QIWI Plc (NASDAQ:QIWI) is a Russian payment service provider that operates in Russia, Kazakhstan, Belarus, Moldova, and other smaller CIS countries. Compared to its international competitors such as Visa Inc. (NYSE:V), MasterCard (NYSE:MA), or PayPal (NASDAQ:PYPL), the company still looks like a startup, with less than $300M in revenues. However, it is one of the leaders on the Russian market, with more than 17M e-wallets opened and more than 150K payment terminals across the country. Moreover, its market share in Russia is about 28% (according to 2015 figures) and remains at least stable.
So, what makes QIWI an attractive company?
First of all, its growth metrics. Look at the three-year CAGR in revenues and net income (Diagram 1). The average revenue growth is in excess of 25%, while the net income growth is tremendous: at ~80% over the period. "Hmm, this looks interesting", you may say. However, since I live in Russia, I can certainly say that achieving these results in 2014 and 2015 is phenomenal. Of course, there is a positive impact to the figures from the recent acquisition of the Rapida and CONTACT payments systems in Russia - not widely known companies even in Russia itself. Nevertheless, the biggest contributor to the revenue growth is the company's business operations.
Secondly, its potential for further growth in operating metrics. Look at Diagram 1 again. Despite lower operating and net profit margins than Visa's and MasterCard's, QIWI looks quite robust in terms of ROA and ROE. Also, unlike Visa and MasterCard, the company does not have any debt on its books, so there is potential for improvement in ROE. Moreover, it is likely that QIWI will improve its metrics in the future by reducing the number of payment terminals and enhancing e-payment services. Why do I think so? According to the annual 2015 results, QIWI removed about 23% of its payment terminals during the year. The company also paid special attention to e-payment services revenue that, as a result, has increased by 80% year over year. According to the current market situation, it is unprofitable to expand the number of terminals, as bigger financial institutions have significantly improved their banking services. Hence, QIWI is playing its best ace now by focusing on the juiciest segment of the market.
Finally, despite the recession in Russia and the ongoing banking crisis, QIWI is able to show profitability metrics in the 30-80% range (see Diagram 2). There is no assurance that these margins will stay unchanged. Nevertheless, they are fantastic now, especially for Russia and the CIS.
Despite these positive points, there are a lot of risks associated with QIWI. I want to emphasize the most significant ones in the section below.
Risk #1.The ongoing recession in Russia may freeze future revenue growth. This is true because QIWI is not the cheapest way to send money around. The more people are affected by the recession, the less they will want to pay for e-services. QIWI can (and most likely will) reduce its fees in order to keep revenues coming. However, this decision will definitely diminish its margins. Later on, I will point this out in my DCF model.
Risk #2. Ruble devaluation. Despite the fact that ruble devaluation makes services cheaper, it also makes ruble revenue shrink in USD terms. For a US-based investor, this is a considerable investment risk. Nevertheless, the current trend is positive for the ruble, because oil prices have made a bounce to the $40 mark. I do not want forecast USDRUB or oil price movements, but in my opinion, they will not be as violent this year as they have been over the last two years.
Risk #3. Market rivalry. As I mentioned before, banks have improved their e-services. Nowadays, more and more people are getting involved into the "cheaper-goers" race, so the financial services market in Russian and the CIS is becoming a "red ocean". It is one of major industry risks of QIWI that may cause revenue, operating metrics, and consequently, net profit margin to decline.
Risk #4. Political risks. QIWI is a Cyprus-based company and is classified in Russia as an offshore company. Despite the fact that it follows the anti-terrorism and money laundering laws, a lot of operations are still in the "grey area". An immediate prosecution by the Russian Central Bank is a low-risk event on the one hand, but on the other, an absolutely catastrophic one. Keep this in mind when considering an investment in this company (a historical aside: the Russian Central Bank has recalled licenses from over fifty banks in Russia in the past two years. As you may guess, this means the banks became extinct thereafter).
In addition, I want to emphasize that all of the highlighted risks are most likely priced into the stock currently. A reduction in the probability of one or more of these risks can cause the stock to rise dramatically in the short to mid-term. Hence, the aforementioned risks look more like opportunities here.
The company's market capitalization has recently hit the bottom by falling below the $1B mark (see Diagram 3). Some may consider this a bad news, but I personally think buying this stock at such low prices follows one of the best quotes by Benjamin Graham: "There are no good or bad companies. There are low and high stock prices."
On this positive note, I want to continue my analysis with a valuation part. I will use my standard set of DCF, comparative, and zero-growth analyses.
My DCF model is presented in Diagram 4. In Diagram 5, you can see how different metrics of QIWI are expected to change during this period. I have made several assumptions, which can be easily seen in the "Assumptions" tab of my Excel file. Note that I am not too optimistic about the future revenue growth (the projected 7-year CAGR is below 10%) or net income growth (the projected 7-year CAGR is less than 14%). It is the result of my assumptions about the diminishing gross profit and EBIT margins (hence, the net profit margin will also decrease). I projected the net profit margin to decrease from 30% to 19% by 2022 in my Base scenario because of the extending recession risks in Russia and the increasing rivalry in this market segment.
Another important assumption is about the cost of equity. According to the CAPM model, the cost is in excess of 25% now. However, if you personally think that you require less return for this type of investment, you can easily change it to the "own rate" in the "WACC calculation" section of the model.
My model shows that, after subtracting the market value of debt, minority interest, and adding back cash and investments with the discounted operating working capital balance, the market value of equity is around $830M in the Base scenario. Consequently, the fair value per share is $14.31, which is 5% higher than the current market price ($13.58 per share).
Source: Data - Morningstar.com, DCF model by author
Source: Data - Morningstar.com, model by author
The sensitivity analysis is presented in Diagram 6. According to the Base scenario and the assumptions for the EV/EBITDA multiple and WACC, the price range is estimated to be between $14.04 and $14.61 per share. This price range represents a 3-7% upside opportunity for the stock.
Source: Data - Morningstar.com, model by author
The Zero-growth analysis has been described in one of my articles. You can read more about it here.
According to this analysis, the current market price shows no margin of safety for the stock. The valuation gives a fair market value of equity of $356M, which transforms into a fair value of $6.14 per share. This figure is 56% lower than the current market price of the stock. If we used only net income in the numerator, the result would be a price of $5.43 per share. It is more than 60% lower than the current price level. The cash flow benefits from depreciation and amortization expenses play a big role here, but on average, the fair value per share is 58% lower than the current market price. Hence, the zero-growth analysis shows that the stock is overvalued in the no-growth scenario. On the other hand, who would ever buy this company's equity if it were not for the growth in the underlying business?
My comparative analysis is based on three key ratios: P/E, P/S, and P/BV (see Diagram 7). According to the P/S and P/BV ratios, the stock looks fairly valued. However, the P/E shows a tremendous 100%+ upside opportunity, because the company's P/E ratio of only 11.0x is extremely low when compared to those of its global peers.
Moreover, the current EV/EBITDA multiples of less than 5x also shows that there is a good opportunity to buy the stock very cheaply. The industry's average EV/EBITDA of approximately 15.7x shows a tremendous upside potential in the event of a positive scenario.
Source: Data - Morningstar.com, infographics by author
I would not say QIWI is the best stock pick for US-based investors. However, it is a good bet on the improvement of the macroeconomic and political situation in Russia. I set a one-year target price range between $17 and $19 per share, based on conservative growth assumptions, diminishing margins, and a weighted average cost of capital of 23-27%. If a better scenario is seen, the price can go even higher (watch the news to determine which macro scenario is unfolding).
Thanks for reading! Appreciate your comments!
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in QIWI over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.