The NAGA Group — Delivering growth in good market conditions

The NAGA Group (DB: N4G)

Last close As at 18/06/2024

5.84

0.09 (1.57%)

Market capitalisation

246m

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Research: Financials

The NAGA Group — Delivering growth in good market conditions

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.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

The NAGA Group

Delivering growth in good market conditions

Software

Scale research report - Update

12 November 2020

Price

€2.48

Market cap

€104m

Share price graph

Share details

Code

N4G

Listing

Deutsche Börse Scale

Shares in issue

42.0m

Last reported net debt* at end-H120

€3.0m

*Adjusted for restricted cash of €1.8m.

Business description

The NAGA Group is a fintech start-up in social trading with a flagship product (Naga Trader) and supplementary services. Headquartered in Hamburg, the company’s operating subsidiary Naga Markets Ltd is located in Limassol, Cyprus.

Bull

The COVID-19 pandemic has driven market volatility, which supports NAGA’s performance.

Management guidance for 2020 assumes strong y-o-y sales growth and positive EBITDA.

Ongoing expansion to Asia, Australia and South Africa may boost sales.

Bear

Sales and earnings are dependent on market conditions historically.

Competitive threat from existing larger players.

Business activity in emerging markets poses a greater risk than in developed countries.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Anna Dziadkowiec

+44 (0)20 3077 5700

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.

Consensus estimates

Year
end

Revenue*
(€m)

EBIT
(€m)

PBT
(€)

EPS
(€)

P/E
(x)

Yield
(%)

12/18

16.1

(4.8)

(5.0)

(0.10)

N/A

N/A

12/19

6.2

(12.2)

(12.3)

(0.33)

N/A

N/A

12/20e

24.9

2.7

3.4

0.06

41.3

N/A

12/21e

31.2

4.8

4.3

0.02

165.3

N/A

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
local ccy (m)

Stock
exchange

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

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%)

Source: Refinitiv data at 11 November 2020, Edison Investment Research


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