Welcome readers to letter 14 where I will round-up the story of Kaspi.kz.
DISCLAIMER: This article does not recommend buying or selling any financial instrument. Please do your own research. This information is for general purposes only and should not be considered investment advice. I am not a financial advisor and do not offer investment recommendations. Investors should obtain advice based on their own individual circumstances from their own tax, financial, legal, and other advisers about the risks and merits of any transaction before making an investment decision, and only make such decisions on the basis of the investor’s own objectives, experience, and resources.
The investment thesis for Kaspi is not complete without a valuation of the business. The valuation can be done simply by dividing earnings or free cash flow by the market valuation (complete business or per share). Another option is to look at the profitability margins. Then you could resort to the book value of the business and maybe most important reverse-engineering the Discounted Cash Flow (DCF) model with conservative assumptions.12
P/E, P/FCF, earnings & FCF yield
As of 24th of August the market capitalization of Kaspi.kz is 18.52 billion USD and the share price is about 95.6 USD
The most recent 12 month earnings (up till June 2023) stand at 1.6 bil USD and the (diluted)3 earnings per share is 8.26 USD per share.
At the same time, the free cash flow was about 1.4 billion USD and 15.1 USD FCF per share for the last 12 months.4
From these numbers we can calculate both price multiples (P/E and P/FCF) and yields.
In the fourth quarter (holiday season) the profits produced are 31% of the annual profit, higher than the average quarter. If the net profits for first half of 2023 are extrapolated now it could amount to 1.7 bil USD for the full year of 2023. This is a bit less than one-tenth of the market capitalization and so the P/E ratio is between 10 and 11 or between 9% and 10% earnings yield. The free cash flow per share could reach 16 USD per share, which is 16.7% FCF yield on the share price or a P/FCF of ~ 6. What’s more, the 6 USD per share dividend
Putting these numbers in perspective to other businesses
Price-to ratios mentioned here are on the lower end of global business valuations as can be seen from the graph below.5 However, because Kazakhstan is considered a riskier place to invest compared to the US for example, the valuation is expected to be lower than the US valuations.
On the other hand, Kaspi.kz as a financial service business in a emerging market may be interesting for investors looking for a Compounder.6 Kaspi is growing revenue, maintaining high margins, and high returns on invested capital (ROIC).7 If the business can maintain the trend for at least 10 years (having a long runway) it can be considered a Compounder in my eyes and, as a result, makes the price-to ratios less significant for consideration of investing.8
Profitability
When it comes to finding compounders in more dynamic geographies like emerging markets, selectivity becomes even more important as companies face very different underlying conditions such as demographics, governance and the opportunity for a country to move up the value chain. Financial Services in India is such an opportunity. While financial services in developed markets can be a very complex area for stock picking, in a well-positioned country like India, the increase in the penetration of financial services and higher structural GDP growth have and will continue to benefit the Indian financial services company HDFC, provided continued strong execution. - Worldwide asset management: the anatomy of a compounder, white paper.
Profitability-wise, Kaspi.kz does not requiring high costs to operate as much of the business happens online. They also lack high capital requirements, they don’t need big factories other then the offices, service- and datacenters. Together, these make for perfect conditions to produce net income with high margin on the revenue. Going forward I do foresee a slow reduction in margins as they add more products and services with higher labor and capital costs to provide these products/services.
The book value of Kaspi.kz is not that straightforward because it operates both banking and non-banking services. The current price-to-book stands at about 10 which is not offering a Margin of Safety.9 How come that the equity (book value) is look relative to the market capitalization? The balance sheet shows that more then 50% of the assets consist of loans to customers (bank loans) whereas the liabilities is mostly consisting of customer deposits (bank accounts). When subtracting the customer deposits from the loans to customers position, the balance sheet is left with little book value. For Kaspi.kz and actually all businesses I really more on the discounted cash flow model as it captures the earnings potential of the business and the price of the potential relative to the market capitalization.
Discounted cash flow (DCF)
As a standard, I use a required return of 10% on an annual basis if I were to consider the DCF model of a business. In this case, the choice of earnings instead of free cash flow (FCF) comes down to the nature of the business. The free cash flow of Kaspi results from subtracting capital expenditure to maintain the business operations (CAPEX) from the operating cash flow (OCF). For the 2022 annual results, this number is composed of the following:
772 bil KZT OCF before changes in asset/liabilities
133 bil KZT in income tax expense
total of 639 bil KZT net OCF
subtracting 59 bil KZT in CAPEX
Gives 580 bil KZT in FCF, 1262 mil USD and 6.65 USD per share
Now to apply this number in a reverse-engineered DCF model we have to do assumptions about the growth in the next 5 and next 10 years. The Kazakh gross domestic product (economic output) has grown rapidly since the start of the century and shows a normal slowdown in the latest 10 years. Assuming this GDP growth slowdown to continue, I would assume a 3% GDP growth rate for the next 10 years. I foresee Kaspi to grow faster than the Kazakh economy, as I assume Kaspi.kz to have a long-term growth trajectory of 7% to 8%.
It is not unlikely that growth of MAU reaches below 10% in 2024. There are almost 13 million users of the Kaspi super app, leaving just 2 million potential users in Kazakhstan. This is 15% of the current number of users. However, through the acquisition of e-commerce businesses in Azerbaijan and Uzbekistan, there is a new pool of potential users following. I therefore estimate ~3% growth impact on FCF/share growth through the number of users growth over the next 10 years.
In addition, Kaspi.kz is buying back their own shares as a strategy to allocate capital in the interest of current shareholders (including Mikheil & Kim). This impacts the FCF/share growth by reducing the number of outstanding shares by around 0.6%.
Kaspi’s payment system is by far the largest in the country, accounting for two-thirds of total cashless transactions as measured by total payment value (TPV) and having 20% higher RTPV than the combined volume of all international payment systems in Kazakhstan, including Visa and MasterCard.10 I would assume 1% FCF/share growth through TPV growth for Kaspi if they can maintain their payments position (revenue and margins) which is easily achieved if the country follows the current trajectory towards more cashless and attracts business for small enterprises (SMEs).11
There is a possibility that the higher margin business Marketplace and Payments keep growing which would add significant more cash flows for Kaspi. The e-Grocery business and Kaspi travel services are displaying high growth. Therefore I would assume 1.5% to 2.5 contribution to FCF growth.
The consumer loans are already reaching their upper limit but there is room for growth in SME and other business loans (Kaspi has just 31% market share in these segments). I expect that this impact could contribute roughly 2% compounded annual growth in 10 years for the FCF.
In conclusion, there is quite a substantial range of valuations that could play out for Kaspi.kz. These models change over time with new insights and results coming online. I have not really taken into account any appreciation in the Kazakh Tenge versus the US dollar because it is very uncertain. I also left out future potential growth outside Kazakhstan because it is not contributing that much to the earnings potential (yet). Finally, there is also a possibility that the business will actually be recognized as a Compounder. Once that happens and the investing world gets to know it, the multiple for the current FCF could shoot up 2 or 3-fold. Even so, the possibility of that is in my eyes less than 5% at the moment. Investors are already struggling to recognize the compounders outside the OECD countries so why would they even consider Kaspi?
Concluding remarks
Full disclosure: I own shares of Kaspi.kz and can not guarantee that this work comes without bias views.
Check the previous work on Kaspi.kz in the Basket section from the homepage for more.
Take my scenarios as a baseline for conducting your own research if you do, the DCF model scenarios are based on a number of assumptions and I can not guarantee that those assumptions are good representatives of reality.
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DISCLAIMER: This article does not recommend buying or selling any financial instrument. Please do your own research. This information is for general purposes only and should not be considered investment advice. I am not a financial advisor and do not offer investment recommendations. Investors should obtain advice based on their own individual circumstances from their own tax, financial, legal, and other advisers about the risks and merits of any transaction before making an investment decision, and only make such decisions on the basis of the investor’s own objectives, experience, and resources.
Resources
Discounted Cash Flow (DCF) Explained With Formula and Examples (investopedia.com), https://www.investopedia.com/terms/d/dcf.asp
Evaluate Stock Price With Reverse-Engineering DCF (investopedia.com), https://www.investopedia.com/articles/fundamental-analysis/09/reverse-discount-cash-flow.asp
Share Dilution Dangers Explained With Formula (investopedia.com), https://www.investopedia.com/articles/stocks/11/dangers-of-stock-dilution.asp
Kaspi.kz Joint Stock Company (KAKZF) Financials: Cash Flow | Seeking Alpha
Guide to the Markets | J.P. Morgan Asset Management (jpmorgan.com), https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
the-anatomy-of-a-compounder.pdf (cworldwide.com), https://www.cworldwide.com/media/s10jt2v2/the-anatomy-of-a-compounder.pdf
Kaspi.kz Joint Stock Company (KAKZF) Profitability | Seeking Alpha, https://seekingalpha.com/symbol/KAKZF/profitability
P/E Multiples are Deceptively Dangerous - Marcellus, https://marcellus.in/newsletter/consistent-compounders/p-e-multiples-are-deceptively-dangerous/#
KSPI - Kaspi.kz JSC GDR Stock Price Quote - XLON | Morningstar, https://www.morningstar.com/stocks/xlon/kspi/quote
Kaspi.kz 2022_Annual_Report
Statistics of payment cards | National Bank of Kazakhstan, https://nationalbank.kz/en/news/elektronnye-bankovskie-uslugi