2023-05-22 18:05:19 ET
Summary
- MICT's acquisition of Tingo Mobile and Tingo Foods opens a unique opportunity for investors in the African agriculture and fintech sectors.
- The deal's structure presents a rare opportunity for retail investors to engage in a large-scale deal in a way typically exclusive to investment bankers.
- Capital flow restrictions in TIO's primary market constrain its ability to return capital to shareholders.
Investment Thesis
In the bustling markets of Lagos or the far-flung villages of Northern Nigeria, one might not find a traditional bank on every corner. Still, mobile money services have managed to thrive, turning every mobile phone into a personal banking platform. This progress highlights a prevailing trend in many emerging markets - leap-frogging traditional banking structures straight to digital finance solutions and, in the process, filling a critical gap in financial inclusion where unbanked and underbanked populations are high. Notable names in this sector include Paytm in India, bKash in Bangladesh, and M-Pesa in Kenya. Amid this transformative landscape, one name commands attention; Tingo Mobile.
Tingo Mobile's relevance goes beyond its presence in the thriving mobile payment sector. What sets it apart is the unique structure of its recent deal with MICT, which formed Tingo Group ( TIO ), bringing an extra layer of intrigue to the narrative. The transaction is far from being a standard asset exchange. The deal didn't provide Tingo's founder, Dozy Mmobuosi, an exit route from his creation or bring in more capital. The deal didn't even include an equal exchange in value. Instead, the deal was structured mainly to propel him and his company into greater visibility and exposure. It offers his firm an enhanced reputation and access to the liquidity of the US capital market. Intriguingly, this arrangement also allows investors a rare chance to get in on the ground floor, a privilege often reserved for the investment banking elite in traditional IPOs. In this unique setup, retail investors aren't merely spectators; they're given an active role in the proceedings.
The specifics of the deal are structured to benefit all parties involved. MICT settled the purchase by issuing 25 million shares to Tingo, Inc. ( TMNA ), Mmobuosi's OTC-traded holding company, along with two unique types of shares, Series A and Series B preferred. These preferred shares are structured to be converted into ordinary shares, bringing TMNA's share up to 75% of total shares post-merger. There is hardly any cash exchange.
The conversion, which is expected to complete by July 1, will increase the total shares by about 101 million. While this may initially appear as dilution, it's more of an invitation. Mmobuosi, through TMNA, will hold a controlling interest of 75%, leaving the remaining 25% available for public investment. In essence, retail investors' interests are closely aligned with the ambitions of the Nigerian tycoon.
It's not every day that such an opportunity presents itself, allowing the average investor to ride the wave of a NASDAQ listing from the start, along an entrepreneurial powerhouse, with no underwriting price that ensures an equal value exchange. The Tingo acquisition can be seen as a refreshing democratization of finance, opening the gates of wealth creation to a wider audience. This momentous deal, which closed in Q4 2022, might not just be good for TIO; it could be a golden opportunity for those everyday investors savvy enough to seize it.
Company Profiles - A Merger of Unequal's
Before acquiring Tingo Mobile, MICT's performance was far from stellar as a finance broker operating primarily in China, plagued by a variety of challenges that left it struggling to achieve significant growth or market penetration. By the time of the acquisition, its ticker had already lost traction to the point where, in its latest earning call, the China operations weren't even mentioned. MICT's legacy brokerage business has become a footnote in TIO's narrative.
In stark contrast, Tingo Mobile, the dominant player in Africa's agriculture trading, has been fundamentally changing the landscape of Nigeria farming by adapting its mobile payment offerings to the fragmented niche of African rural farming. Its business model revolves around a digital ecosystem that links farmers to buyers, services, and financial tools, offering a comprehensive one-stop solution through the farm's lifecycle from seed to sale. Tingo Mobile also has a track record of profitability and growth, bringing its young (43 years old) owner to the multi-billionaire club. From 2019 to the 11 months that ended November 2022 (the time of the MICT-Tingo acquisition), Tingo Mobile's net profit grew steadily from $94.4 million to an impressive $260 million.
The Deal
To ensure a smooth transition, big-name auditors - Ernst & Young and Deloitte - were brought on board. Although these accounting giants audited Tingo Mobile's operations and assets, they didn't underwrite the deal or issue a guiding price to the market, further sweetening the all-stock deal for retail investors. The all-stock transaction was based on a specific number of MICT shares that were already under NASDAQ notice for trading below $1 for thirty consecutive days. Below is a table showing how much MICT paid for this African gem
When the deal closed, MICT shares traded at $0.75 per share, effectively valuing Tingo Mobile at $290 million, a modest sum compared to the $260 million net income generated in the eleven months that ended November 2022, right before the deal close, setting its valuation at about a PE ratio of 1x.
The TIO story didn't stop with the acquisition of Tingo Mobile. In February 2023, MICT went on to purchase Tingo Foods, also owned by Mmobuosi. The purchase price might make some finance pundits scratch their heads in disbelief: a meager $204 million promissory note carrying an interest of just 5%, a drop in the ocean, especially when you consider the stunning performance of the subsidiary in a brief two-month period. As per TIO's Q1 2023 quarterly report (accounting for Tingo Foods' operating from the time of the acquisition in February to the end of March 2023), Tingo Foods racked up a staggering $577 million in sales, with an operating profit of $143 million. These are no small potatoes, even by food processing standards.
The acquisition of Tingo Foods, just like its predecessor Tingo Mobile a few months earlier, is characterized by incredibly favorable terms for TIO and, by extension, its retail investors. The financials are incredible, mirroring a robust business, making the $204 million promissory note for Tingo Food and the 388 million common equity units for Tingo Mobile look like a steal.
Skepticism: Digging Deeper Into the Financials
TIO has received criticism on a number of issues, with skeptics questioning the company's apparent silence on device sales and the temporary absence of its NWASSA website and app. This has given rise to doubts about customer engagement metrics. Yet it is essential to distinguish between noise and signal.
The perceived volatility in TIO's device sales doesn't indicate any strategic retraction of oversight; instead, it is a direct result of the company's unique sales approach. TIO engages in partnership contracts with farming associations, which purchase devices in bulk for their members. This bulk purchase model inherently results in sales figures that fluctuate, not due to business instability but due to the sales model itself. In the past few years, TIO has successfully brought on board the two largest farmers' associations in Nigeria, understandably leading to a plateau in device sales as the market reaches saturation. However, Mr. Mmobuosi is not complacent in my view. The company is replicating its successful sales model in Ghana, where farmers' associations have committed to enrolling a minimum of 2 million new farmers, with a target of 4 million, as stated in the Q1 2023 earnings release. The company also has plans to expand into other African nations, bringing it closer to its goal of increasing its customer base from 12 million to 30 million in the short term.
It is also important to address the question of the technological moat and technological engagement of TIO's broad demographic of African farmers. In essence, the company's consumer-facing platform, be it the Chinese smartphones it assembles in Nigeria, or the GSM telecommunication service it provides through its partnership with Airtel, are mere conduits, facilitating the stable and thriving NWASSA platform for agricultural trade and ancillary services, which can be accessed through SMS and phone calls. SMS Mobile Payments are popular in Nigeria and have become a crucial part of the country's financial ecosystem, supported by the Central Bank to promote financial inclusion, particularly in areas where internet connectivity is low but mobile phone penetration is high.
Claims of inflated app engagement could be seen as a diversion from the true growth narrative within TIO's core operations. The NWASSA business, TIO's operational heart, is vibrant and exhibiting growth in trading and financial services and within the insurance and mobile payment segment. The NWASSA platform revenue skyrocketed from $198.6 million in 2021 to $532 million in 2022, as shown in the table above.
Instead of seeking validation through glitzy tech tools or high-profile web design, TIO's strengths lie in its ability to solidify its presence in the African market through consistent growth of its core businesses. Serving the marginalized and impoverished farmer communities in Nigeria and other African nations while generating hundreds of millions of dollars in profits is an incredible feat, mirroring its product's value, even to those in the most resource-scarce environments, often frugal in their spending. In my view, TIO's profitability figures are a testament to the tangible economic benefits its services deliver, equipping these hardworking farmers with means to provide better for their families and enhance their living conditions.
Tingo Food's Impact on Growth and Valuation
A recent audit report from Deloitte lays bare the financial health of Tingo Foods, painting a compelling picture of profitability and growth prospects. As of 2022 year-end, Tingo Foods held non-current assets, predominantly property, and equipment valued at a modest $13 million (the land is leased from Mr. Mmobuosi). Its current assets, largely composed of inventory, stood significantly higher at $201 million, with a cash reserve of $54 million. However, the true marvel of this report lies in the company's ability to churn out substantial revenue from these seemingly humble resources.
From inception on August 11, 2022, to December 31, 2022, Tingo Foods raked in a whopping $466 million in revenue. Fast forward to the first quarter of 2023, the food processing business reported revenues of $577 million, a $110 million (23%) hike from the preceding four-month period ending December 2022, which brought $143 million in operating profit in the same period.
These figures translate to an impressive adjusted yield on invested capital of 11x in the quarter (calculated as the ratio of Q1 23 operating profit of $143 million to the non-current asset value of $13 million). One can envision astronomical returns by extending these return ratios to the 1.6 billion food processing project under development in Nigeria. Such growth potential is representative of the high rewards one would typically associate with investments in emerging economies.
Taking a step back and analyzing TIO under a no-growth scenario, we find that the company still represents a case of undervaluation. Total shares outstanding currently stand at 163,727,382, but by June 30, 2023, TMNA will most likely convert its Series A and Series B preferred, bringing the total balance to 552,426,003.
Using TIO's Q1 2023 net profit of $177 million as a proxy of static financial performance, we can forecast an annual net profit of $708 million. Speaking of static performance, one should note that most of TIO's earnings are defensive and recurring, including mobile leasing (44% of 2022 revenue), utility online payment service (18% of 2022 revenue), and mobile service revenue (6% of 2022 revenue). As for food processing, which is currently the primary contributor to earnings and sales, it is defensive in nature and resilient to the ebbs and flows of economic cycles.
Dividing the $708 million proforma net profit over the projected 552 million shares gives us an EPS of $1.3. With the current share price standing at $5.3 per share, the corresponding PE ratio sits at just 4x. This is substantially lower than the industry median of 20x, suggesting that TIO shares are trading at a significant discount.
Company | Ticker | FWD P/E |
Nestle | ( NSRGY ) | 21.4 |
Mondelez | ( MDLZ ) | 24.2 |
Hershey | ( HSY ) | 27.9 |
General Mills | ( GIS ) | 20.7 |
Kraft Heinz | ( KHC ) | 13.5 |
Danone | ( DANOY ) | 17.5 |
Kellogg | ( K ) | 16.9 |
Tyson Foods | ( TSN ) | 30.9 |
McCormick | ( MKC ) | 33.8 |
Campbell Soup | ( CPB ) | 17.5 |
Tingo Group | TIO | 4.0 |
Achilles Heel Underpinning The Hold Rating
Nigeria's currency, the Naira, has been unstable for years. The country's economy has grappled with fluctuating oil prices, inconsistent fiscal policies, terrorism, and a critical shortage of foreign currency. These factors, coupled with a high inflation rate, have eroded the Naira's purchasing power and pushed Nigeria's central bank to implement capital controls that limit the ability to move money out of the country.
This directly impacts TIO's ability to return capital to its shareholders. While the company may be generating considerable revenue in Naira, getting cash out of the country for dividends or converting it to US dollars for share buybacks could prove challenging in the current climate.
This friction suggests that TIO's investors are betting on capital gains more than dividend yield or share buybacks, a hypothesis mirrored by the stock's rapid price increase, while TMNA, which holds a 75% stake in TIO, still trades for cents on the dollar, despite now attracting attention on the back of the Tingo Mobile sale. If investors were anticipating dividends or share repurchases, they would have bought TMNA, who, after the sale of Tingo Mobile, is a shell, OTC-traded company whose sole purpose is to hold a 75% interest in TIO. When it comes to returning capital to shareholders, it always boils down to trust in management's commitment to that endeavor; however, if you don't trust TMNA to do the right thing with its shareholders, there is no reason to believe that TIO will do the opposite. The Tingo deal hasn't resulted in a material change of ownership, and the team that pulls the strings at TMNA is the one who does so at TIO.
Summary
MICT's acquisition of Tingo Mobile and Tingo Foods offers the African fintech giant a golden ticket to substantial exposure through its NASDAQ listing, amplifying its visibility and reputation in the global financial arena. For everyday investors, this merger is a rare invitation to join the ride at the ground level, often a privilege reserved for elite investment bankers.
While the deal may have invited some skepticism stemming from the lack of customer engagement platforms like apps and websites for Tingo Mobile and NWASSA, the bigger picture reveals an opportunity that is hard to pass, with the promise of an impressive revenue stream from Tingo Foods, expansion into other African nations, and a solid foothold in Africa's burgeoning tech and financial sectors.
Despite recording hefty net profits, TIO's capacity to distribute dividends or buy back shares is hampered, largely due to government capital flow constraints. Consequently, your investment returns hinge on optimistic speculations about improvements in Nigeria's economic landscape that would ease these restrictions. In this context, short-term gains are essentially reliant on a fellow investor buying into the promise of a brighter future, paying more for the stock than you did, driven by the same valuation hypothesis that puts little weight on the company's limited ability to distribute its wealth back to its investors, at least in the short run, or at the magnitude that it would if it was operating in a more financially-liberal region. Therefore, our hold rating is an exercise in optimism layered with a sober apprehension of Africa's geopolitical and macroeconomic realities.
For further details see:
Tingo: An Unparalleled Opportunity With A Wrinkle