The NAGA Group — Further ecosystem expansion delayed

NAGA’s revenues increased 25% y-o-y to €16.1m in FY18, in line with the company’s forecast of a year-on-year sales growth. Brokerage revenues reached €8.1m (up by 24% y-o-y) coupled with the expansion of NAGA Markets’ (NAGA’s online broker) customer base by c 25.7k. At the same time, however, trading volume decreased from €42bn to €36bn due to lower market volatility through the year and new ESMA regulations, which introduced new leverage restrictions for retail clients trading in CFDs. At end-2018, NAGA Group managed customer assets of €15.8m vs €10.6m at end-2017. Revenues from services increased 27% y-o-y to €8.0m in 2018, which included €7.6m generated on sales to NDAL, the company’s business partner. NDAL raised US$50m in an initial coin offering (ICO) (conducted by NAGA last December) and is responsible for the development of the NAGA Coin, NAGA Wallet and NAGA Exchange. Together with revenues from activated programming services of €1.6m, NAGA’s total performance stood at €17.7m in FY18, up 26% y-o-y.

EBITDA decreased to €0.3m from €2.9m in FY17 and the net loss was €4.1m vs €2.2m in the previous year. This means earnings fell short of the company’s guidance of a slight year-on-year decline. Dynamic growth in total performance and reduction of brokerage expenses on the acquisition of HBS were more than offset by higher operating costs and one-off items. Over FY18, NAGA’s personnel expenses increased significantly to €6.8m from €2.7m, driven by an increase in headcount following the HBS acquisition (91.5 in full-time equivalents at end-2018 vs 22 at end-2017), higher salaries and an €0.5m management bonus payment attributable to FY17 performance. Marketing expenses reached €1.8m vs €0.2m in FY17 as the company embarked on new promotional activities, such as the HSV partnership and co-operation with Sky Media. The company previously highlighted that marketing expenses for the 2018/19 football season should reach c €1.8m and anticipates this will have a positive impact on its business in 2019.

One-off items included a value adjustment on receivables of €1.8m, predominantly an adjustment for doubtful receivables at €1.7m. We note that this write-off was booked on receivables from NDAL for NAGA’s advisory services. This may come as a surprise given that NDAL collected the equivalent of US$50m in the ICO in December 2017. We believe this write-off may be an indication that these proceeds are now largely exhausted, as they were already spent and/or because some part was held in cryptocurrencies and lost a significant part of its value. Moreover, NAGA recognised an €0.8m impairment charge on NAGA Virtual Software (an exchange for virtual goods), a former JV with Deutsche Börse that sold its 40% stake in the platform to NAGA in September 2018.

In FY18, the company’s equity ratio increased to 96.2% from 79.7%, assisted by a sharp growth in equity to €119.5m from €20.3m. This follows the issue of c 11.8m shares in exchange for contributions in kind for the acquisition of HBS in February 2018. At the time, NAGA’s shares traded at €8.10, which boosted the acquisition price to €95.4m (the transaction was entirely non-cash) as well as NAGA’s equity This has translated into a goodwill recognition of €94.7m. Importantly, NAGA’s current share price is much lower at €0.97.

Operating cash flow was negative at €2.9m vs a negative €4.2m in FY17. NAGA’s cash position decreased by 58% y-o-y to €3.7m at end FY18 from €8.7m due to a €3.7m decline in accounts payables (vs an increase of €1.3m in FY17) and €2.1m investments in intangible assets (vs €1.5m in FY17), which we understand resulted from the development of Naga Trader.

In April 2019 NAGA announced it will restructure the group amid continued uncertainties in capital markets, specifically the cryptocurrency space. The company aims to improve profitability through cost savings of 60–70% compared to FY18. NAGA will now focus on the organic growth of its customer base and its profitable social trading platform Naga Trader. In addition, it will shift all operational tasks to the group’s offices in Cyprus and reduce its operations and personnel in Germany and Spain. It is worth noting that management board member and the company’s largest shareholder, Yasin Qureshi, moved from the management board to a newly created advisory board on 30 April 2019 and will focus on strategy, innovation, business development and M&A. As a result, the management board was reduced from three to two members: Benjamin Bilski, NAGA’s co-founder, and Andreas Luecke, who is also a supervisory board member at HBS. The company hopes the restructuring measures will bring positive effects in FY20.

However, NAGA highlights that unfavourable market conditions and economic uncertainties coupled with the ongoing restructuring process may have an adverse impact on its FY19 results. Due to weaker business activity in Q119, NAGA guides to a slight decline in brokerage revenues in FY19. The company states the trading volume and customer base is growing, with trading volumes expected to improve 50% y-o-y in FY19. NAGA anticipates EBITDA will decrease substantially, affected by lower revenues and restructuring costs despite the intended expansion into new markets outside the EU (for instance, Southeast Asia). We would like to underline that NAGA expects a significant decline in revenues from advisory services to NDAL, which seems to be an indication that product development within the Naga ecosystem will be lacklustre in the near term. Consequently, NAGA expects a higher net loss in FY19 vs FY18.

In December 2018, NAGA agreed to cooperate strategically with Binance, one of the largest cryptocurrency platforms in the world as measured by trading volume. In the initial part of the cooperation, NAGA Group will enable Binance Coin (BNB) cryptocurrency holders to invest in products on Naga Trader without having to exchange their BNBs for a classic fiat currency beforehand. In addition, Naga Trader can now be used to purchase all NAGA’s investment products via a Bitcoin or Ethereum account (where these cryptocurrencies may act as base currencies) and customers may take short positions in cryptocurrencies. We estimate that the average daily traded value in the BNB cryptocurrency over the last three months was around $354m.

In our last update note we discussed the remaining FY18 developments in the NAGA ecosystem, such as the introduction of an AI-based robo-adviser, the launch of the beta version of Naga Exchange (which went live in May 2019) and the introduction of Naga Card. It should be noted that p2pfx, NAGA’s subsidiary that was supposed to launch its online FX/CFD peer-to-peer trading app by the end of 2017 or early 2018, did not conduct any business activities in 2018. NAGA states that this year it will develop a new cryptocurrency-trading platform and change p2pfx’s name accordingly. We understand that NAGA intends to focus primarily on Naga Trader and will keep the investments in other components of the ecosystem (including products developed by NDAL) to a minimum amid the ongoing restructuring process. Having said that, NAGA intends to launch a new service called NAGA Stocks in August 2019, which will allow users to trade directly in listed stocks and aims to take some market share from traditional brokers.

The downward trend in NAGA’s share price started in November 2017 and was recently fuelled by the restructuring announcement, lower than expected FY18 earnings and subdued FY19 forecasts. The share price has levelled off around €1.0, which is below the IPO price of €2.60 and less than the sale price of the transactions conducted by management and supervisory board members in April and July 2018 (with the sale price range of around €5.90–5.95 per share and a total volume of c €330k).

Given NAGA’s short-term operating history and business focus, blockchain and fintech companies still in the ramp-up phase may be appropriate comparators for valuation purposes. The peer group thus includes online brokers (eg IC Group and CMC Markets), fintech companies (Cinnober Financial Technology) and mobile social media and gaming apps (Momo and Gree). These companies are still young, small in scale and are often listed on exchanges with lighter regulatory burdens (such as OTC markets in the US). NAGA is trading at an FY18 EV/sales ratio of 2.2x.

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