Fawry for Banking & Payment Technology Services SAE

We initiate coverage on FWRY with a FV of EGP6.90 and an Overweight recommendation. The company’s business model fuels long-term growth because of being tied to consumer spending. FWRY trades at 2024 P/E of 19.2x & EV/EBITDA of 10.5x, compared to pee...

Healthy growth across all business lines. A solid fourth quarter. New business lines to gradually kick in throughout 2023.

Contribution per user (ARPU less cost of servicing per user) highlights the operating profitability of a fintech business model. The contribution margin is lowest for digital banking. Applying a valuation overlay to the per user contribution of individual stocks points to 360 Digitech, Fawry and Waterdrop as attractive investments. In contrast, Indian fintechs are incurring contribution losses on each customer served. Payments fintech tend to have highest payback period; this is because ARPUs tend to be low while significant marketing spend is required to attract new users.

Based on our study of 20 listed emerging market fintechs, the median customer acquisition cost (CAC) is US$50, while the annual servicing cost is cUS$55 per user, albeit with wide variations by product and geography. In this report, we examine emerging market fintechs’ customer acquisition and servicing costs. The CAC for our emerging markets fintech sample stands at a median US$50 per user (2021). This, in our view, is due to the larger target market compared with sectors like investech and insurtech, and therefore these firms can attract a larger customer base at a relatively low level of marketing spend. In contrast, lending and investech have the highest CAC.

Emerging market fintechs have also been caught in the downdraft; a few firms have declined substantially. We include their valuation multiples in the Appendix. In FY 2021, the firm oversaw INR4.0tn gross merchandise value (GMV) (ie US$53bn) via 7.4bn transactions, generating INR2.8bn revenue. Kakao Pay's digital stock trading offering is also performing strongly, with registered accounts almost doubling yoy to 5.2mn users. The company also has a digital banking arm, PagBank, which offers its clients access to products such as third-party investment funds, marketplaces and home insurance.

FWRY obtained the consumer finance license, with service offering to the market expected in 3Q22. The focus here is to convert MyFawry into a SuperApp providing different banking services through linking consumer finance, issuing of MyFawry cards (pending regulatory approvals), having the technology of managing customer acquisition on the same platform. FWRY is currently partnering with banks in the microfinance business and the current cost of funds is around 10-11%. Management believes that the company will continue to witness growth in the acceptance and agent banking business segments in 2022 at the same magnitude of 2021.

At the IPO price of GBP13.98 per share, e-finance was effectively priced at around the mid-point of global emerging markets digital payments peers and Egypt’s Fawry, which had listed in 2019. Nevertheless, e-finance’s valuation now leaves very little room for error as it seeks to become a leading enabler of financial inclusion in Egypt – on key metrics, it is trading at more than twice the median of its EM peers. The EM tech sector, in general, has experienced a pull-back since January. This is perhaps to be expected after a 12-year bull run. For payments businesses, incurring heavy expenditure to build market share can be a positive net present value strategy.

Egyptian digital payments infrastructure firm e-finance recently announced plans to offer up to 14.5% of its shares in an initial public offering in Q4 this year. The firm announced its IPO plans for Q4 this year. Bee was established in 2010 and is now a leading e-payments solution provider in Egypt. Ebtikar bought a 60% stake in Bee in 2017 for EGP156mn (US$8.8mn) and now owns 80% of this business. With more than 3mn financial transactions on daily basis, Fawry became the first Egyptian electronic payments company to reach a US$1bn market valuation, following strong share price performance since its IPO in August 2019.

About two-thirds of Egypt’s population does not have a bank account, and cash penetration of the economy is among the highest in emerging markets. Based on public comments from 15 Egyptian fintechs, top strategic priorities for sector participants include geographical expansion and introducing new products. As highlighted previously, the fintech landscape in Egypt is heavily skewed towards payments. MerQ, an AI-based virtual assistant/chatbot provider, plans to expand its product offerings to raise financial inclusion levels in Egypt. Ebtikar bought a 60% stake in Bee in 2017 for EGP156mn (US$8.8mn) and now owns 80% of this business.

Egypt scores well in our recently publishedFintech Financial Inclusion Scorecard, which seeks to identify the countries that offer the best potential for fintechs to boost financial exclusion. At the same time, only a third of adults have a bank account, while bank branch and ATM infrastructure is also lagging. Egypt’s regulatory environment is favourable for fintechs, with the launch of the Fintech Egypt platform, and the introduction of a fintech regulatory sandbox that allows startups to test their ideas in a controlled environment. Paymob raised US$18.5mn of funding in its April 2021 Series A funding round, making it the largest Series A fintech transaction in Egypt.

In this report, we look at seven emerging market fintechs that are planning initial public offerings (IPOs) later this year. However, the net loss also increased (up 200% yoy) to US$155mn. The prospectus can be accessed here. In addition, Kakao Pay plans to set up a digital non-life insurance unit that will offer niche products to mobile banking customers, typically young people. As per recent news reports, PolicyBazaar soon plans to file a draft prospectus for listing in Mumbai. It was established in 2009 and now offers collection services for more than 90 service providers and operates a network of more than 64,000 points of sale.

Based on our survey, 43% of fintechs are profitable. A further 26% expect to become profitable within a year. Breaking our results down by activity, the insurtech and investech sectors have the largest proportion of currently profitable companies (c60%); as we have highlighted previously, these firms typically take a very targeted approach, and are usually competing with incumbents that have labour-intensive business models. However, the winner-takes-all economics of this sector means this heavy investment can still be considered NPV-positive. However, with tightening regulatory conditions, this situation could rapidly shift.

Looking at valuation from new angles: We’ve looked at our peer group average from 2 different perspectives. Total Revenues: Looking at global peers, and despite the fact that FWRY’s revenues are expected to grow by 45.0% and 43.0%, which is higher than global peers’ average revenue growth of 36.6% and 24.0% in 2021f and 2022f, respectively; FWRY’s take rate comes at 1.4-1.6%,which is below global peers average of around 3.1%.

Financial performance in 2020 matched management expectations and market consensus for revenues (+40.0% YoY, cEGP1.24 bn), EBITDA (+48% YoY, c. In 2021, managements believe that performance should meet the consensus expectations of the market, with revenues growing by 42% (c. EGP506 mn, a margin of 28.8%) and net profit growing by 56% (c. This is attributed to the reach, easiness and convenience to the consumers. Fawry has secured financing of around EGP350 million, which should be driving growth in 2021. ·

The pandemic winners among developed market stocks, almost all tech firms, are now household names, with the likes of Zoom helping to transform our working and personal lives and Tesla becoming a retail-investor favourite, recording staggering share price growth. Many of our showcased companies are trading at elevated multiples but this has not stopped the upward march of their shares. In an environment where the global economy has contracted, investors are willing to pay a significant premium for growth outliers.

In Figure 2, we present the 10 listed digital payments companies along with revenue contribution from digital payments. Source: World Bank, company accounts, central bank data, Tellimer Research. Revenues and transaction value are based on 2019 annual data; banking penetration, mobile subscriptions, cash penetration and active users are based on latest available numbers. The platform has 9.2mn active users with an annual transaction value of US$29bn. Recent performance: Total revenue of Pagseguro grew by 32% in 2019 to BRL5.7bn and revenue from transaction activities (59% of total revenues) grew by 49% to BRL3.4bn with transaction volume growing by 50%.

E-payments currently represents around 1.5% of household consumption component within the GDP. My Fawry: MyFawry is a mobile application that started to gain traction, with around 800k downloads since launch. Banking Services contribution to total revenues reached 10.8% in 1Q20, up from 5.9% (+4.9ppts YoY). Higher SG&A expenses can be attributed to higher costs associated with network expansion. CBE’s initiative would increase the number of PoS added to Fawry’s network, but the magnitude of the increase depends on the developments that will take place. Fawry is ahead of competition and is not concerned about new entrants, since market has a huge potential.