Bull or Bear Independent Analysis
TrustBuddy AB
Value Drivers
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Quality of Earnings
Risk Profile
Leadership Instability as CFO Linus Lönnroth is acting as
interim CEO. We believe that a company in such early
stages requires defined leadership presence, which the
company falls short on here.
Lack of confidence among CLO, who sold 20% of his
shares in Q2 2014. We believe this might be due to insight
about regulations impacting the lender/borrower relationship in P2P lending.
Volatile multiples largely due to the nature of being a
new company, and also a number of “one-time” events.
Accounting reporting methodology was changed in
2012, which skews numbers during that year.
New acquisitions of companies in Italy and the Netherlands create opportunity to capitalize on P2P Lending industry by improving product and geographic diversity
Strong Revenue growth has still resulted in low or
negative profit margins among TrustBuddy and peers
Quality of Management
Analyst
Cameron Andrews
[email protected]
Share price
52wk high / low
Shares
outstanding
Nyckeldata
Market cap (MSEK)
Net debt (MSEK)
EV (MSEK)
Sector
List / Ticker
Next report
Performance
1 month
3 month
1 year
YTD
Major owners
River and Mercantile Asset Management
BlackRock Advisors LLC
TCW Investment Management, Co.
BlackRock Investment Mgmt (AUS) Ltd.
Management
Linus Lönnroth
Simon Nathanson
0,60
2,68/0,489
405 550 000
243,33
85
328,33
P2P Lending
TBDY
2015-06-30
-31,8%
-51,6%
-76,9%
-44,72%
Ownership (%)
4,33
2,32
1,03
1,12
CFO/Interim CEO
Chairman
TBDY Income Statement (MSEK)
40
20
Revenue
0
dec-13 mar-14 jun-14 sep-14 dec-14
Net Income
Date
14-10-08
14-07-18
14-07-18
14-05-26
14-01-16
Insider Transactions
Insider
Shares
No. of Shares
N: Jens Glasø
+50,000
30,127,552
N: Sebastian Hagman +50,000
50,000
N: Linus Lönnroth
+26,000
1,161,848
N: Bård Bjerkås
-400,000
2,000,000
N: Samuel Tawadros
+10,000
10,000
-20
-40
Value Drivers
New online
platform
developed in
2014
License
requirement
in Sweden as
of June 2015
Trend towards
greater whole
ownership from
lenders
Decreased
ROIC due to
greater
competition
Lower
expected
growth of
fixed costs
refer to important disclosures
at the end
of this document
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2015-04-09
Investment Thesis
Revenue growth is expected to remain between
40-60% annually in the medium term, as global
profitability is not yet certain. Taking into consideration the current platform capacity and
trend observations of both revenues and expenses it is expected that TrustBuddy will see positive
earnings in the midterm. Low entry barriers will
attract a number of new entrants, leading to a
diminished annual revenue growth rate, and
higher competition for market share. At the moment this is not a big concern, as revenue growth
is consistently above 100% annually, across all
listed P2P lenders. While business volume increases the profit margin per transaction will
face continued pressure against profit margins.
Expected positive earnings in 2017-2018
Fixed costs are expected to increase gradually
throughout the business phases above, with rates
less than the revenue growth. Using relative historical average growth rates of operating expenses and revenues, it is my estimated forecasted
that TrustBuddy will make positive earnings in 23 years.
Expected profit margin improvement through
acquisitions of Dutch P2B lender Geldvoorelkaar
and Italian lender Prestiamoci during Q4 of the
2014 fiscal year are be expected to increase
TrustBuddy’s margins in the medium term.
EV/Sales increased to 2.6, and EV/EBITDA improved to its highest level in years, indicating
positive strides in company fundamentals. This
should benefit the company over the next 3-5
years due to product and geographical diversity
has been improved from these acquisitions.
Earnings volatility resulting from high operating leverage, as well as an increase in expected
competition, makes them highly uncertain at
the moment. The business faces regulatory risk
resulting from low contractual relations between counterparties. Impending regulatory
licenses in Sweden is expected to lower competitive
barriers
to
entry,
assuming
TrustBuddy receives the license. The operational efficiency of TrustBuddy AB lending
team in maintaining low default rates of
around 2% historically eliminates the indirect
credit risk, which could switch lender clients
from competitors. Other peers offer insurance
products, which create higher costs for their
suppliers of capital.
The interest bearing LT liability of 38 million
SEK, which represents 28% of Equity at YE14 is
fully covered by Cash and Cash equivalents of
40 million SEK, making the default risk moderate.
Summary
Earnings volatility due to high leverage and influence of regulation adds to the uncertainty of
TrustBuddy’s short-term profitability. Recent
acquisitions have boosted the company’s financial picture, but sustained effects are yet to be
seen. Strong revenue growth is expected to
continue in the medium term, although at a
lower rate than the past 3 years. Based on the
above, we assume a required rate of return to
be higher than average market.
Company Description
TrustBuddy AB is the only Peer-to-Peer (P2P) lender
listed on the OMX: First North exchange. Headquartered in Stockholm, Sweden, the company has been
providing short-term consumer loans of up to 10,000
SEK since 2011. TrustBuddy is active in 10 European countries through 3 different names:
1) TrustBuddy: Consumer ST Loans up to 10,000SEK
2) Geldvoorelkaar (Netherlands): SME Loans up to
750,000 Euro; average loan is 48 months
3) Prestiamoci (Italy): Consumer LT Loans up to
30,000 Euro; average loan length: 34 months
Please refer to important disclosures at the end of this document
2015-04-09
Valuation
Strong Revenue Growth but Inconclusive P/B Valuation
All three companies have incurred losses in recent years, so Price/Book ratios have
been calculated in favour of the commonly used Price/Earnings. Currently, there are
few publicly listed peers of TrustBuddy. Both OnDeck and LendingClub are based in
the United States, and have market capitalizations of 13.2bn and 80.6bn SEK, respectively. This is in comparison to TrustBuddy’s market cap of 215mm SEK.
TrustBuddy’s P/B has trended downwards since 2011, with a current ratio of just
0.2. In 2012, a better calculation of TrustBuddy’s P/B is 1.24 by eliminating effects of
uncommonly high intangible assets. We see this as a signal of uncertain growth expectations due to recent acquisitions, changes to reporting methods, and the merging
of parent and group companies. All three companies have shown +100% revenue
growth in recent years, yet still report low or negative margins. So, while
TrustBuddy could be seen as an undervalued company based on P/B, all 3 firms are
too new and speculative to make any deterministic conclusions.
Disclosure:
Cameron Andrews – Does not own stocks in TBDY
Shant Sanossian – Does not own stocks in TBDY
Please refer to important disclosures at the end of this document
2015-04-09
Industry Assessment
Industry Assessment
Porter’s 5 Forces depicts TrustBuddy as an important player in an industry with high growth
potential, as demonstrated by +100% annual growth since 2011. Other alternatives exist to
TrustBuddy’s P2P lending service, however the current climate of interest rates favours this
model. It is important that TrustBuddy capture these benefits and become profitable in the
medium term.
Bull or Bear
Value Drivers
Quality of
Earnings
Risk Profile
Quality of
Management
& Ownership
Overall View
Enterprise value is expected to decrease in the short- to medium-term as
the temporary positive effects of two acquisitions stabilizes. Earnings
have been volatile over the past three years, however this is expected to
decrease with greater maturity.
TrustBuddy has had consistently negative earnings since 2011. The industry is expected to benefit from macro trends in low deposit returns and
stricter lending standards at conventional FIs, as well as diversified offerings through acquisition.
250 thousand loans were issued in 2014, signifying a diversification
across end users. Industry risk is increased due to low barriers to entry
from competitors globally.
Although still a new company, management changes have been the norm
over the past 4 years, including a complete overhaul of the Board of Directors in 2014. The role of interim CEO is held by the existing CFO, with no
understanding for the situation of the CEO’s leave from TrustBuddy.
Excessive volatility and uncertainty is expected for TrustBuddy in the
short term, due to management changes and changing impact of recent
acquisitions. Recommendation is to reduce exposure to TrustBuddy in the
short term, until more stability takes effect.
Please refer to important disclosures at the end of this document
2015-04-09
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Please refer to important disclosures at the end of this document