Ferratum — Building a scalable financial platform

Ferratum — Building a scalable financial platform

Following solid H119 results, with EBIT up 23.8% y-o-y to €20.5m in H119, Ferratum reiterated its FY19 EBIT guidance of over €45m. The company continues its strategic shift to longer-term lending by expanding and optimising the offering across geographies and products. In parallel, Ferratum is in the process of launching a new mobile banking application (Mobile Wallet) based on its IT platform FerraOS. The company plans to transform the Mobile Wallet into a scalable financial platform with open application program interface (API) access. Ferratum has set its mid-term EBIT target at €100m pa.

Milosz Papst

Written by

Milosz Papst

Head of Content, Investment Trusts

Ferratum

Building a scalable financial platform

Financials

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4 November 2019

Price

€8.2

Market cap

€178m

Share price graph

Share details

Code

FRU

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Shares in issue

21.7m

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Last reported net debt at 30 June 2019

€283.6m

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Business description

Ferratum, founded in 2005 and headquartered in Helsinki, provides mobile banking, digital consumer and small business loans. It operates in 23 countries across the globe and has c 780k active customers. Its major products include (in descending revenue share order): Credit Limit, PlusLoan, Microloan, SMEs and Primeloan (including Mobile Bank).

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Bull

Rapid revenue growth supported by new products and geographic expansion.

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European banking licence enabling activity across EEA countries.

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Growth potential from scalable financial platform based on an asset-light model.

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Bear

Economic slowdown may lead to lower revenues and higher loan impairments.

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Highly competitive market.

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Fintechs are currently subject to increased regulatory scrutiny

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Analyst

Milosz Papst

+44 (0)20 3077 5700

Following solid H119 results, with EBIT up 23.8% y-o-y to €20.5m in H119, Ferratum reiterated its FY19 EBIT guidance of over €45m. The company continues its strategic shift to longer-term lending by expanding and optimising the offering across geographies and products. In parallel, Ferratum is in the process of launching a new mobile banking application (Mobile Wallet) based on its IT platform FerraOS. The company plans to transform the Mobile Wallet into a scalable financial platform with open application program interface (API) access. Ferratum has set its mid-term EBIT target at €100m pa.

Long-term lending delivers

Ferratum generated sales of €145.6m in H119, up 17.2% y-o-y, assisted by a 31.1% increase in Credit Limit to €78.8m at the expense of the Microloan segment, which posted an 8.5% decline to €19.4m. This reflects the strategy to prioritise longer-term, lower-risk products. More focused marketing and improved cost discipline lifted the EBIT margin to 14.1% from 13.4% in H118 (in line with the FY14–18 range of 13.7–15.0%) and EPS to €0.49 from €0.32 in H118. Asset quality expressed as annualised impairments to the credit portfolio was c 31% vs 28% at end-2018 and an FY14–18 range of 26–33%. Importantly, the company placed an €80m senior unsecured bond in April 2019 (rated BB- by Fitch, in line with group rating), refinancing €25m of existing debt and raising €55m for further growth.

Scaling up and transforming the lending business

Ferratum’s focus remains on scaling up products with higher customer lifetime value, especially in the SME Lending and Credit Limit segments (which represented 63% of its total sales in H119 vs 57% in H118). It also plans the future business in Finland (from 2019) and Denmark (thereafter) to be operating under banking licence status, which will lower the cost of capital by utilising customer deposits. The company intends to merge its digital lending with Mobile Wallet (a successor of Mobile Bank; currently in pilot stage in Latvia) and create a scalable financial platform. In doing so, it plans to pursue an asset-light business model and drive lower-risk commission income, supported with off-balance sheet lending as well as partnerships and joint ventures.

Valuation: Reflects growth prospects

Ferratum is trading at an 6.8x FY19e P/E and a 1.4x EV/sales ratio. This implies a 27% discount (on P/E) and a 44% discount (on EV/sales) to its international peers active in financial services and microlending.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

221.6

23.24

0.89

0.18

9.2

2.2

12/18

262.2

22.33

0.89

0.18

9.2

2.2

12/19e

297.3

30.63

1.21

0.26

6.8

3.2

12/20e

344.9

39.08

1.52

0.33

5.4

4.0

Source: Ferratum accounts, Refinitiv consensus estimates

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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

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Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

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This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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 research department of Edison 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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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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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

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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