee data privacy to its presumably growing base of customers, and Triumph Business Capital will not get any advantage from having TriumphPay as a corporate sibling.
“Triumph Business Capital will have to compete as if it were a standalone entity,” Moss said in his report. That could mean that “some natural friction” might develop between the two “that eventually leads to some sort of spin-off transaction.”
TriumphPay will fundamentally shift its business model with the acquisition, Moss said. The unit now is a “factored receivable, balance sheet heavy generator.” But by bringing in the capabilities of HubTran, it instead will transform into “a fee income interchange generating business.” Moss makes the comparison to Visa and Mastercard as companies that fit into that latter category.
If TriumphPay combined with HubTran turns into a fee-generating machine, it would generate $50 million to $400 million in revenue “in several years,” Moss said.
That has the potential for major impact on Triumph’s stock price. Visa and Mastercard trade at 39X and 45X 2021 estimates, respectively, Moss said, while banks are generally trading at 14X to 5X estimates.