RBC Dominion Securities Inc.

Drew McReynolds, CFA, CA (Analyst)

(416) 842-3805 drew.mcreynolds@rbccm.com Toze Francisco (Associate) (416) 842-4123 toze.francisco@rbccm.com

Haran Posner (Analyst)

(416) 842-7832 haran.posner@rbccm.com

May 5, 2013

Points International Ltd.

We See Further Upside Potential in the Shares as Growth Accelerates through 2014
Our View: Q1/13 was an in-line quarter with management reiterating 2013 guidance that points to significant underlying momentum in the business.

Outperform
NASDAQ: PCOM; USD 18.66; TSX: PTS Price Target USD 22.00 19.00
WHAT'S INSIDE Rating/Risk Change In-Depth Report Preview Price Target Change Est. Change News Analysis

Key Points:
Increasing price target from $19 to $22. We have made adjustments to our forecast to reflect: (i) higher revenue growth in 2014E; (ii) slightly higher gross margins at 15% longer-term; and (iii) higher depreciation and amortization. Our 2013E and 2014E EBITDA estimates change from $9.9MM and $19.6MM, respectively, to $8.8MM and $20.9MM. Following our estimate revisions and a lowering of our WACC from 11.5% to 11.0%, our price target increases from $19 to $22. Our lower WACC assumption (which translates to a $1/share increase in our target) reflects, in our view, improving visibility on the accelerating growth profile through 2014E. We continue to see upside in the shares. Management expects runrate revenue and EBITDA exiting 2013 of $300MM and $20MM (before strategic investments). We believe these run-rates sustainably increase the company's earnings power. Driving this outlook is the recent addition of eight new partners including principal partners Southwest Airlines and Finnair. This outlook excludes any contribution from the current pipeline of potential new business (>$50MM in annualized revenue), which we believe could be crystallized over the next 12 months, providing further upside to our forecast. We believe current levels still represent an attractive entry point given the robust EBITDA CAGR through 2015E (58%), the absence of cash taxes, a debt-free balance sheet with a growing cash balance ($22MM in 2013E), and option value with Points.com as well as ongoing mobile payments and third-party API initiatives. Q1/13 operating results in line with expectations. Revenue of $37MM (+32% YoY) exceeded our $32MM estimate, reflecting a higher contribution from principal partners (new and existing) and seasonal effects. EBITDA of $529k (-53% YoY) was in line with our $509k estimate with the YoY decrease reflecting incremental investments across the business. EPS of $0.00 was essentially in line with our -$0.01 estimate. We see growth accelerating in H2/13 and continuing through 2014E driven by new partners (Southwest) and a pipeline of potential new partners. Key takeaways from the quarter: (i) the company delivered on the first quarter of what is a very strong 20132014 outlook implied by guidance (which was unchanged as expected); (ii) the contract with Southwest remains on track to commence in Q3/13; and (iii) Europe (25% of revenue) remains sluggish but is showing early signs of improvement.

Scenario Analysis*
Downside Scenario 16.00 14%
*Implied Total Returns

Current Price 18.66

Price Target 22.00 18%

Upside Scenario 26.00 39%

Key Statistics
Shares O/S (MM): Dividend: 15.4 0.00 Market Cap (MM): Yield: Enterprise Val. (MM): 287 0.0% 166

RBC Estimates
FY Dec Revenue (MM) Prev. EBITDA (MM) Prev. EPS (Op) - FD Prev. Revenue (MM) 2013 Prev. EBITDA (MM) 2013 Prev. 2011A 122.9 5.8 0.25 Q1 36.9A 32.0E 0.5A 2012A 139.5 6.2 0.54 Q2 43.3E 44.4E 1.4E 1.8E 2013E 213.0 213.9 8.8 9.9 0.28 0.34 Q3 57.9E 61.9E 3.0E 3.6E 2014E 327.9 317.8 20.9 19.6 0.91 0.86 Q4 74.9E 75.6E 3.9E 4.0E

All values in USD unless otherwise noted.

Priced as of prior trading day's market close, EST (unless otherwise noted).

For Required Non-U.S. Analyst and Conflicts Disclosures, see page 6.

Target/Upside/Downside Scenarios
Exhibit 1: Points International Ltd.
30.00

Investment Thesis
Despite recent share price performance, we continue to see upside in the shares. Management expects runrate revenue and EBITDA exiting 2013 of $300MM and $20MM (before strategic investments). We believe these run-rates sustainably increase the company's earnings power. Driving this outlook is the recent addition of eight new partners including principal partners Southwest Airlines and Finnair. This outlook excludes any contribution from the current pipeline of potential new business (> $50MM in annualized revenue), which we believe could be crystallized over the next 12 months, providing further upside to our forecast. We believe current levels still represent an attractive entry point given the robust EBITDA CAGR through 2015E (58%), the absence of cash taxes, a debt-free balance sheet with a growing cash balance ($22MM in 2013E), and option value with Points.com as well as ongoing mobile payments and thirdparty API initiatives. Potential Catalysts for the Stock: The addition of new principal partners Execution toward management's run-rate revenue and EBITDA targets of $300MM and $20MM exiting 2013, respectively Greater than expected acceleration in transaction activity on Points.com Potential Risks for the Stock: The loss of key principal partners given the reasonably high degree of partner concentration The inability to renew key principal partner contracts at favourable terms The loss of U.S. Airways following the proposed merger with American Airlines A trend toward In-house solutions by loyalty partners

26.00
25.00

22.00

Share Price (USD/sh)

20.00

18.66 16.00

15.00

10.00

5.00

0.00

Current Share Price

Price Target

Upside Scenario

Downside Scenario

Source: RBC Capital Markets estimates

Target Price/ Base Case Our base case scenario assumes no further major principal partners and mid-teen gross margins. To derive a one-year target of US$22.00 for Points, we use a discounted FCFbased approach. Our valuation assumes a WACC of 11.5%, which exceeds the 9.010.0% WACC we use to value the long-established companies in our coverage universe. We assume a terminal growth rate of 3.0% and include cash net of deposits payable to commercial partners Upside Scenario Our upside scenario translates to a value per share of US $26.00. In this scenario, we assume the addition of one major principal partner in 2015 and a modest expansion in gross margins to the 1617% level. Downside Scenario Our downside scenario translates to a value per share of US $16.00. In this scenario, we assume the loss of one major principal partner in 2015 and a modest contraction in gross margins to the 1314% level.

Exhibit 2: Summary of Q1/13 Results versus Expectations

($000s, unless stated) Revenues Principal Other partner revenue Interest Total Direct costs Gross margin Gross margin % Ongoing operating costs EBITDA EBITDA margin % Adjusted EPS Q1/13A Q1/13E Q1/12A YoY Comments

34,600 2,304 14 36,918 30,259 6,659 18.0% 6,130 529 1.4% ($0.00)

28,946 2,987 60 31,994 25,289 6,705 21.0% 6,196 509 1.6% ($0.01)

25,340 2,689 9 28,038 21,632 6,406 22.8% 5,289 1,117 4.0% $0.03

36.5% (14.3%) 55.6% 31.7% 39.9% 3.9% -481 bps 15.9% (52.6%) -255 bps nmf

Better than expected (due in part to seasonality ) after a relatively softer Q4/12 Decline due to mix of partners and product sales

Expect gross margins to remain below 20% as new contracts come online YoY increase consistent with accelerated investments in the business

Sources: Company reports, RBC Capital Markets estimates

Exhibit 3: Calculation of One-Year Target Price

Cost of Capital Equity Debt WACC Terminal Growth Rate Cost Cap 12.1% 5.0% Weight 85% 15% WACC 10.3% 0.8% 11.0% 3.0% DCF Sensitivity WACC 10.0% 11.0% $22.06 $20.11 $22.83 $20.69 $23.69 $21.34 $24.68 $22.07 $25.83 $22.89 $27.16 $23.84 $28.73 $24.93 2017E 29,437 (3,566) 25,871 (6,727) 3,566 (2,475) 5,199 25,435 2018E 30,545 (3,637) 26,908 (6,996) 3,637 (2,599) 3,394 24,345

$22.07 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 2014E 20,944 (3,360) 17,584 (8) 3,360 (2,138) 15,554 34,352

8.0% $27.77 $29.24 $30.97 $33.05 $35.59 $38.76 $42.84 2015E 24,624 (3,427) 21,197 (5,511) 3,427 (2,245) 15,830 32,698

9.0% $24.54 $25.58 $26.77 $28.17 $29.82 $31.80 $34.22 2016E 27,511 (3,496) 24,016 (6,244) 3,496 (2,357) 7,153 26,063

12.0% $18.52 $18.97 $19.47 $20.03 $20.65 $21.34 $22.13 2019E 31,658 (3,710) 27,949 (7,267) 3,710 (2,729) 3,495 25,159

13.0% $17.21 $17.57 $17.96 $18.39 $18.87 $19.40 $19.99 2020E

14.0% $16.11 $16.40 $16.71 $17.06 $17.43 $17.84 $18.30 TV

Discounted FCF (US$000) EBITDA Less: Depreciation and amortization EBIT Less: Unlevered cash taxes Add: Depreciation and amortization Less: Capex Less: in non-cash working capital Free Cash Flow to the Firm

2010A 3,271 (895) 2,376 172 895 (5,333) 4,282 2,392

2011A 5,755 (2,298) 3,457 487 2,298 (2,121) 2,175 6,296

2012A 6,221 (2,803) 3,418 4,769 2,803 (1,698) 6,748 16,040

2013E 8,804 (3,319) 5,485 267 3,319 (2,036) 16,821 23,856

Terminal Growth Rate

32,808 (3,784) 29,024 (7,546) 3,784 (2,865) 3,607 26,004 334,795

Enterprise Value Add: Cash (Net of Deposits Payable) Add: Investments Equity Value Equity Value per Share (US$) Target price US$

305,486 10,968 5,000 321,454 $20.65

310,452 21,817 5,250 337,519 $22.07 $22.00

308,924 41,405 5,513 355,842 $23.13

Sources: Company reports, RBC Capital Markets estimates

Exhibit 4: Summary of Financial Forecast

Market Data (US$) Share Price (US$): 52-week High: 52-week Low: 100-day Average Volume (NASDAQ): Shares Outstanding Basic ('000): Market Capitalization (US$000): Enterprise Value (US$000): Year-End December (US$000) Revenue Principal Other partner revenue Interest Total Revenue Direct costs Gross margin Ongoing operating costs EBITDA Depreciation and amortization EBIT Capital tax, interest and other EBT Taxes FX gains/losses and other Net Income Per Share Data1 Adjusted EPS2 Operating Cash Flow Free Cash Flow3 Book Value Net Debt / (Cash) Profitability Gross Margin EBITDA Margin EBIT Margin Valuation Multiples EV/EBITDA Price/Adj. EPS 1 Price/Operating Cash Flow Price/Free Cash Flow2 Price/Book Value Average Basic Shares O/S 1
1 2

$18.66 $18.66 $8.63 36,362 15,120 282,146 249,506 2008 65,483 9,194 920 75,597 58,717 16,880 16,324 556 1,532 (977) 566 (1,543) 2,012 (3,555) 2009 70,781 8,946 52 79,779 63,057 16,722 16,115 607 783 (176) 14 (190) (344) 90 64

RBCCM Targets (US$) Rating: Outperform 1-yr. Price Target (US$): $22.00 Annual Dividend: $0.00 Dividend Yield: 0.0%

Statistical Summary Revenues (US$000) EBITDA (US$000) EPS FCFPS

2008 2009 2010 2011 2012 2013E 2014E 75,597 79,779 95,678 122,934 139,509 212,985 327,939 556 607 3,271 5,755 6,221 8,804 20,944 $ (0.10) $ 0.01 $ 0.17 $ 0.25 $ 0.54 $ 0.28 $ 0.91 $ 0.05 $ 0.04 $ 0.19 $ 0.31 $ 0.40 $ 0.46 $ 1.26

2010 89,087 6,577 14 95,678 76,006 19,672 16,401 3,271 895 2,376 24 2,352 (172) 570 1,954

2011 114,865 8,048 21 122,934 98,501 24,433 18,678 5,755 2,298 3,457 4 3,453 (487) (92) 4,032

Q1/12 25,340 2,689 9 28,038 21,632 6,406 5,289 1,117 661 456 456 (73) (45) 574

Q2/12 34,208 2,112 9 36,329 29,192 7,137 5,036 2,101 699 1,402 1,402 69 29 1,304

Q3/12 32,172 2,159 8 34,339 27,300 7,039 5,487 1,552 715 837 (19) 856 118 (8) 746

Q4/12 38,139 2,657 7 40,803 32,825 7,978 6,527 1,451 728 723 (33) 756 (4,883) 1 5,638

2012 129,859 9,617 33 139,509 110,949 28,560 22,339 6,221 2,803 3,418 (52) 3,470 (4,769) (23) 8,262

Q1/13 34,600 2,304 14 36,918 30,259 6,659 6,130 529 919 (390) (390) (370) 28 (48)

Q2/13E 40,852 2,346 54 43,252 35,679 7,573 6,193 1,380 800 580 10 570 148 422

Q3/13E 55,435 2,399 64 57,898 48,426 9,472 6,501 2,971 800 2,171 10 2,161 562 1,599

Q4/13E 71,877 2,952 88 74,917 64,019 10,898 6,974 3,924 800 3,124 10 3,114 810 2,305

2013E 202,764 10,001 219 212,985 178,383 34,602 25,798 8,804 3,319 5,485 30 5,455 1,150 28 4,277

2014E 316,118 10,859 963 327,939 279,991 47,948 27,004 20,944 3,360 17,584 40 17,544 3,615 13,929

$ $ $ $

(0.10) $ 0.10 $ 0.05 $ 0.89 $ (22,854) 22.3% 0.7% -1.3% nmf nmf nmf nmf 20.9x 13,664

0.01 $ 0.05 $ 0.04 $ 0.86 $ (23,914) 21.0% 0.8% -0.2% nmf nmf nmf nmf 21.6x 14,982

0.17 $ 0.28 $ 0.19 $ 1.05 $ (28,463) 20.6% 3.4% 2.5% nmf nmf nmf nmf 17.7x 14,982

0.25 $ 0.35 $ 0.31 $ 1.27 $ (34,853) 19.9% 4.7% 2.8% nmf nmf nmf nmf 14.7x 15,040

0.03 $ 0.11 $ 0.09 $ 1.34 $ (37,622) 22.8% 4.0% 1.6% nmf nmf 42.3x 46.6x 13.9x 15,079

0.09 $ 0.13 $ 0.12 $ 1.42 $ (32,640) 19.6% 5.8% 3.9% nmf nmf 43.6x 46.9x 13.1x 15,111

0.05 $ 0.14 $ 0.13 $ 1.47 $ (34,145) 20.5% 4.5% 2.4% nmf nmf 37.3x 40.4x 12.7x 15,120

0.37 $ 0.10 $ 0.06 $ 1.84 $ (45,108) 19.6% 3.6% 1.8% nmf 34.6x 39.3x 46.1x 10.1x 15,120

0.54 $ 0.48 $ 0.40 $ 1.84 $ (45,108) 20.5% 4.5% 2.5% nmf 34.6x 39.3x 46.1x 10.2x 15,138

(0.00) $ 0.01 $ (0.01) $ 1.82 $ (39,611) 18.0% 1.4% -1.1% nmf 37.1x 48.7x nmf 10.3x 15,473

0.03 $ 0.09 $ 0.08 $ 1.85 $ (48,188) 17.5% 3.2% 1.3% nmf 42.1x nmf nmf 10.1x 15,473

0.10 $ 0.19 $ 0.18 $ 1.95 $ (66,971) 16.4% 5.1% 3.7% nmf 37.4x 47.2x nmf 9.6x 15,473

0.15 $ 0.25 $ 0.22 $ 2.10 $ (68,912) 14.5% 5.2% 4.2% 28.3x nmf 34.0x 40.6x 8.9x 15,473

0.28 $ 0.55 $ 0.46 $ 2.10 $ (68,912) 16.2% 4.1% 2.6% 28.3x nmf 34.0x 40.6x 8.9x 15,473

0.91 1.36 1.26 3.00 (103,232) 14.6% 6.4% 5.4% 11.9x 20.6x 13.7x 14.8x 6.2x 15,473

Adjusted for the February 2011 reverse stock split Fully diluted excluding unusuals and FX gains/losses 3 Free cash flow is defined as cash from operations before changes in working capital less capex

Sources: Company reports, RBC Capital Markets estimates

Valuation
To derive a one-year price target of US$22.00 for Points, we use a discounted FCF-based approach. Our valuation assumes a WACC of 11.0%, which exceeds the 9.010.0% WACC we use to value the long-established companies in the media sector. Based on a theoretical capital structure of 15% debt and 85% equity as well as a 5.0% after-tax cost of debt, our WACC assumption translates to a cost of equity of 12.1%. We assume a terminal growth rate of 3.0% and include cash net of deposits payable to commercial partners.

Price Target Impediments

Impediments to the shares reaching our one-year price target include: (i) potential disruption in the travel industry; (ii) potential loss of key loyalty partners given the high degree of partner concentration; (iii) a weaker than expected cyclical recovery in transactional activity; and (iv) in-house solutions by loyalty partners and/or adverse changes to contracts.

Company Description
Points International is the owner and operator of Points.com, the world's leading reward program management web site. In addition to operating the consumer website at Points.com, the company helps loyalty programs leverage their own online presences and drive greater member engagementa key success factor for a loyalty program. Points operates two segments: Loyalty Currency Services (95% of revenue); and Consumer Services (5% of revenue). Across the two segments, Points has more than 50 loyalty partners.

Required Disclosures Non-U.S. Analyst Disclosure

Toze Francisco and Haran Posner (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Conflicts Disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. RBC Capital Markets, LLC makes a market in the securities of Points International Ltd. and may act as principal with regard to sales or purchases of this security. The author is employed by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada.

Explanation of RBC Capital Markets Equity Rating System

An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector average. Ratings Top Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Rating As of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflects a security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility.

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For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/ Outperform, Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described above).
Distribution of Ratings RBC Capital Markets, Equity Research Investment Banking Serv./Past 12 Mos. Count Percent 294 38.68 170 25.30 8 10.53

Rating BUY[TP/O] HOLD[SP] SELL[U]

Count 760 672 76

Percent 50.39 44.56 5.04

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or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited, RBC Capital Markets (Hong Kong) Limited or Royal Bank of Canada, Hong Kong Branch at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388). To Singapore Residents: This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch and Royal Bank of Canada (Asia) Limited, registered entities granted offshore bank and merchant bank status by the Monetary Authority of Singapore, respectively. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicative of future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch or Royal Bank of Canada (Asia) Limited. To Japanese Residents: Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financial instruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank. . Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright RBC Capital Markets, LLC 2013 - Member SIPC Copyright RBC Dominion Securities Inc. 2013 - Member CIPF Copyright RBC Europe Limited 2013 Copyright Royal Bank of Canada 2013 All rights reserved