Value Investors Club / Triterras, Inc. (trit)

Description

Netfin Acquisition Corp (“Netfin”), a SPAC, merged with Triterras Fintech Pte Ltd (the

“Company” or “Triterras”) on November 10. Triterras’ Kratos platform connects and enables

commodity traders to buy and sell and source financing from lenders. Less than 3% of Netfin’s

shares were submitted for redemption in connection with this combination. This deal is more akin

to a late stage venture deal with a commensurate risk/reward profile. Within a year of the launch

of Kratos in June 2019, its online marketplace, the Company has become one of the world’s highest

volume commodity trade and trade finance platforms. It was immediately highly profitable and in

the approximately 15 months it has been live, it has facilitated $8.8 billion in transaction volume.

For the first six months of fiscal 2020 ending August, the Company generated revenues of $23.7

million, EBITDA of $17.3 million, and net income of $14.2 million. Fiscal 2020 (ending in

February 2021) forecast is to facilitate $10.3 billion of total trade and trade finance transactions,

and to generate approximately $40 million of EBITDA growing at 60% CAGR through 2023.

Kratos significantly lowers admin costs, focuses on sub $10M transactions and provides full,

Know your Customer (“KYC”) and Anti Money Laundering (“AML”) support at attractive prices

of 30 bps to trade and 130 bps for trade finance. The Kratos platform rides on Ethereum blockchain

for transparency and security, mitigating fraud. It helps traders and lenders operate 100% online

as compared to the old-school, tedious, paper-intensive, fraud susceptible, high overhead and time-

draining process, transforming the industry to be more efficient, direct and more attractive for sub

$10M transactions. Traditional bank lenders have pulled back from this segment because of cost,

fraud and regulatory concerns, leading to what WTO estimates is a $1.5 trillion annual funding

shortfall. The Company has a blue-sky opportunity to achieve accelerating growth, as it has the

first mover advantage and is the only platform of scale serving this market.

HISTORY

Triterras Holdings (“Holdings”) was founded by Srinivas Koneru in 2011 focusing on physical

commodity trading. Holdings owned Triterras and Rhodium, a physical commodities trader.

Netfin has acquired Triterras and its Kratos platform and not the legacy physical commodity

trading business, Rhodium, to create a pure play fintech business.

In 2016, Koneru saw that banks were pulling back from trade finance for small and medium

enterprises (“SME”) because of Basel 3 regulatory requirements, costs (costs are same for a

$50MM loan and a $5MM loan), and significant fraud in the SME space. There are hundreds of

thousands of SME traders. The genesis of Triterras was to create a solution for Rhodium to better

manage costs, provide transparency and security to enable it to secure financing. By 2018,

Koneru latched on to the idea of using Ethereum blockchain as a tool to accomplish that goal and

functionally capture the entire flow from origination of trade to the end and in between, not just

for Rhodium but as a platform for 3rd parties, as well.

The Company first developed its Risk Management module that does bank-grade Know your

Customer (“KYC”) and Anti Money Laundering (“AML”) checks, integrating with third party

tools like Artemis, World-Check, D&B and Orbis, that enable KYC, Sanctions and AML checks.

After passing these checks a trader is allowed in the platform. This module was launched in June

2019. To enable these traders to execute trades, the Company developed Trade Discovery. Then

the Company launched its Trade Finance module in February 2020, to enable traders to secure

financing.

Transactional platforms such as Kratos require scale to be successful. One of the most difficult

aspects of starting a platform is attracting initial participants as the platform seeks to build the

critical mass necessary for success. Rhodium had nearly 400 customers as of February 2020, and

US$2.3 billion in overall commodities traded for the year ended February 29, 2020. The launch

of Kratos’ ecosystem was enabled by its relationship with Rhodium, whose existing physical

commodity trading business initially provided immediate scale to the platform, of both

transaction volume and users. The user base was rapidly expanded with 71 distinct parties

executing more than 4,800 transactions comprising more than US$7.7 billion in transaction

volume and US$1.1 billion in Trade Finance Volume from June 2019 through August 2020.

CEO of Netfin, Maurer, owned Longview resources, a commodity trading firm, which became

an early adopter of the platform, accounting for roughly 9% of revenues. Maurer’s familiarity

with Kratos, led to the acquisition of Triterras by Netfin. Post its initial reliance on Rhodium, the

Company has seen rapid adoption of its ecosystem by third parties. Thus, Rhodium and

Longview related revenues are diminishing rapidly as percentage of total revenues and are

expected to be under 15% of the anticipated total revenue for the year ending February 28, 2021.

Although, Rhodium will continue to serve as a source of clients under a commission structure.

MARKET NEED

Trade and trade finance is an archaic business that has not changed much in over a century.

Industry requires excessive paper documentation throughout the supply chain process. Documents

are manually handled resulting in high risk and operational complexity due to human error.

Manufactured goods have very lenient supervision and paper documents can be altered throughout

the supply chain, leading to fraud. Physical products also require critical quality assurance.

Purchasers utilize credible mediators like brokers, private investigators, arbitrators, etc. which

increases the transaction cost. Expensive back office headcount & procedures are required to move

a product from point A to B. Demand for commodities trade funding is based on immediate and

persistent business transactions. Banks and traditional enders have become very selective in

funding SMEs (rejection rate of over 50%), resulting in unavailability of funds at required times.

KRATOS SOLUTION

Kratos provides faster and more efficient digital execution, mitigates the potential for

documentation fraud or data tampering by using blockchain-enabled technology and provides easy

coordination of numerous transaction participants, all the while reducing paper-

based documentation costs. Each transaction is timestamped & chronologically stored using

blockchain-based smart contracts, offering transparency. Fraud risk is mitigated, as there is no risk

of data modification & data tampering; data is stored in a distributed and replicated chain of servers

as blocks are cryptographically sealed in a chain system. There is no downtime & 24x7 availability

given decentralized network architecture, preventing overall system failure

Kratos gives lenders, specifically specialist trade finance companies, or funds, or alternate lenders,

an attractive universe of lending opportunities, which often allows such lenders to lend at higher

yields (9% to 13%), than larger transaction sizes, where banks or other large providers compete to

provide funding. These lenders are predominantly in US, some in Europe, and a few in Middle

East and Singapore. The Company found tremendous receptivity amongst such lenders, because

unlike banks, these funds don’t have a huge back-office of 500 people to conduct KYC, AML

checks, etc. Making the costs associated with small loans prohibitive, despite strong yields. The

Kratos trade finance module provided all the transparency that they need so that they can originate

loans at a very low cost.

In addition to the security and ease of conducting trade and trade financing, another reason for

Kratos popularity is its disruptive pricing structure. When buyers and sellers agree to execute a

physical commodity trade on Kratos, it charges 0.30% of the transaction value to the party who

initiates the transaction. If financing is sourced on the platform by the trader as well, they incur a

fee of 1.3% which is notably cheaper than current offline market rates for capital sourcing, which

are generally closer to 2.0% to 2.25%. The Company does not charge a platform fee to financing

providers and the providers set their own interest rate and other fees before agreeing to finance the

transaction.

A testament to the need for a platform such as Kratos is that, within 15 months of its inception, it

has onboarded 61 traders, ~25 are in the funnel and 300 in database. Annual volume per trader is

up to $154M from $92M in 2019. Kratos has 11 onboarded lenders with $17B assets under

management. Triterras has expected revenue growth of ~70%+, Adj. EBITDA margins of

~70%+. Also, the Company has seen virtually no customer churn.

KRATOS PLATFORM

The goal of Kratos is to bring together the entire commodity trading ecosystem — buyers,

sellers, traders, financiers, insurers and logistics providers — to facilitate trade finance and

commodity trading efficiently in a consistent, transparent and trusted environment.

Kratos platform currently serves three constituencies:

• Traders as operators as they conduct their commodity trading activities,

● Traders as borrowers of trade finance, and

●Lenders who provide that trade finance.

Kratos’ platform architecture will consist of six different modules, each of which serves a

particular trade finance and commodity trading need. Four of these modules, “Trade Discovery,”

“Risk Assessment” (which is accessible to all users without charge, and supports the other modules

by facilitating KYC, Sanctions and AML checks, as well as credit score reporting and bill of lading

checks for users), “Trade Finance” and “Insurance” are operational, and the Company expects to

complete the remaining two modules, “Logistics” this month and “Supply Chain Finance” by

February 2021.

GROWTH DRIVERS

Network Effect

A platform like Kratos, once it becomes successful, is blessed with the network effect. Each party

added has the potential to add their multiple counterparties, leading to geometric growth. As a

trader or lender joins the platform, they work to bring their counterparts onto the platform. For

example, if you’re a seller, you urge your buyers to enroll or vice versa. And given the benefits of

transacting on the platform, they just simply see it as a better ecosystem for conducting business

with their existing relationships. Similarly, a critical mass of traders attracts lenders, which in turn

attract more traders or borrowers, creating a virtuous cycle.

Additional business from Existing clients

The scale and ease of use of the platform positions Triterras well to increase transaction volumes

with existing users as Kratos constitutes a relatively small part of the overall business of their users

which provides for an opportunity to capture additional business flow from existing relationships.

Management is planning to actively engage with their user base to increase business flow through

referral incentives and other strategies to increase the user base, which also increases existing

transaction volumes. Some users only use the Trade Discovery module but do not seek financing

via the Trade Finance module, which is an aspect of the platform that all users can greatly benefit

from. Kratos can capture more value from each trade and potentially increase overall trade volumes

by increasing the number of users who seek financing through the Trade Finance module. When

the Insurance and Logistics modules are active, this will also provide further opportunity to

increase volumes.

Additional Modules

Insurance: The Company’s planned Insurance module will allow users to access trade

credit insurance, which is required by many trade finance lenders. Kratos’ “Insurance” module

was completed last month, allowing users to source credit insurance that normally covers between

85%-90% of the trade finance receivable to protect finance providers against defaults. The

Company does not currently plan to charge an additional fee for users that source credit insurance

on Kratos, but believes that the availability of credit insurance on Kratos will drive increased trade

finance volume and user growth.

Logistics: When Kratos’ Logistics module is completed, which is expected this month, the

Company expects to begin arranging the functional aspects of chartering, post-fixture voyage

management and voyage financials with traders on the platform. The Company does notplan on

charging an additional fee for users that source logistics services on Kratos, but believe that the

availability of logistics on Kratos will drive increased transaction volume and user growth.

Supply Chain Finance: The Company expects to lunch its “Supply Chain Finance”

module, by February 2021. This module expands Kratos beyond commodities and focuses on the

SME suppliers to large “anchor” buyers. The lender will provide immediate payment at the request

of small suppliers who have otherwise offered deferred payment terms to the anchor buyer. The

Company plans to charge suppliers that opt for supply chain finance a sourcing fee of 1.3% of the

amount financed.

Geographic Expansion

Kratos enjoys a diverse user base across many types of users and commodities, but is currently

Asia focused. The Company plans to expand into additional geographies without requiring

significant adjustments to the overall platform or its offering due to the nature of the technology

used and the lack of a physical presence requirement.

Acquisitions

Triterras is also looking into selectively pursuing inorganic growth through acquisitions and

partnerships. These opportunities include accretive acquisitions of existing offline businesses in

the trading ecosystem, commonly known as forums, in which traders seek counterparties on their

own through these forum platforms. Along with acquisitions of existing offline businesses,

Triterras is also looking into artificial intelligence, analytics and dashboard reporting, credit

scoring, and rating solutions as well as paymentprocessing solutions which would allow for

additional features to be added to the platform. With $180 million of cash and no debt, the

Company has plenty of financial flexibility.

COMPETITION

Kratos has the first mover advantage being the only non-petroleum commodity trade and trade

finance platform of scale that is serving this non-petroleum sub-$10 million segment. There are

other platforms out there, some using blockchain and some not, that deal with much later stages

of trade finance and deal with larger transactions, but none are hitting this pre-shipment part of the

of the supply chain, sub-$10 million segment where this trade finance shortage exists. The other

platforms that are mentioned include Allegro Commodity Management and Eka. These products

are considerably more expensive compared to Kratos and are mainly used by the big players in the

industry like Cargill. It is difficult to compare these other platforms to Kratos as they do not have

a trade finance module or a credit insurance module. It is difficult to consider them competitors as

they are targeting larger trade and trade finance companies. while Kratos is targeting a completely

different area of the industry. Triterras is also growing significantly faster than any other platforms.

The Company believes that it has at least a two-year first-mover advantage, if other platforms try

to move into its space. One can build the best designed digital marketplace in the world, but if

they don’t have parties and counterparties participating in the marketplace, it will fail. It’s the

classic chicken-or-the-egg problem that many platform businesses face. And it’s a significant

barrier to new entrants. Also, traders would generally consider using only one platform because

using more than one would add significant complication and chaos to the trading process. It is

much easier to manage the day to day operations through one platform rather than two as using

two would complicate business transactions and make it much more difficult to conduct trades

and track each process.

Triterras’ strategy to develop a one-stop-shop to cover all aspects of trade and trade finance and

continuing to roll out various add-on features and services, they’re going to be difficult to compete

because it’s going to drive transaction volume, increase users on the platform, and make them hard

to catch. This is a blue-sky opportunity with the biggest risk being execution, with the exception

of another disruptive competitor/s, as Kratos has just created and validated the market need.

TRANSACTION OVERVIEW

The key transaction terms are outlined in the following slide:

Pro forma shares outstanding will be approximately 82M based on 3% redemption levels. This

share count should be considered along with the 26M warrants (to purchase at $11.50 per share)

and 15M earnout shares based on financial/share price performance for a total share count potential

of ~125M.

FINANCIAL PROJECTIONS

For the first six months of fiscal 2020 ending August, the Company generated revenues of $23.7

million, EBITDA of $17.3 million, and net income of $14.2 million on $4.1 billion of trading

volume and $877 million of trade finance volume. Fiscal 2020 (ending in February 2021) forecast

is to facilitate $10.3 billion of total trade and trade finance transactions, and to generate

approximately $40 million of EBITDA. Monthly run rates for July and August, which were $785

million per month of trade volume and $260 million for trade finance volume, totaling over $1

billion per month. If these trends continue, the Company is on track to beat its fiscal 2020 guidance.

Fiscal 2021 projection is for $17 billion for trade volume. The basic assumption here is 85 traders

doing $200 million of volume. The Company added 61 traders in its first 15 months, so adding

another 24 over the next 15 months does not look unreasonable. Volume per trader grew from $92

million in fiscal 2019 to its current run rate of $150 million, a 63% increase or an increase of $60

million per trader. Target volume per trader of $200 million, would require average volume per

trader to increase by $50 million or 33%. Also, not unreasonable, and one can run sensitivities on

volume versus number of traders, etc.

To hit the FY 2021 trade finance volume projection of ~$5.7B, they only need ~$2.8B in lending

capacity (AUM gets turned 2.5x per year because the average trading cycle is 120-150 days).

Kratos already has lenders with $17 billion of lending capacity, so there is plenty of runway on the

lending side. According to the Company, buyers attempt to utilize a trade finance option in ~80%

of trades which generates a receivable to the finance provider due in up to 150 days. Currently,

Kratos finances 1/3 of those trades while the other portion is financed through other sources

already known to the buyer and seller.

Based on this assumption, FY 2021 projections are revenues of $123 million, EBITDA of $84

million, and net income of $71 million. FY 2022 projections are revenues of $196 million,

EBITDA of $140 million, and net income of $113 million. FY 2022 projections are revenues of

$247 million, EBITDA of $177 million, and net income of $144 million.

VALUATION

If the platform continues to catch the type of traction it has recently, the outer year projections

could easily be exceeded and if it doesn’t because of competitive, execution or other reasons, the

miss could also be very wide. Fiscal 2020 and 2021 projections seem reasonable. I also take some

comfort in the fact that approximately 90% of Triterras’ initial shareholders are rolling their equity

into the transaction. The valuation equates to approximately 8.0x enterprise value/2021 EBITDA

multiple and at 12.0x price/2021 earnings, which is more than a 50% discount to more established

comps (list in Company’s slide presentation) that are growing at a significantly slower pace with

lower margins. A commensurate trading level, based on 2021 projections, would imply a stock

price north of $25 per share. And if the Company achieves its numbers and gets a 20X EBITDA

multiple on its fiscal 2022 numbers, similar to comps, by that time, it would have ~125 million

shares outstanding, cash would have built up to over $700 million and share price would be ~$35.

Obviously, the short history, unknown new competitive entrants and execution risk make it hard

to have high confidence in the numbers past 2021. However, for the reasons mentioned in the write

up, the set up is very intriguing. I’m playing it through warrants for position sizing and a lottery

ticket type outcome but shares should perform quite nicely as well if the Company continues to

execute its business plan.

RISKS

- Execution

- New competition

- Ownership concentration

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

Catalyst

Continued Execution

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			2020	2021
Price:	12.00	EPS	0	0
Shares Out. (in M):	82	P/E	0	0
Market Cap (in $M):	985	P/FCF	0	0
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	815	TEV/EBIT	0	0