MyBucks — Rapid expansion calls for new capitals

MyBucks (DB: MBC)

Currency in EUR

Last close As at 26/01/2023

EUR0.06

0.05 (400.00%)

Market capitalisation

EUR1m

Research: Financials

MyBucks — Rapid expansion calls for new capitals

MyBucks’s (MBC’s) H119 results reveal a continuation of solid loan book expansion driven by both organic growth (especially in the banking business) and acquisitions (including Capfin and Pride). As the company is still loss making at the bottom line and generates negative operating cash flows, growth has been facilitated by both higher indebtedness and new customer deposits in H119. With the integration of entities acquired over the last years now completed, and given the recently introduced measures to reduce funding costs and operating expenses, the company should continue to gradually approach its break-even point.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

MyBucks

Rapid expansion calls for new capital

Financials

Scale research report - Update

19 March 20191 April 2019

Price

€3.7

Market cap

€47m

Share price graph

Share details

Code

MBC

Listing

Deutsche Börse Scale

Shares in issue

12.7m

Last reported net debt at end-December 2018

€164.7m

Business description

MyBucks is a Luxembourg fintech company listed in Frankfurt. It provides unsecured loans, banking solutions and insurance to customers and SMEs in 11 African countries, Europe and Australia. It uses AI technology to assess creditworthiness and is fully integrated with local banking systems.

Bull

Large target market, with mobile and internet penetration well ahead of traditional banking.

Expanding banking business.

Proprietary AI and integration with local government and banking systems.

Bear

Sub-Saharan Africa is arguably at higher risk from financial and political shocks than more developed markets.

Competition from traditional microfinance institutes and banks.

Highly leveraged business.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

MyBucks’s (MBC’s) H119 results reveal a continuation of solid loan book expansion driven by both organic growth (especially in the banking business) and acquisitions (including Capfin and Pride). As the company is still loss making at the bottom line and generates negative operating cash flows, growth has been facilitated by both higher indebtedness and new customer deposits in H119. With the integration of entities acquired over the last years now completed, and given the recently introduced measures to reduce funding costs and operating expenses, the company should continue to gradually approach its break-even point.

Growth fuelled by expansion of banking operations

MBC was able to increase its net loan book by c 30% sequentially (and 50.7% yoy) in H119 to €111m, which was assisted by the significant growth posted in the banking segment. The importance of this business is increasing steadily, as it now represents c 63% of total loan book. At the same time, loan book quality (as measured by the provisions to gross loan book ratio) improved to 11.2% from 19.4% in H118. As operating expenses were up by 39.3% y-o-y to €25.6m due to expanding business and integration of recently acquired companies, MBC has recorded a €2.1m pre-tax loss in H119.

New funding initiatives on the agenda

MBC continues to generate negative operating cash flow including interest paid (€10.6m in H119), which is the result of continued strong lending business growth. In order to fund this as well as its recent investments, MBC has raised additional borrowings, translating into a net debt to equity ratio of 91% at end-December 2018 (vs 84% at end-June 2018). This has led to a number of covenant breaches, although MBC obtained waivers for most of them. MBC is awaiting regulatory approval of its recent private placement which would increase its equity by c €10m from debt conversion. Further funding measures are planned for this year.

Valuation: Indicative of the company’s growth profile

MBC has not reached its break-even point at the bottom-line yet and together with the lack of available consensus, this makes it difficult to prepare a peer valuation. MBC’s shares trade at a last 12-month (LTM) EV/sales ratio of 3.2x, implying a 3% discount to peers. MBC’s LTM EV/EBITDA stands at 12.4x vs 11.7x for Ferratum (one of its closest peers).

Historical data

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(c)

DPS
(€)

P/E
(x)

Yield
(%)

06/15

31.3

5.7

33.42

0.0

11.1

N/A

06/16

38.9

0.9

(6.45)

0.0

N/A

N/A

06/17

55.8

(7.2)

(1.10)*

0.0

N/A

N/A

06/18

61.3

(4.6)

(0.83)*

0.0

N/A

N/A

Source: MyBucks accounts. Note: *From continuing operations.

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.

Financials: Continued growth in loan book

MBC’s gross loan book increased by €28.8m to €125.0m in H119, up by 29.9% vs end-FY18 (and 36.9% vs end-H118). This includes €5.9m attributable to the acquisition of Capfin (Spotco Holdings), an Australia-based lending institution taken over by MBC in July 2018. Net loan book stood at €111m, up by 29.5% vs €85.7m in FY18 and 50.7% y-o-y. When adjusted for the impact of the first-time adoption of IFRS 9, the sequential net loan book growth was even higher at 32.4% (according to our estimates).

The loan book expansion translated into a 23.7% y-o-y growth in the company’s sales to €37.4m (including c €3m from Capfin consolidation), especially in the individual lending segment (up by 19.7% y-o-y to €33.7m) and SME lending (up to €1.3m from €0.1m in H118). The banking segment’s revenues increased by an impressive 86.9% y-o-y to €17.8m, which was mostly organic and driven by all markets where MBC has a banking licence, with Mozambique in particular standing out. On the contrary, the overall non-banking lending segment delivered lower sales at €19.6m, down by 5.4% y-o-y due to the disposal of part of MBC’s loan book in South Africa and lower revenues in Malawi following the sale of the local loan book to its own banking operations. This was only partially offset by the consolidation of Capfin.

The growth in net loan book was accompanied by a decrease in loan impairment charges from last year’s €6.3m to €4.7m. The provisions to gross loan book ratio stood at 11.2% at end-December 2018 and was broadly comparable with the end-June 2018 figure of 10.9%. However, excluding the IFRS 9 adoption adjustment, the H119 value would have been 9.7%, according to our calculations. Moreover, the ratio improved significantly vs the ratio as at end-December 2017 of 19.4%, which was backed by a higher contribution of MBC’s banking business (63% of loan book at end-H119 vs 55% in H118), as the former is characterised by a higher loan book quality in comparison to MBC’s non-banking lending business. An additional positive driver was the launch of MAICA, an AI-based collection algorithm, which helped raise the share of collections to gross loan book from 89.3% in H118 to 92.0%. Interestingly, MyBucks was able to increase the average loan tenure to 20 months from 14 months a year ago on the back of banking operations expansion. This was facilitated by the execution of local bond programmes (tenors of two to three years).

However, the lower loan book impairment charges have been offset by increased operating expenses of €25.6m (up by 39.3% y-o-y) due to the expansion of MBC’s banking operations as well as integration of the companies acquired in FY18 (Capfin in Australia and Pride in Malawi). MBC anticipates a reduction of operating expenses in H219 as the integration process has been completed and the company has recently introduced certain cost-cutting measures that should translate into c €2m of savings pa. As a result of the above, MBC reported a loss after tax from continuing operations at €4.3m, compared with last year’s loss of €2.2m. Still, the company expects it will break even and start generating net cash surpluses in the medium term.

Exhibit 1: Results summary

€000s

H119

H118

y-o-y % change

Revenue

37,378

30,215

23.7%

Individual lending revenue

33,674

28,138

19.7%

Banking income

471

251

87.8%

Insurance revenue

1,952

1,706

14.4%

SME lending revenue

1,280

119

N/M

Loan book impairment charges

(4,704)

(6,306)

-25.4%

Other income

1,852

4,304

-57.0%

Employee costs

(10,150)

(6,923)

46.6%

Depreciation, amortisation and other impairments

(1,497)

(1,011)

48.1%

Consulting and professional fees

(2,692)

(1,986)

35.6%

Selling expenses

(3,851)

(2,470)

55.9%

Other operating expenses

(7,410)

(5,987)

23.8%

Total operating expenses

(25,600)

(18,376)

39.3%

Share of profit in joint venture

206

N/M

N/M

Operating profit

9,132

9,836

-7.2%

Operating margin

24%

33%

-812bp

Investment revenue

1,283

2,190

-41.4%

Finance costs

(12,252)

(11,242)

9.0%

Foreign exchange

(268)

(728)

-63.2%

Profit before tax

(2,105)

56

N/M

Income tax

(2,174)

(2,208)

-1.5%

Profit after tax from continuing operations

(4,279)

(2,153)

98.8%

Discontinued operations

(500)

(589)

-15.0%

Profit after tax

(4,780)

(2,741)

74.4%

Source: MyBucks accounts, Edison Investment Research

Further need for new capital amid high gearing

MBC’s expansion in the banking segment allows it to improve access to cheap funding in the form of customer deposits and the inter-bank market. In addition, the company has implemented local bond programmes and refinancing of its high-interest legacy debt. The above measures led to a reduction of MBC’s average annualised funding costs to 15.8% (vs end-December 2017 at 20.2%).

Having said that, it is also worth noting that MBC’s gearing level, as measured by net debt (including customer deposits) to the sum of equity and net debt increased to 91% from 84% at end-June 2018. This resulted from 1) banking segment expansion and the resulting increase of current deposits from customers (up by 68.8% during the period to €34.6m), 2) higher borrowings (€148.0m at end-December 2018 vs €119.9m at end-June 2018) raised to cover the negative operating and investing cash flow (c €10.6m each in H119) and 3) a reduction of total equity (down by 30.6% to €16.6m) due to accumulated losses. This has led to a number of debt covenant breaches, although MBC has already received waivers for the majority of the affected debt. As such, we believe that it is quite likely that MBC will obtain the remaining waivers. Moreover, given the growing importance of the company’s banking operations, MBC is in discussions with its debtholders (some of these negotiations have already been successful) to modify its covenants in order to reflect the higher gearing level applicable to the banking business. This would provide MBC with further balance sheet headroom.

Still, MBC’s continued growth is dependent on new capital. As part of the private placement announced in December 2018, MBC intends to issue new shares to existing shareholders for their debt to equity swaps to increase its equity capital by c €10m and thus improve its gearing ratio. The investors have already made an irrevocable offer for MBC shares and the agreement is pending regulatory approval (expected within the next several weeks). As part of the transaction, MBC has also raised €3m post the balance sheet date by issuing shares to a new investor. To further improve its gearing ratio, it plans to conduct further debt to equity conversions and also intends to execute further capital measures, including potentially (apart from a new share issue at the parent company) raising new capital in local markets as well as conducting initial public offerings of MBC’s existing operations in their primary markets.

Entering the next growth phase

MBC’s business profile is gradually shifting towards the banking segment. In the course of H119, it made an irrevocable offer to purchase the remaining 50% stake in NFB for €7.9m, which was provisionally accepted in January 2019 by the Central Bank of Malawi. The company is in the final stages of closing the transaction. Following the approval, MBC will have to dispose of at least 35% of NFB’s shares within three years. MBC also applied for a banking licence in Zambia last year and expects that it will be able to launch its banking operations there soon.

MBC is now entering a new growth phase that should not be exclusively based on acquisitions and organic growth through greenfield expansion, but will also be driven by product and technology outsourcing, including joint venture partnerships, a franchising model and a white-labelled technology offering. Based on our discussion with the company, we understand that MBC has already signed memorandums of understanding with a number of parties in both Sub-Saharan and North Africa, as well as the Middle East and Asia. MBC’s strategic focus is still on African countries and the company is currently examining new markets with strong economic potential (according to MBC), such as Cameroon, Ghana, Nigeria, Rwanda, Egypt and Sierra Leone.

Despite the overall good progress, there are certain economic and regulatory challenges in some of MBC’s existing markets. The official exchange rate of the Zimbabwean currency was recently subject to a 60% devaluation, which will affect the exchange rate conversion upon consolidation of MBC’s subsidiary. However, the company does not see any negative impact on trading. The Zimbabwean market made up 17% of MBC’s loan book in FY18. Another uncertainty factor is the debt relief bill passed in September 2018 in South Africa, introducing the option of debt cancellation for consumers earning less than ZAR7.5k per month with total debt of less than ZAR50k. It is difficult to assess at this stage what the exact impact on MBC will be. However, the company has stressed that there is a complex process that needs to be followed to deem a certain debt irrecoverable (and thus eligible for cancellation) and that the company’s bad debt policy with this respect is more conservative, which should minimise the impact of the new legislation. The South African market represents less than 8% of MBC’s current loan book which may decrease further as the contribution of the banking business grows (it does not plan to obtain a banking licence in South Africa).

Valuation

The ramp-up of MBC’s banking segment together with the costs of integrating the recently acquired businesses translated into higher operating expenses and thus has kept the company beneath its break-even point at the net profit level (whereas its peers are already profitable). As there is no market consensus available for MBC, we have looked at the LTM EV/sales ratio, which currently stands at 3.2x and implies a c 3% discount to peers. MBC’s LTM EV/EBITDA stands at 12.4x vs 11.7x for Ferratum, also a German-listed, technology-led mobile consumer lender.

Exhibit 2: Peer group comparison

 

Market cap

P/E (x)

EV/sales (x)

 

(€m)

LTM

2019e

2020e

LTM

2019e

2020e

Ferratum

212.54

10.59

7.03

5.46

1.76

1.47

1.23

On Deck Capital

383.14

9.31

10.86

9.40

2.96

2.59

2.34

Letshego

282.20

4.84

N/A

N/A

N/A

N/A

N/A

Capitec Bank

8,981.75

30.11

27.17

22.29

7.78

7.02

6.07

Atlas Mara

250.29

4.68

4.57

3.45

0.91

0.80

0.69

Peer group average

11.91

12.41

10.15

3.35

2.97

2.58

MBC

51.63

N/M

N/A

N/A

3.25

N/A

N/A

Premium/discount

N/M

N/A

N/A

(3%)

N/A

N/A

Source: Refinitiv, Edison Investment Research. Note: Prices as at 13 March 2019. Numbers for peers adjusted for differences in fiscal year-end.

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Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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