eTranzact International Plc

ETRANZACT INTERNATIONAL PLC

Ticker:                          ETRANZACTNature of Business:   Processing SystemLocation :                                Nigeria
Recent Price:                 NGN2.61    52-Week High/Low: NGN2.61/1.85Estimated Fair Value:        NGN1.10-NGN2.40
Expected Return:        5.9%Consider Buy:          Below NGN2.40Business Risk:                 Average
Financial Risk:      MediumEconomic Moat:      WeakCorporate Governance:     Average

Company Overview
Etranzact International Plc (ETRANZACT) started as a private limited in May 2003. It went public in June 2009 and was quoted on the Nigerian Stock Exchange in August of the same year. ETRANZACT provides electronic transaction switching and payment processing services.  ETRANZACT  also operates in South Africa, Ghana, Zimbabwe, Kenya, Cote d'Ivoire, and the UK.  eTranzact Global Limited, a company incorporated in the British Virgin Islands, owns the highest number of shares in the company(50.33%); Sybase Nigeria Business Solutions Limited has a 13.5% equity stake in ETRANZACT while Blue Account GASL Nominee Limited owns 6.1% of its shareholding.

ETRANZACT collaborates with financial and telecommunications companies to facilitate e-payments through Automated Teller Machines (ATM), the web, Point of Sale (POS) terminals, mobile phones, and participating banks’ branches. Its association with international organisations, like  Mastercard and MoneyGram,  has eased international payments via its platform. eTranzact Global Limited provides the platform for its, e-payment solutions.

Technology is the foundation necessary for the success of the business. The company invested an additional NGN80.5 million in its software in 2019. Management is not resting on its oars-it is planning to raise additional capital for investment in technology and new product development. This is aimed at meeting the changing needs of its customers.

Mr. Wole Abegunde is the chairman of the board of directors of the company. Mr. Olaniyi Toluwalope replaced Mr. Valentine Obi who stepped down as managing director on June 1, 2018.

Investment Thesis
ETRANZACT realises revenue from mobile purchases, commissions on the usage of its switching platform, maintenance, and support services. Revenue from mobile purchases has been growing and it accounts for the bulk of the company’s gross earnings. The mobile purchases segment of the business involves the sale of airtime, service, and transaction fees on mobile devices. PocketMoni, an app developed by the company, propels the mobile purchases business segment. PocketMoni enables customers to buy airtime, pay bills, receive money, send money, and withdraw cash. The business segment constitutes, on average, 75.3% of revenue and 17.5% of gross profit.  Revenue from mobile purchases jumped 49.8% ( on a 3-Year Compound Annual Growth Rate) to NGN23.3 billion in 2019. However, the high cost of sales associated with this business segment has resulted in low profit margins.

Other commission business segment accounts for most of the gross profit; despite producing an average of 19.6% of revenue, it has generated an average of 73.7% of gross profit in the past 8 years.  In addition, the low cost of sales of this segment has led to a high gross profit margin. In 2019, the gross profit margin stood at 82.9% compared to 80.2% of the prior year.

ETRANZACT’s maintenance, support, and software development business segment is also a low-cost and high margin business. The cost of sales averaged 24.4% of revenue while gross profit margin averages out to 83.8%.

The drive by the Central Bank of Nigeria (CBN) to create a cashless society is a boon to ETRANZACT and other mobile money operators in Nigeria. Though dividend payment has been irregular, ETRANZACT could offer investors capital appreciation in the medium term.

Valuation
A share of ETRANZACT ranges from NGN1.10 to NGN2.40 by our valuation. Currently, it is trading within our fair value estimate. We recommend a hold on its shares.

Financial Overview
ETRANZACT posted revenue of NGN25.2 billion in 2019 compared to NGN18.8 billion made in 2018. This was tantamount to a year-on-year increase of 34.3% compared to a 60.6% increase of the prior year. Mobile purchases produced a bulk of revenue, accounting for 92.6% in 2019 (2018:89.7%). Other commissions business segment produced 4.6% of revenue in the year under review; it produced 8.8% of revenue in 2018. Revenue from mobile purchases increased from NGN16.8 billion to NGN23.3 billion, representing an annual gain of 38.8%. Other commissions were NGN1.2 billion, 29.2% down from the previous year’s NGN1.7 billion.

Gross profit added NGN265.7 million to NGN1.8 billion achieved in the earlier year. This resulted in a 15.1% increase over the previous year’s figure. Operating profit was NGN60.3 million as against NGN3.5 billion operating loss recorded a year ago. Profit Before Tax (PBT) and Profit After Tax were NGN291.6 million and NGN147 million respectively. ETRANZACT recorded a loss before tax and loss after tax in the previous period owing largely to the provision made for fraud asset in that year.  These losses have almost wiped off shareholders’ fund, leading to a loss of 95.2% in 2018. However, shareholders’ fund has gone up by 92.1% from NGN159.7 million in 2018 to NGN306.7 million in 2019.

The cost of sales is rising faster than revenue thereby depressing profit margins. The cost of sales has moved up by 45.6% while revenue has grown by 34.3% over the past three years. Though it rose by 15.1% year-on-year, gross profit has declined at a compound rate of 11.3% over the past three years. The gross profit margin of 8% trails its 8-year average of 20.5%.  The operating profit margin was 0.2% while the PBT margin was 1.2% in 2019.

Business Risk
ETRANZACT processes a large volume of transactions for numerous customers and is liable to lose money through nonperformance or fraudulent practices of employees or third-party contractors or merchants. In addition, the business requires considerable investment in technologies, and research and development; failure of its e-payment technology solutions could lead to heavy losses or business collapse.

Strong rivalry is prevalent among licensed payment service providers in Nigeria. Commercial banks, with the resources and technology at their disposal, are intensifying their efforts to offer new digital banking products to their customers.  Increasing competition will exert downward pressure on revenue and profit margins.

Recommendation: Hold

Earnings Chart of eTranzact International Plc

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