The Naga Group — High trading momentum maintained

The NAGA Group (DB: N4G)

Last close As at 20/11/2024

5.84

0.09 (1.57%)

Market capitalisation

246m

More on this equity

Research: Financials

The Naga Group — High trading momentum maintained

NAGA Group continues to benefit from retail investor activity and volatility in financial markets, further underpinned by its social trading functionalities (trade copy feature in particular). Consequently, after completing its restructuring in FY19, NAGA posted a positive EBITDA and a small net profit in FY20, with management now guiding to robust FY21 sales of €50–52m (€24.5m was already generated in H121) and EBITDA of €13–15m. Recently, it also secured further funding through convertible bonds with a volume up to €25m (of which €8.0m has already been issued).

Milosz Papst

Written by

Milosz Papst

Head of Content, Investment Trusts

Financials

The NAGA Group

High trading momentum maintained

Financial services

Scale research report - Update

2 August 2021

Price

€5.08

Market cap

€214m

Share price graph

Share details

Code

N4G

Listing

Deutsche Börse Scale

Shares in issue

42.0m

Last reported net debt at end-FY20*

€4.8m

*Adjusted for restricted cash of €4.5m.

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

Higher market volatility supports NAGA’s results.

Trade copy feature stimulates user activity while reducing customer acquisition costs and churn.

Expansion to non-European markets 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 Group continues to benefit from retail investor activity and volatility in financial markets, further underpinned by its social trading functionalities (trade copy feature in particular). Consequently, after completing its restructuring in FY19, NAGA posted a positive EBITDA and a small net profit in FY20, with management now guiding to robust FY21 sales of €50–52m (€24.5m was already generated in H121) and EBITDA of €13–15m. Recently, it also secured further funding through convertible bonds with a volume up to €25m (of which €8.0m has already been issued).

Strong FY20 trading driving earnings

NAGA Group reported a significant increase in revenues to €24.4m in FY20 (versus €7.6m in FY19 and FY20 management guidance of €22–24m), driven by growing trading volumes (€120bn in FY20 versus €41bn in FY19). An improved gross margin (93.8% versus 74.3% in FY19), coupled with lower personnel expenses (down 10% y-o-y to €4.1m) as a result of earlier restructuring, helped NAGA reach an EBITDA of €6.6m (versus a loss of €9.2m in FY19). Earnings per share excluding minorities stood at a minor positive €0.03 after a €0.31 loss in FY19. The company’s net debt excluding restricted cash stood at €4.8m at end-2020 (versus €3.4m), implying a moderate net debt to EBITDA ratio of 0.7x.

Growth from foreign expansion and new products

NAGA Group aims at fulfilling its growth ambitions through maintained focus on core competencies in the online brokerage business, further development of customer support to drive user satisfaction and growth in customer base, and continued high level of IT and product innovation. Major potential growth catalysts are international expansion (in particular beyond European markets), as well as new products, including NAGA Pay (a mobile banking and investing app) and NAGA Pro (a service for ‘digital influencers’).

Valuation: FY21 and FY22 growth seems priced in

NAGA’s FY21e and FY22e EV/EBITDA of 14.9x and 9.4x (based on Refinitiv consensus) represents a 2% discount and 7% premium to peer group median. This suggests its current valuation discounts a continuation of high earnings momentum into FY22. Its FY21e and FY22e EV/sales multiples of 4.1x and 2.9x imply a 4% premium and a 10% discount to peer group, respectively.

Consensus estimates

Year
end

Revenue
(€m)

EBIT

(€m)

PBT

(€)

EPS
(€)

P/E

(x)

Yield
(%)

12/19

7.6

(12.2)

(12.3)

(0.31)

N/A

N/A

12/20

24.4

2.8

2.1

0.03

169.3

N/A

12/21e

53.1

11.5

11.3

0.24

21.5

N/A

12/22e

75.7

22.3

25.2

0.35

14.7

N/A

Source: NAGA Group, Refinitiv consensus as at 2 August 2021. 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.

Financials: High user activity in FY20

NAGA’s revenues increased significantly in FY20 to €24.4m from €7.6m in FY19, slightly exceeding management guidance of €22–24m published in July 2020. This was assisted by a visible growth in trading volumes (€120bn in FY20 versus €41bn a year earlier) amid increased volatility during the COVID-19 pandemic and ongoing expansion of the business supported by NAGA’s marketing activities. NAGA’s customer base increased 72% y-o-y to 43.6m users at end-2020, with the average number of active users per month more than doubling to 10,549k versus 5,090k in FY19. Moreover, NAGA’s assets under management reached €21.8m versus €17.6m in FY19. NAGA’s growth has been assisted in particular by its trade copy offering, which stimulates user activity while reducing customer acquisition costs and client churn.

Meanwhile, direct expenses related to trading revenues and trading costs associated with hedging the trades grew in aggregate by 27% y-o-y to c €3.5m, translating into a gross profit margin of c 93.8% in FY20 compared to 74.3% in FY19. NAGA’s development expenses stood at €2.5m in FY20, representing c 10.3% of its revenues (22.5% in FY19), mostly aimed at expanding functionalities and enhancing the stability of the Naga Trader app and web application, as well as developing the NAGA Pay app. NAGA capitalised c €2.0m of these expenses, including €1.6m attributable to Naga Trader and c €0.4m to NAGA Pay. The company spent €6.6m on marketing and advertising in FY20 (versus €2.5m in FY19 amid restructuring), focused on non-European markets, while personnel expenses declined by 10% y-o-y to €4.1m as a result of cost optimisation. Consequently, NAGA’s EBITDA reached €6.6m versus management’s FY20 guidance of €5.5–6m and a loss of €9.2m in FY19. At the same time, its operating cash flow improved to €3.7m in FY20 from a negative €2.4m in FY19. NAGA’s net income excluding minorities stood at €1.3m (versus a €12.0m loss in FY19).

Exhibit 1: Financial summary

€000s unless otherwise stated

FY20

FY19

y-o-y change

Revenue

24,353

7,619

219.6%

Trading revenue

24,259

5,618

331.8%

Revenue from services

94

2,001

(95.3%)

Capitalised programming services

1,964

779

152.1%

Total performance

26,317

8,398

213.4%

Direct expenses of trading revenues

(2,347)

(1,339)

75.3%

Trading costs

(1,131)

(1,396)

(19.0%)

Gross profit

22,838

5,663

303.3%

gross margin

93.8%

74.3%

19.5 pp

Other operating income

1,490

167

792.2%

Development expenses

(2,510)

(1,717)

46.2%

Personnel expenses

(4,119)

(4,589)

(10.2%)

Marketing & advertising expenses

(6,614)

(2,455)

169.4%

Allowance from doubtful accounts from deliveries and services

0

(1,410)

(100.0%)

Other operating expenses

(4,516)

(4,828)

(6.5%)

EBITDA

6,570

(9,167)

NM

D&A

(3,594)

(2,745)

30.9%

Amortisation of goodwill

(186)

(270)

(31.1%)

EBIT

2,789

(12,182)

NM

Financial income

28

7

300.0%

Financial costs

(683)

(132)

417.4%

Income (loss) before taxes

2,134

(12,307)

NM

Income taxes

148

(151)

NM

Deferred taxes

(261)

(919)

(71.6%)

Net profit/(loss)

2,021

(13,377)

NM

attributable to shareholders of the parent

1,256

(12,002)

NM

minority interests

765

(1,375)

NM

EPS, basic and diluted (€)

0.03

(0.31)

NM

Source: NAGA Group accounts

Adjusted for restricted cash (which rose to €4.5m at end-2020 from €2.9m at end-2019), NAGA’s net debt increased to €4.8m from c €3.0m at end-H120 and c €3.4m at end-FY19. This implies a safe net debt to EBITDA ratio of 0.7x. However, we note this includes the €3.0m senior loan that NAGA received from its largest shareholder, Fosun Fintech Holdings, in November 2019 and a €2.0m convertible bond that it issued to this company in January 2020, which both have a two-year maturity (due in November 2021 and January 2022, respectively). NAGA completed a share issue in July 2020 with gross proceeds of c €4.6m. Consequently, its ratio of total equity to total assets stood at 86% at end-2020 versus 88% at end-2019. Here, we note that c 86% of NAGA’s total assets represent intangibles, primarily built in 2018 for the Cash Generating Unit Brokerage.

Moreover, NAGA’s growth ambitions should be supported by financing from Yorkville Advisors, a US alternative investment manager that provides specialty financing solutions, which it secured in March 2021. As part of this agreement, NAGA will issue a convertible bond to Yorkville Advisors with a total volume of up to €25m (equivalent to US$30m) over the next three years on meeting certain undisclosed conditions. NAGA already issued the first c €8.0m zero-coupon tranche (maturing in March 2022) at a 5% discount to its nominal value, with conversion price per share set at 95% of the market price per share (calculated in line with the terms and conditions document). We estimate that at NAGA’s current share price, a conversion would result in a c 3% dilution. NAGA can redeem the already issued convertible note at any time in whole, at a rate of 108% of their principal value.

Continued growth envisaged for FY21

Management reaffirmed its guidance for group sales of €50–52m and EBITDA of €13–15m in FY21, which it hopes will be supported by NAGA’s global expansion and rising client demand for digital investing and banking products. NAGA’s unaudited preliminary sales in H121 increased to €24.5m (of which €11.7m in Q121) from €13.3m in H120 (of which c €7.0m in Q120). As a result, the company is broadly halfway through its full-year revenue target. This was largely driven by copied trades, which reached 2.8m in H121 (out of 4.8m total trades) versus 0.6m in H120 (2.7m). It translated into total trading volumes of €132bn in H121 versus €50bn in H120.

Meanwhile, the company has been working on new functionalities of its offering, most notably NAGA Pay, a mobile neo-banking app with a fully digital onboarding process that will offer direct payment services in the UK and the European Economic (including SEPA transfers), a European IBAN account, a prepaid credit card and access to social trading with all asset classes available in NAGA Trader. The relaunched version of NAGA Pay app will be powered by Contis, one of the leading banking-as-a-service platforms in Europe (NAGA Pay was initially launched in November 2020 under a different setup). NAGA plans to deliver the first personal accounts in NAGA Pay in Q321, subject to receiving regulatory approvals. NAGA has also initiated the licensing of its crypto and blockchain division, which we understand will allow to expand the NAGA Pay app to cover physical crypto wallets (subject to licensing later in Q421, according to management), including buying and selling physical cryptocurrencies and make blockchain-based deposits and withdrawals. Management aims at leveraging NAGA Pay to convert low margin payment services clients into higher-margin contract for difference customers via its social trading platform NAGA Trader, which it will offer as part the NAGA Pay app.

NAGA has subsidiaries in Cyprus, China, Thailand and Nigeria and intends to launch operations in Australia, South Africa and Vietnam once it receives the appropriate licences.

Valuation

We compare NAGA Group to a peer group consisting of several online brokers, as well as the social media platform JOYY. Based on Refinitiv consensus, the company is trading on a FY21e EV/sales ratio of 4.1x, which implies a 4% premium to peer median. However, this changes into a 10% discount on FY22e EV/sales. Its FY21e EV/EBITDA of 14.9x is 2% below the peer group median and the FY22e ratio of 9.4x implies a 7% premium. This suggests its valuation discounts a continuation of high earnings momentum into FY22. We note FY21e Refinitiv consensus for NAGA Group’s sales and EBITDA is €53.1m and €14.6m, respectively, sales in line with management guidance and EBITDA close to the upper end of guidance. NAGA’s growth path is partially dependent on the level of price volatility and investor activity in the broader markets.

NAGA’s shares are now cross-listed publicly on the OTCQX Best Market (the top-tier segment of an over-the-counter market dedicated for entrepreneurial and development stage US and international companies, provided by OTC Markets Group), which management hopes will improve liquidity and help expand investor base. The cross-listing does not affect NAGA’s existing ordinary shares and it did not issue any new ordinary shares as part of the cross-trade. NAGA continues to rely on the announcements and disclosures it makes to Deutsche Börse's Scale segment and is not subject to the SEC reporting requirements.

Exhibit 2: NAGA group peer comparison

Company name

Market cap
local ccy (m)

Stock
exchange

P/E (x)

EV/Sales (x)

EV/EBITDA (x)

2020

2021e

2022e

2020

2021e

2022e

2020

2021e

2022e

IG Group

£3,864

LSE

8.9

12.9

10.2

3.7

3.9

3.0

6.6

8.0

5.9

CMC Markets

£1,317

LSE

7.4

12.4

12.2

2.9

3.6

3.4

5.0

8.0

7.8

Alpha FX Group

£688

LSE

53.2

35.7

N/A

13.2

9.0

N/A

32.2

20.3

N/A

JOYY

CNY4,180

Nasdaq

N/A

127.5

13.0

0.8

0.5

0.3

N/A

29.5

9.8

flatex

€2,801

Deutsche Börse

46.8

18.9

13.1

13.8

7.6

6.0

36.8

15.3

10.9

Peer group median

-

27.9

18.9

12.6

3.7

3.9

3.2

19.4

15.3

8.8

NAGA Group

€214

Deutsche Börse

169.3

21.5

14.7

9.0

4.1

2.9

33.2

14.9

9.4

Premium/(discount)

-

NM

14%

16%

144%

4%

(10%)

71%

(2%)

7%

Source: Refinitiv data at 2 August 2021, Edison Investment Research


General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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

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.

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

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

1185 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

More on The NAGA Group

View All

Latest from the Financials sector

View All Financials content

Research: Real Estate

Foxtons — Strong results, dividend and share buy back in H2

Foxtons Group’s core London market has been improving all year and the interim results highlight both the recovery and the contribution from recent acquisitions. Furthermore, the company announced a return to paying dividends in respect of the half year and given the strength of both trading and the balance sheet, revealed a £3m share buyback programme that should augment earnings. We retain our underlying assumptions but raise our valuation by 1p to 130p to reflect the share buyback.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free