Following solid H119 results, with EBIT up 23.8% y-o-y to €20.5m in H119, Ferratum Oyj (DE:FRU) reiterated its FY19 EBIT guidance of over €45m. The company continues its strategic shift to longer-term lending by expanding and optimising the offering across geographies and products. In parallel, Ferratum is in the process of launching a new mobile banking application (Mobile Wallet) based on its IT platform FerraOS. The company plans to transform the Mobile Wallet into a scalable financial platform with open application program interface (API) access. Ferratum has set its mid-term EBIT target at €100m pa.
Long-term lending delivers
Ferratum generated sales of €145.6m in H119, up 17.2% y-o-y, assisted by a 31.1% increase in Credit Limit to €78.8m at the expense of the Microloan segment, which posted an 8.5% decline to €19.4m. This reflects the strategy to prioritise longer-term, lower-risk products. More focused marketing and improved cost discipline lifted the EBIT margin to 14.1% from 13.4% in H118 (in line with the FY14–18 range of 13.7–15.0%) and EPS to €0.49 from €0.32 in H118. Asset quality expressed as annualised impairments to the credit portfolio was c 31% vs 28% at end-2018 and an FY14–18 range of 26–33%. Importantly, the company placed an €80m senior unsecured bond in April 2019 (rated BB- by Fitch, in line with group rating), refinancing €25m of existing debt and raising €55m for further growth.
Scaling up and transforming the lending business
Ferratum’s focus remains on scaling up products with higher customer lifetime value, especially in the SME Lending and Credit Limit segments (which represented 63% of its total sales in H119 vs 57% in H118). It also plans to migrate its business in Finland (in 2019) and Denmark (in Q419/Q120) to banking licence status, which will lower the cost of capital by utilising customer deposits. The company intends to merge its digital lending with Mobile Wallet (a successor of Mobile Bank; currently in pilot stage in Latvia) and create a scalable financial platform. In doing so, it plans to pursue an asset-light business model and drive lower-risk commission income, supported with off-balance sheet lending as well as partnerships and joint ventures.
Valuation: Reflects growth prospects
Following a c 27% share price appreciation in the year to date, Ferratum is trading at an 8.3x FY19e P/E and a 1.6x EV/sales ratio. This implies a 1% discount (on P/E) and a 35% discount (on EV/sales) to its international peers active in financial services and microlending.
Business description
Ferratum Oy, founded in 2005 and headquartered in Helsinki, provides mobile banking, digital consumer and small business loans. It operates in 23 countries across the globe and has approximately 780k active customers. Its major products include (in descending revenue share order): Credit Limit, PlusLoan, Microloan, SMEs and Primeloan (including Mobile Bank).