Value Investors Club / LESAKA TECHNOLOGIES INC (LSAK)

Description

Thesis Overview

We previously wrote-up LSAK in June of 2022 which covers much of the situation background.

https://valueinvestorsclub.com/idea/LESAKA_TECHNOLOGIES_INC/9656846532

Since then, a number of key developments have occurred which we believe warrant a detailed

update on the Company, most notably a world renown fintech investor/operator becoming

Executive Chairman of the business earlier this year. Despite what we believe to be the original

thesis / value creation story to be playing out, the shares are slightly lower than 2 years ago,

which we think presents an even more attractive risk-reward today.

As a refresher, LSAK used to be a mismanaged holding company in South Africa which underwent

a transformational acquisition in April of 2022, acquiring the Connect Group.

Today the business is composed of:

1. Merchant Segment (75% of Group EBITDA) – this segment is primarily composed of the

Connect business which possesses 4 sub-segments targeting the SA micro-merchant landscape:

value-added services (airtime, prepaid electricity, bill payments services), merchant acquiring,

smart-safes, and merchant lending. Connect is the only end-to-end solution in the market

covering VAS/card acceptance, cash management, and a lending product. There is also a small

legacy merchant business focused on card payment processing at large retailers (Woolsworths,

Pick n Pay, ShopRite) which has zero/minimal contribution to earnings.

2. Consumer Segment (25% of Group EBITDA) – this is a consumer banking business servicing

primarily the 1.4m active customers in the low-income SASSA social grant recipient market,

offering depository, lending, insurance, and other banking products.

3. Non-Core Assets – the company still holds onto stakes in a number of non-core legacy

investments, most relevant being its 10% stake in Indian BNPL company, Mobikwik.

What initially drew us to the situation was the constellation of high-quality change agents

involved including:

4. Value Capital Partners (“VCP”) – South African engagement/constructivist fund who owns 25%

of the company today and effectively controls LSAK. The firm was founded in 2016 by Antony Ball,

a highly regarded SA private equity investor and co-founder of the PE firm Brait. VCP has steadily

grown their stake, increasing most recently in July 2023.

5. Ali Mazanderani – the recently appointed Executive Chairman, a world renown fintech

investor/operator who has served on the boards and invested in a number of the most successful

global payments businesses (StoneCo, Network International, etc)

We view LSAK to be transitioning from the special situation we initially highlighted 2 years ago to

now an open-ended long-term growth story. The shares today trade at ~9.5x fwd EBITDA and we

expect EBITDA to grow >20% in USD terms.

What’s Happened Since June 2022

Since we last wrote-up LSAK, there have been several key developments to the situation:

6. Connect Group Integration and Execution – since acquiring these assets 2 years ago for 12.8x

EBITDA, LSAK is on track to grow Connect EBITDA at a ~30% CAGR (70% cumulative or now 7.5x

EBITDA based on their initial purchase price). That’s been driven by rapid deployment of payment

terminals in the SA informal merchant market (share gain + market growth) with 85% cumulative

growth in payment volumes in their VAS/acquiring businesses (device growth + per merchant

spend growth) and 35% growth in their loan book. The success here has in large part been driven

by Connect CEO Steve Heilbron (former Investec senior executive) who came over to LSAK in the

acquisition. We view him to be a rockstar in a space compared to the competition. We believe this

asset can continue to compound earnings at ~20% USD CAGR over the next 5 years

7. Consumer Segment Turnaround From Loss-Making to Highly-Profitable – as we highlighted in

our initial write-up, this Consumer business traditionally had a widespread fixed cost base coming

from its 350 retail branches and network of mobile/fixed ATMs. In June of 2022 this business was

severely loss-making (-40% EBITDA margin). Over the last 2 years, the Company has successfully

right-sized its cost structure, moving to a more consolidated and digital distribution channel while

also growing monthly ARPU through increased loan/insurance product penetration. Margins have

steadily improved and in the most recent quarter, this segment posted positive +24% EBITDA

margins and from our conversations with management/experts should be on track to hit ~25%

EBITDA run-rate margins in the near-term. The turnaround here has been led by the former LSAK

CEO Chris Meyer (another previous head of corporate/investment banking at Investec) and

division CEO Lincoln Mali (a veteran exec from Standard Bank). The team is now focusing more on

growing ARPU here now that margins have been more normalized.

a. This business is also benefiting substantially from the financial distress and inevitable

shuttering of the South African Postbank which was historically the largest servicer of

SASSA social grant accounts. The Postbank today has ~3.5m customers remaining and

has been bleeding off several hundred thousand accounts per month while LSAK has

been absorbing a growing share (10-15%) of those losses. At that rate, we would expect

LSAK to be able to gain ~500k customers over the next few years.

8. Management Transition – Perhaps the most important change that’s happened: in December

2023, LSAK announced that CEO Chris Meyer would step down to be replaced by board member,

Ali Mazanderani, who would become Executive Chairman. As previously highlighted, Ali is one of

the most globally respected fintech investors/operators. Ali was formerly a partner at EM-focused

PE firm Actis, served on the boards of StoneCo in Brazil, Network International in Dubai, and

Fawry in Egypt. In recent years he founded a European-based fintech unicorn, Saltpay. Ali was one

of the main architects of Lesaka’s current strategy and presented his vision on the fiscal Q4 2020

earnings call. Previous CEO Chris Meyer played a crucial role in restructuring LSAK from a holdco

to a profitable operating company. We believe Mazanderani’s leadership represents LSAK taking

the next step towards its vision of becoming the leading SA fintech.

a. Ali’s Track Record – we researched a dozen different Fintech investments (e.g. Emerging

Markets Payments, Paycorp, GHL Systems, Stone, Pine Labs) Ali led while at Actis from

2010 to 2018. In aggregate, this investments returned ~3x MoM on 5 year horizons,

excluding StoneCo which was likely a much higher “homerun” MoM. Compared to the

relevant market fintech/tech indices, Ali’s investments outperformed by ~20% p.a.

b. Ali’s Vision – In Ali’s inaugural and in recent communications to the market, he has

expressed a vision to turn LSAK into the South African fintech champion. To accomplish

this, we believe LSAK will pursue a combination of investing in continued organic growth

as well as going after a pipeline of accretive acquisition opportunities. Looking at the

above mentioned Actis deals, we can see Ali has substantial experience in accretive M&A

with almost all of the aforementioned deals creating platform value through a number of

add-ons in a “buy-and-build” strategy. In essence, we think Ali hopes to turn LSAK into the

Square/StoneCo of South Africa. The Company has already identified a number of

synergistic tuck-ins as well as several more transformational deals to do in the South

Africa and neighboring markets. We think there is ~R500m of EBITDA to acquire in the

next 5 years (compared to Company guidance of R700m EBITDA for FY24, fiscal end of

June).

1. The M&A opportunity landscape should be aided by a dynamic in Africa fintech

where there are likely numerous forced sellers of VC/growth-equity funded

operations which have experienced valuation collapses since previous years’

growth funding frenzies.

9. Adumo Acquisition – the first evidence of Ali’s vision came to fruition in May 2024 when LSAK

announced the acquisition of another South African competitor in both the merchant and

consumer space, Adumo. The acquired assets generate ~R200m of EBITDA, serving 1.7m active

customers, 119k merchants and processes >R250bn in throughput annually. Adumo also has a

large employee footprint covering SA, Namibia, Botswana, Zambia, and Kenya. LSAK is acquiring

Adumo for R1.6bn / $86m or ~9x LTM EBITDA. On the most recent earnings call, management

noted that Adumo has historically grown at ~20% normalized Rand EBITDA terms. The sellers of

the deal include Apis Partners, African Rainbow Capital, the IFC, and Adumo management.

Importantly, the purchase consideration is funded primarily through LSAK shares and only $12.5m

of cash, implying the sellers are taking LSAK shares at $4.25/share (a ~7% discount to LSAK share

price prior to announcement). We view the fact that Adumo’s sophisticated African fintech PE

owners were willing to take LSAK shares as a big positive signal on the LT value here. We also

believe there are likely substantial synergies, potentially run-rate value of R100m annually) from

consolidating cost structure and cross-sell of consumer and merchant products. That would take

the purchase price down to ~5x PF EBITDA without organic growth or ~3x PF EBITDA paid with 15-

20% organic growth over 3 years. We think this deal on its own is ~17% accretive to LSAK share

price in 12 months and 28% in 2 years.

a. The Company expects to put out more detailed financials on Adumo in late June which we

think could serve as a near-term catalyst for the stock. Our above financial analysis of the

Adumo business are based on estimates from industry channel checks. We do not yet

believe that the market recognizes how accretive the Adumo deal should be.

Valuation & Upsides

Today LSAK trades on ~9.5x fwd EBITDA. Compared to an estimated ~20% forward USD EBITDA

growth, that would imply a ~0.4-0.5x TEV/EBITDA/USD Growth factor. International payments

peers trade at a premium on ~1x TEV/EBITDA/USD Growth. Another lens to look at it is vs South

African high-growth peers which trade on 1-2x PEG.

We believe in the next 12 months, LSAK shares should trade at $9.34/share (~110% upside)

based on a 13x fwd EBITDA multiple (0.75x TEV/EBITDA/Growth and 0.95x PEG, implying some

growth-based re-rating). This upside includes 26% M&A accretion value from Adumo and if LSAK

can do another deal slightly smaller than Adumo.

Over 2-3 years, we think LSAK shares should trade at $11.28/share (~2.5x upside) based on a

12.5x fwd EBITDA multiple (compared to above target multiple, fwd growth will have slowed

slightly to mid-teens USD). This includes 50% M&A accretion value from 2 more years of deals.

In summary, since we last wrote-up LSAK, the shares are -8% lower and multiple is

unchanged despite 2 years of excellent execution in Connect, a material turnaround in the

Consumer segment, the taking over of a rockstar Executive Chairman, and a transformative

acquisition in Adumo. We view the downside to be materially de-risked while the upside

remains substantial.

Risks

10. Execution and competition – As mentioned in our previous write-up, while Lesaka's business

model is highly relevant to the informal merchant base in South Africa today, it must continue to

evolve its business mix as more of the economy is digitized while also fighting off competition

which will invariably be attracted to this TAM. The Connect Group has demonstrated a strong

track record of doing this historically and experts we spoke with believe the pieces are in place

within Lesaka for this to continue going forward and for Lesaka to emerge as one of the winners in

the space.

11. Leverage – Pro forma for the Adumo acquisition, we would expect leverage to fall from 2.6x today

to 2.3x (before the impact of synergies or growth). The Company is now LFCF generative and its

business lines have proven resilient and growing even in a weak economic environment (e.g.,

Covid). The Company’s stake in Mobikwik also partially offsets 1/3

rd of the net debt.

12. Currency – Nearly all the revenue for the company is generated in rand. While South Africa's

economy and fiscal situation have struggled for years, the current commodity upcycle should be

positive for their balance of payments. We assume ~3% p.a. devaluation in our base case as this

is the cost to hedge the rand in global forward markets and indicates what the market expects the

rand to devalue at.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

M&A

Organic EBITDA growth

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			2024	2025
Price:	4.50	EPS	0	0
Shares Out. (in M):	61	P/E	0	0
Market Cap (in $M):	270	P/FCF	0	0
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT	0	0