KAKZF - Kaspi.kz Grows Revenue But Risks Abound

2024-01-17 16:37:59 ET

Summary

• Joint Stock Company Kaspi.kz plans to raise an estimated $873 million in an IPO of its American Depositary Shares.
• The company offers a 'Super App' with various services in Kazakhstan and has seen impressive revenue and profit growth.
• However, investors should be cautious due to the numerous risks involved in Kaspi's operating model.
• My outlook on the IPO is Neutral [Hold].

Kaspi.kz Is Growing Revenue And Profits But The Risks Are Broad

Joint Stock Company Kaspi.kz ( KAKZF ) ("KSPI") has filed to raise $873 Million in an IPO of its American Depositary Shares representing underlying common shares, according to an SEC F-1/A registration statement .

While the company's top line revenue and profit growth has been impressive, investors face numerous risks.

Given those risks, my outlook on the Kaspi.kz IPO is Neutral [Hold] due to broad risks.

What Does Kaspi.kz Do?

Almaty, Kazakhstan-based Joint Stock Company Kaspi.kz was founded to connect merchants and government agencies with consumers via a growing collection of mobile app services.

Management is headed by founder, Chairman and CEO Mr. Mikheil Lomtadze, who has been with the firm since its inception in 2007 and was previously a partner at Baring Vostok Capital Partners. Before that, he had founded a strategy consulting and auditing firm in the country of Georgia.

The company’s primary offering is a "Super App" with ecommerce, government access, payments, point-of-sale, transportation and related services.

As of September 30, 2023, Kaspi.kz has booked fair market value investment of $306.8 million from investors, including Asia Equity Partners, Baring Fintech Nexus and various individuals.

The company advertises its application via major online mobile app platforms and through its own digital media and offline efforts.

As of September 30, 2023, the firm's app "had approximately 13.5 million Average MAU [Monthly Active Users] and...565,000 active merchants."

Sales and Marketing expenses as a percentage of total revenue have remained low as revenues have increased, as the figures below indicate:

(Source - SEC.)

The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing expense, rose sharply to 33.7x, indicating increasing efficiency in the most recent reporting period, as shown in the table below:

(Source - SEC.)

According to a 2023 market research report by eCommerceDB, the ecommerce market in Kazakhstan was an estimated $3.4 billion in 2023 and is forecasted to reach $4.4 billion by 2027.

This represents a forecast CAGR (Compound Annual Growth Rate) of 6.6% through 2027.

The main drivers for this expected growth are growth in the large submarkets of Hobby & Leisure and Electronics.

Also, the submarkets of Fashion, Furniture & Homeware accounted for 18.3% and 11.4% of the total ecommerce market, respectively.

Major competitive or other industry participants include domestic and foreign payment providers, global marketplace platforms and fintech companies.

Joint Stock Company Kaspi.kz Recent Financial Results

The company’s recent financial results can be summarized as follows:

• Accelerating top line revenue growth

• Increasing gross profit but reduced gross margin

• Growing net income

• Reduced cash flow from operations.

Below are relevant financial results derived from the firm’s registration statement:

(Source - SEC.)

As of September 30, 2023, Kaspi.kz had $1.2 billion in cash and $11.2 billion in total liabilities.

Free cash flow during the twelve months ending September 30, 2023, was $2.2 billion.

Kaspi.kz’s IPO Details

Kaspi.kz intends to raise $873 Million in gross proceeds from an IPO of its American Depositary Shares representing underlying common shares, offering 9 million ADSs at an estimated $97.00 per ADS.

No existing shareholders have indicated an interest in purchasing shares at the IPO price.

At IPO, the Enterprise Value of the company will be approximately $28.4 billion and the share float percentage will be 4.76%.

At the completion of the offering, company shares will trade on the Nasdaq, the KASE (Kazakhstan Stock Exchange), the LSE (London Stock Exchange) and the AIX (Astana International Exchange).

The firm will receive no proceeds from the IPO, as selling shareholders will be offering all ADSs in the transaction.

Management’s presentation of the company roadshow is not available.

Regarding outstanding legal proceedings, management says there have been no legal proceedings against the firm which it believes may have "significant effects" on its financial condition or profitability.

The listed bookrunners of the IPO are Morgan Stanley, J.P. Morgan, Citigroup, Susquehanna Financial Group, and Wolfe | Nomura Alliance.

Valuation Metrics

Below is a table of the firm’s relevant capitalization and valuation metrics at IPO:

(Source - SEC.)

Kaspi.kz’s Top Line Revenue Growth Is Accelerating

KAKZF is seeking a U.S. public capital market listing to enable shareholders to sell shares and is likely to seek a future investment with follow-on offerings.

The company’s financials have generated increasing topline revenue growth, higher gross profit but reduced gross margin, greater net income but lowered cash flow from operations.

Free cash flow for the twelve months ending September 30, 2023, was $2.2 billion.

Sales and Marketing expenses as a percentage of total revenue have dropped recently; its Sales and Marketing efficiency multiple rose sharply, showing an increase in efficiency, a positive signal.

The firm currently plans to pay dividends equal to or greater than 50% of IFRS net income. The payment of any such dividends is subject to a variety of restrictions.

Kaspi’s recent capital spending history indicates it has spent moderately on capital expenditures as a percentage of its operating cash flow.

The market opportunity for providing eCommerce services in Kazakhstan is reasonably large and expected to grow at a moderate rate of growth in the coming years.

Kaspi is also exposed to credit risk, liquidity risk, and has funded most of its operations through customer account deposits.

The financial services industry in Kazakhstan has been subject to various crises of confidence, which, if they are repeated, may quickly and negatively impact the firm’s ability to have sufficient funds for part or all of its operations.

Kazakhstan law does not allow for ADS holders in various jurisdictions to vote their shares, so U.S. shareholders may not have effective voting rights.

Also, selling shareholders include the company founder & CEO and major investors.

So, Kaspi represents significant risks for U.S. shareholders but is growing quickly as the leading provider of its Super-App approach to various ecommerce services in Kazakhstan.

The Super-App concept is compelling, but a question I have is how well the firm will be able to expand its app to neighboring countries, given the war in Ukraine and a generally unstable "neighborhood" surrounding Kazakhstan.

As to valuation, management is asking investors to pay an Enterprise Value / Revenue multiple of 7.42x at IPO, which appears reasonable given the firm’s growth and profit trajectory.

However, the risks that Kaspi faces throughout its business are substantial, as I’ve outlined above.

While risk-on investors may downplay those risks, I believe they are material.

Also, at $97.00 per ADS, I don’t see a significant retail investor base jumping into Joint Stock Company Kaspi.kz, so this IPO will likely be mostly limited to institutional investors who may exert greater price control given the risks.

As such, my outlook on the Joint Stock Company Kaspi.kz IPO is Neutral [Hold] due to numerous and broad risks.

Expected IPO Pricing Date: Week ending January 19, 2024.

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