WEX（WEX US）| Share Gainer with Some Near-Term Headwinds Ahead; Initiate at Hold

WEX has seen broad momentum across its business following a post-pandemic normalization period. The company has gained share in its core Mobility segment alongside impressive growth across Corporate Payments and Benefits aided by the recovery of travel volumes and float revenue on HSA balances. While we are optimistic on the long-term outlook for WEX across each of its operating units, we see a more balanced risk-reward profile ahead. Beyond our expectation for mean reversion in the Mobility business, the abating of float revenue tailwinds in the Benefits segment and the normalization of consumer travel volumes cause us to forecast a top-line slowdown towards the low end of the company’s mid-term outlook in the coming years. While we remain on the sidelines for now, potential future upside catalysts that could cause us to be more positive on the stock include: consistent 20%+ growth in the Benefits segment (ex-float), further penetration into the SMB B2B payments space, and an expanded EV strategy to capitalize on the shifting economics as fleets transition from ICE-only to EV/mixed in the coming years. We are initiating coverage on WEX with a Hold rating and $190 target price.

Mobility Solutions is WEX’s largest segment (~61% of revenue), where the company is a global leader in fleet vehicle payment solutions. WEX had a banner FY22 in the Mobility segment with organic growth outpacing that of peers, driven by a combination of expansion among the company’s existing customer base and finance fee growth ahead of expectations. However, following many quarters of impressive execution, we do expect some mean reversion in WEX’s Mobility segment. In particular, roughly one-third of WEX’s Mobility business is over the road, heavy trucking, an industry that has seen a material slowdown given the postpandemic shift in spending patterns away from goods and towards services. WEX saw same store sales fall -2% in 1Q23 and we do not expect any material uptick in that metric in the near term. As such, we are modelling ~3% Y/Y organic growth in FY23, below the company’s ~4-8% mid-term target for the segment. While we do expect some incremental acceleration into FY24/FY25, we expect that recent trends in WEX’s Mobility growth will flip and the company will lag behind its closest competitor through our forecast period and remain at the low end of its mid-term outlook for the next two years.

WEX’s Benefit solutions segment (~21% of revenue) offers SaaS software with embedded payment solutions as well as plan administration tools for employer provided health benefits and benefit enrollment. Following multiple acquisitions that expanded WEX’s capabilities, the company is now addressing a ~$10bn TAM that is growing ~9-12% annually. Importantly, WEX now provides custodial and depository services for Health Savings Accounts (HSAs) through the company’s WEX Bank subsidiary, which is the 6th-largest HSA custodian in the US with ~ $4.9bn in AUM and 2.2m HSA accounts where WEX acts as custodian. WEX’s depository services generate high-margin float revenue that accounted for ~12% of the segment’s revenue in FY22, growing ~152% Y/Y. WEX is guiding to ~25-30% growth in Benefits in FY23 and is targeting long-term annual revenue growth of ~15-20% (excluding the impact of interest rates). We are currently modelling FY24/ FY25 growth just below the company’s long-term target given the potential for interest rate cuts and what we see as a challenging macro environment for benefits providers in the near term.

WEX’s Corporate Payments solutions (~17% of revenue) provides customers with embedded payments offerings that allow customers to integrate the company’s vertical payments solution directly into existing workflows via a set of proprietary APIs. Moreover, the company is the clear market leader in travel with customers including OTAs and airlines, with travel accounting for 70%+ of segment volumes. WEX was a pioneer in the virtual card industry and the company has further expanded into AP automation and spend management where WEX has won major deals, including with AVDX and AXP. We see great potential in the company’s recently launched Flume offering, targeted at WEX’s ~500k SMB customers. With Flume, WEX is pursuing SMBs that aren’t using AP automation services today, but are already in the WEX ecosystem with existing relationships which we see as a significant cross-sell opportunity going forward. WEX is guiding to Corporate Payments growth of ~7-11% in FY23, below the company’s mid-term outlook of ~10-15%, as it laps a very difficult FY22 comp. While we expect WEX will come in at the high end of its FY23 guide for the segment, we expect Corporate Payments growth to trend towards the bottom end of the mid-term range through the remainder of our forecast period.

Our $190 target price is based on a CY24E P/E of ~12x, a premium to legacy payment peers but a discount to the networks, which we believe is warranted given WEX’s top-line growth trajectory and EPS growth potential over the mid-term. Potential upside risks include continued outperformance in the Mobility segment, incremental deposits at WEX Bank, acceleration in travel trends, and new customer wins. Downside risks include a slowdown in the demand environment for branded fuel cards or corporate payments services, mean reversion in recent travel trends, further declines in fuel prices, increased FX headwinds, and increasing competition.