Small Caps | 10:05 AM
Cuscal's unique position in Australia's payments infrastructure market offers attractive earnings growth, supported by high barriers to entry, operating leverage and acquisitions.
- Cuscal's payments infrastructure creates high barriers to entry
- Transaction growth and acquisitions underpin earnings expansion
- International payment providers challenge Cuscal's competitive moat
- Valuation divides analysts' views
By Danielle Ecuyer
Cuscal ((CCL)) listed in November 2024 at $2.50, with substantial shareholder Bendigo and Adelaide Bank ((BEN)) selling its equity ahead of the IPO.
Share price charts since are almost the perfect embodiment of what every long-term investor wants to own.
Over the last year, the share price has tracked steadily but cautiously higher from the bottom left-hand corner of the chart to the top right-hand corner. Every pullback since late 2024 has been benign, including the recent one.
Having retreated slightly from its 52-week high of $6.598, the current price around $6 is up 65%-plus from a low of $3.63, taking Cuscal's market capitalisation to $1.14bn.
That performance certainly stands out when small caps have been under considerable pressure over 2026, burdened by rising interest rates, adverse macro conditions and an unfavourable Federal Government budget regarding CGT changes.
Stockbroker Morgans initiated coverage this week. Cuscal is the largest independent business-to-business payments infrastructure provider in Australia, outside of the four major banks.
It has around 150 institutional clients, manages more than eleven million cards and processes representing around 16% of Australia’s New Payments Platform (NPP) transactions (PayID and PayTo).
In essence, Cuscal facilitates the technology which permits smaller banks and fintechs to offer customers the same payment capabilities as a big bank. The alternative option would be to build a competing infrastructure.
Services include card issuing, payment processing, real-time payments, merchant acquiring (allowing businesses to accept and process electronic payments), as well as fraud prevention and data services.
In terms of the infrastructure, we are talking about the technology, including software, payment-processing systems, network connections, data centres and regulatory licences, rather than the physical infrastructure, like telecommunications cables.
As far as Morgans is concerned, Cuscal has a “unique position in payments infrastructure”.
Importantly, the business model is largely transaction-volume-based, not value-based, which facilitates steady long-term compounding growth, the analyst emphasises.
Due to the relatively high barriers to entry for another party to replicate the scope of the services and the infrastructure, including licensing approval and material investment spend, the client base remains “sticky”, with historical churn of around -1% of revenue.
No major clients were lost in FY26.
Cuscal, outside of the banks, is one of only few providers with what is described as “full-spectrum” payments infrastructure, as well as ADI (Authorised Deposit-taking Institution) status, as regulated by APRA, including the licences and scope to provide direct settlement and NPP connectivity.
Factors improving the competitive position
Morgans calls out Cuscal's ‘infrastructure’ as a “durable” moat, with relatively high barriers to entry, including investment costs and regulatory issues.
The durability of client retention is also earmarked as a positive. Some 64% of FY24 revenue had two or more years to run, implying a sizeable portion of revenue is contracted, and some relationships have persisted for over 40 years.
From an industry perspective, the transition to non-cash payments from cash, as well as fewer, larger transactions to more, smaller, frequent ones, is emphasised by Morgans as a positive macro tailwind.
Fees, as noted, are more volume-based than value-based. Cuscal also has an early-mover advantage in NPP. It connected 40 institutions to the NPP on launch day in 2018, prior to other banks.
Morgans indicates Cuscal was the first Australian company to develop connectivity infrastructure for Apple Pay, Google Pay and Samsung Pay.
Operating leverage is also on a growth trajectory. Revenue has grown faster than costs, allowing for an expansion in EBITDA margin, which rose to around 24% in FY26 from circa 17% in FY23.
FY26 results released in August showed volumes advanced 12% y/y, exceeding management’s guided high single-digit level, while underlying EBITDA rose 16% y/y to $76m.
Macquarie noted organic transaction volume growth of 6% y/y as well as contributions from the recently acquired Indue. Organic opex grew 4% y/y, which offers further evidence that operating leverage is emerging in the core business, ahead of the larger synergies from two recent acquisitions.
Canaccord Genuity pointed to the first full half-year contribution of Indue, following its acquisition in December 2025, and a one-month contribution from Paymark.
For context, Indue had added around 20 banking, government and fintech clients, with the broker noting management expects around $15m–$20m of annual post-tax cost synergies by FY29 and commending Cuscal for achieving $2.1m of cost synergies already in the first seven months of ownership in FY26.
The acquisition is expected to be more than 25% EPS accretive at full run-rate.
Paymark, bought in May, has brought forth a “meaningful” presence in NZ’s payments infrastructure market, and the broker expects the acquisition to be mid-single-digit EPS accretive in FY27.
Canaccord points out Cuscal’s Acquiring business, which accounts for around 9% of net operating income (NOI), has experienced weaker growth as international payment providers such as Square capture an increasing share of transaction activity.
Acquiring refers to the infrastructure that enables merchants to accept electronic payments, with Cuscal’s customers being the banks and payment providers that offer these services to retailers and other businesses, rather than the merchants themselves.
Importantly, Cuscal has not lost any Acquiring customers, but some are increasingly using international providers to process transactions, limiting revenue growth.
Acquiring net operating income remained flat at $30m in FY26, with management expecting continued challenges in FY27.
This weakness is being offset by stronger growth in Issuing, which supports banks providing debit and credit cards and accounts for 59% of net operating income, and Payments, including real-time transfers through the NPP, representing another 24%, Canaccord explains.
At the recent AGM, Ord Minnett indicated management had reconfirmed FY27 guidance for “mid-20s” underlying net profit after tax growth, which aligns with consensus forecasts, although Ord Minnett is itself more upbeat with a $60m forecast (management's guidance amounts to circa $57.75m).
At the FY26 results, Cuscal identified organic transaction volume growth as well as full-year contributions from Indue and Paymark as supporting its guidance for FY27.
Ord Minnett is forecasting a three-year EPS CAGR of around 22%, which is expected to achieve “earnings certainty” against a difficult macroeconomic backdrop of RBA rate hikes and high energy prices.
Canaccord expects double-digit net profit after tax growth annually out to FY29. When combined with the Indue and Paymark synergies, FY29 net profit after tax growth should reach 28%.
Macquarie observed management explained the existing Paymark switch as operationally “clunky” and investment is well overdue.
Management also explained at the FY26 results that both Indue and Paymark will initially dilute consolidated margins. Indue will only lift margins once duplicated vendor infrastructure is retired. This means FY27 net profit after tax growth will be less margin-led and more contribution-led at the group level.
In terms of dividends, Bell Potter highlighted dividends will be based on 18%–19% capital adequacy and, as noted by Macquarie, any dividend increase needs to be sustainable. As at FY26, the capital ratio stood at 19.1%.
Strategically, Morgans sees Cuscal’s growth emanating from four key pillars; product and geographic extension, including ongoing investment in fraud detection and data analytics; ongoing product and capability offerings to remain relevant with technological change; organic client growth, plus M&A like the Indue acquisition, as well as a strong risk management framework.
In terms of competitors, Morgans notes ASL, Fiserv and J.P. Morgan as also covering parts of Cuscal’s range of services, but none have the breadth of offering in Australia.
Morgans suggests replicating Cuscal’s “connectivity” would take considerable time and investment.
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