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Research: Financials
NAGA recorded strong growth in sales and EBITDA in H120 as it benefited from high market volatility triggered by the COVID-19 pandemic. Management confirmed the full-year guidance it had released in late July 2020, which assumes sales of €22–24m (vs €6.2m in FY19) and EBITDA of €5.5–6.0m (vs a loss of €9.2m in FY19). In the coming months, NAGA aims to increase marketing to improve brand awareness and enter new countries (most notably Australia), which it plans to finance with €4.6m raised through a capital increase in July 2020.
The NAGA Group |
Delivering growth in good market conditions
Software |
Scale research report - Update
12 November 2020 |
Share price graph
Share details
*Adjusted for restricted cash of €1.8m. Business description
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NAGA recorded strong growth in sales and EBITDA in H120 as it benefited from high market volatility triggered by the COVID-19 pandemic. Management confirmed the full-year guidance it had released in late July 2020, which assumes sales of €22–24m (vs €6.2m in FY19) and EBITDA of €5.5–6.0m (vs a loss of €9.2m in FY19). In the coming months, NAGA aims to increase marketing to improve brand awareness and enter new countries (most notably Australia), which it plans to finance with €4.6m raised through a capital increase in July 2020.
Strong momentum continues
NAGA turned profitable in H120, posting EBITDA of €3.9m (vs a loss of €4.6m in H119) and net income of €2.4m (vs a net loss of €6.7m). The results were driven by a notable increase in brokerage revenues to €11.6m from €1.3m a year earlier, supported by a larger customer base and increased trading volumes amid high market volatility during the pandemic. Preliminary Q320 figures were also visibly stronger than a year earlier, with sales of €7.1m (vs €1.2m in Q319) and EBITDA of €1.9m (vs a loss of €1.0m).
Working towards business expansion
Management expects major growth drivers in 2021 to be: 1) the brokerage business in China, where it launched operations in June 2020; 2) market entrance in Australia, which is planned for 2021; and 3) the challenger bank NAGA PAY, which will start in mid-November 2020. The company also intends to enter South Africa in 2021 and develop its financial education offering. NAGA aims to finance its expansion with €4.6m from the July 2020 capital increase. It also received €5m in funding from its core shareholder, Fosun Fintech Holdings, including a €3.0m senior loan in November 2019 and a €2m convertible bond issued in January 2020 (both have a two-year maturity). Adjusted for restricted cash, net debt was €3.0m at end H120 (vs €3.4m at end FY19).
Valuation: Stabilisation after H120 growth
NAGA’s share price has rebounded to c €2.5–3.0 this year following a period of weaker performance in H219 during the turnaround stage (c €0.6–1.0 over the period). It currently trades on FY20e EV/Sales of 4.3x and FY20e EV/EBITDA of 17.0x, which represents a 31% discount and a 13% premium to its peers, respectively.
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Consensus estimates
Source: NAGA Group, Refinitiv consensus as at 11 November 2020. Note: *Revenue includes brokerage sales and revenues from services as reported by the company. |
Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.
Higher brokerage revenues drive H120 results
In H120, NAGA reported a notable increase in total performance to €12.1m from €2.0m a year earlier, driven by visibly higher brokerage revenues (€11.6m in H120 vs €1.3m in H119). This was assisted by an increase in the number of customers to 37.9k at end H120 from 25.4k at end FY19 and real money trades to €2.7m (with a €50bn overall trading volume) from €1.1m (€16.5bn) a year earlier, which we believe was assisted by high market volatility in the period due to the COVID-19 pandemic. At end June 2020, NAGA managed assets of €18.5m, which compares with €17.6m at end December 2019 and €13.0m at end June 2019.
Operating expenses increased to €8.7m from €6.8m in H119, affected by higher brokerage expenses linked to growing brokerage sales over the period and visibly higher marketing spend amid the ongoing expansion. These were only partly offset by lower personnel costs after NAGA reduced the number of staff during the restructuring process, which it completed in H219. In the period, EBITDA reached positive €3.9m vs negative €4.6m a year earlier, while net profit was €2.4m compared to a net loss of €6.7m in H119.
Exhibit 1: Financial summary
€000s |
H120 |
H119 |
y-o-y change |
Revenue |
11,673 |
1,672 |
N/M |
Brokerage revenue |
11,613 |
1,348 |
N/M |
Revenue from services |
59 |
323 |
(81.7%) |
Activated programming services (commissions) |
410 |
356 |
15.2% |
Total performance |
12,083 |
2,028 |
N/M |
Oher operating income |
462 |
184 |
N/M |
R&D expenses |
(548) |
(570) |
(3.9%) |
Brokerage expenses |
(1,488) |
(751) |
98.1% |
Personnel expenses |
(1,678) |
(2,409) |
(30.3%) |
Marketing & advertising expenses |
(2,881) |
(1,079) |
N/M |
Other operating expenses |
(2,081) |
(1,986) |
4.8% |
EBITDA |
3,870 |
(4,583) |
N/M |
D&A |
(1,414) |
(2,190) |
(35.4%) |
Amortisation of goodwill |
0 |
0 |
N/M |
EBIT |
2,456 |
(6,774) |
N/M |
Financial income |
(11) |
1 |
N/M |
Financial costs |
(252) |
(2) |
N/M |
Income (loss) before taxes |
2,192 |
(6,774) |
N/M |
Income taxes |
227 |
82 |
N/M |
Deferred taxes |
0 |
0 |
N/M |
Net profit/(loss) |
2,419 |
(6,692) |
N/M |
Minorities adjustment |
240 |
369 |
(35.0%) |
Net profit/(loss) ex minorities |
2,659 |
(6,323) |
N/M |
Source: The NAGA Group accounts
In H120, NAGA recorded a slightly negative operating cash outflow of €0.2m compared to a cash outflow of €1.7m a year earlier. Cash was €4.2m at end H120 (vs €3.2m at end FY19), but €1.8m of this amount (€2.9m) was restricted as these funds were deposited as security with liquidity providers. NAGA’s long-term liabilities stood at €5.5m at end H120, up from €3.6m at end FY19 after the company was granted a €2.0m convertible bond in January 2020 from its core shareholder Fosun Fintech Holdings, with a c 45% stake in the company according to Bloomberg data as at 12 November 2020.
At end June 2020, NAGA’s long-term liabilities also included a €3.0m senior secured loan, which Fosun Fintech Holdings granted to NAGA in November 2019. The loan and the bond from Fosun have a two-year maturity and their coupon rates (ie 12% pa for the loan and 6% pa for the bond) imply an annual interest expense of c €480k (as reflected in higher financing costs in H120). Adjusted for the restricted cash, NAGA’s net debt declined slightly to €3.0m at end H120 from €3.4m at end FY19.
NAGA’s capital position was supported by a €4.6m capital increase (vs the targeted €5.0m) that it completed in July 2020. The company issued 1.8m shares at a subscription price of €2.50 per share. We note that total assets were €109.0m at end H120 and mostly included intangible assets (c €108m), of which €95.0m was goodwill related to the cash generating unit, which arose from the Hanseatic Brokerhouse Securities (HBS) transaction in 2018. We also note that NAGA had €1.4m in trade receivables from NDAL at end H120 (unchanged vs end FY19). NDAL is NAGA’s business partner; it raised US$50m from an initial coin offering (ICO) conducted in December 2018 and is responsible for the development and operations of the NAGA Coin, NAGA Wallet and NAGA Exchange. We describe NAGA’s plans for further co-operation with NDAL in detail in our previous update note.
Solid post-period performance and expansion plans
NAGA has continued to deliver solid growth post period end, with preliminary Q320 sales of €7.1m (vs €1.2m in Q319) and EBITDA of €1.9m (vs a loss of €1.0m). Management highlights that this was fostered by NAGA’s strategic repositioning post restructuring. According to management, the strong trading performance has continued in Q420, most notably in China, where it launched operations in June 2020. In 2020, management guides to sales of €22–24m (vs €6.2m in FY19) and EBITDA of €5.5–6.0m (vs -€9.2m in FY19). The company’s guidance implies sales of €3.2–5.2m in Q420 and EBITDA between negative €0.3m and positive €0.2m (based on H120 reported and preliminary Q320 figures).
NAGA’s focus in Q420 will be on increasing brand awareness, marketing and expanding the team. Management plans to use the €4.6m in proceeds raised from the July 2020 capital increase mostly for marketing, with the aim of increasing its share in existing and new markets. NAGA plans to launch Naga Markets in Australia and South Africa in 2021, with the exact timing of entries dependent on regulatory approvals. In mid-November 2020, it will commence a challenger bank NAGA PAY in Google Play and the Apple App Store, which will combine mobile banking, trading, social trading and cryptocurrency trading. Notably, only NAGA announced its plans to develop the product in May 2020.
Meanwhile, NAGA aims to become a provider of financial education services. It has set up two training centres in Nigeria, and organised the first trading webinar, hosted by senior FX analyst, Andreas Thalassinos, who has joined the company as director of education. In October 2020, NAGA announced the onboarding of 50 new employees in its headquarters, which represents a notable increase from the 75 full-time equivalents it employed in FY19 (last available data).
Management expects that major growth drivers in 2021 will be its brokerage business in China, the launch of NAGA Markets Australia and the challenger bank NAGA PAY.
Valuation
NAGA’s share price was c €2.5 on 11 November 2020, which compares with its IPO price of €2.6 and represents notable growth from the all-time low of c €0.6 at the end of 2019.
Given NAGA’s short 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 includes online brokers (eg IG Group, CMC Markets and flatex), although these are more mature and profitable companies than NAGA, which turned profitable only in H120. The company is trading on FY20e EV/Sales of 4.3x and FY20e EV/EBITDA of 17.0x based on consensus forecasts.
Exhibit 2: NAGA group peer comparison
Company name |
Market cap |
Stock |
P/E (x) |
EV/Sales (x) |
EV/EBITDA (x) |
|||||||
2019 |
2020e |
2021e |
2019 |
2020e |
2021e |
2019 |
2020e |
2021e |
||||
IG Group |
£2,892 |
LSE |
12.0 |
13.3 |
13.3 |
3.6 |
3.8 |
3.9 |
7.4 |
8.2 |
8.7 |
|
CMC Markets |
£1’010 |
LSE |
11.6 |
7.4 |
7.4 |
3.7 |
2.6 |
3.7 |
8.2 |
4.8 |
9.6 |
|
Alpha FX Group |
£483 |
LSE |
41.1 |
38.9 |
38.9 |
11.7 |
9.9 |
8.3 |
27.2 |
24.4 |
20.2 |
|
JOYY |
CNY7,789 |
Nasdaq |
23.6 |
25.8 |
25.8 |
5.1 |
N/A |
N/A |
N/A |
N/A |
N/A |
|
flatex |
€1,637 |
Deutsche Börse |
66.1 |
25.4 |
25.4 |
15.0 |
8.5 |
6.8 |
52.7 |
22.7 |
16.8 |
|
Peer group average |
|
30.9 |
22.2 |
22.2 |
7.8 |
6.2 |
5.7 |
23.9 |
15.0 |
13.8 |
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NAGA Group |
€104 |
Deutsche Börse |
N/A |
41.3 |
165.3 |
17.2 |
4.3 |
3.4 |
N/A |
17.0 |
12.8 |
|
Premium/(discount) |
|
N/A |
N/M |
N/M |
N/M |
(31%) |
(39%) |
N/A |
13% |
(8%) |
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Source: Refinitiv data at 11 November 2020, Edison Investment Research
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Research: Investment Companies
Tetragon Financial Group (Tetragon) reported a 1.0% decrease in NAV in 9M20 in total return terms. NAV has so far proved resilient to market volatility, while Tetragon’s shares followed the market sell-off in Q120 and lagged the following market recovery. This resulted in a historically high discount of 61%. Tetragon maintained its quarterly DPS of US$0.10 after reducing it in Q120 (implying a 4.3% annualised yield). In the current economic environment, Tetragon intends to increase its exposure to CLOs, as well as continue ramping up its private equity investments through Hawke’s Point and Banyan Square Partners. Tetragon also launched a litigation finance venture (Contingency Capital).