Kaspi.Kz: Dominant Business With More Room To Grow (NASDAQ:KSPI)

I’ve never found myself in a more complicated love-hate relationship than owning shares of Joint Stock Company Kaspi.kz (OTC:KSPI). I first heard about the company when it went public on the London Stock Exchange and, after reviewing the numbers, the only reasonable assessment was “This is just too good to be true”. Sales were growing between 40-60% every quarter, Net Income was growing 60% year over year, and profit margins were an incredible 50%. I eventually found myself getting comfortable with the business after a few months of research – or at least as comfortable as a US Citizen can get with a Kazakhstan-based business. The stock quickly doubled from my entry point only to fall from $150 a share to $40 a share after massive protests broke out in January 2022. Investing in frontier markets such as Kazakhstan is not for the faint of heart. Still, for those willing to ride out the vicissitudes of the market, I believe an investment in Kaspi will be rewarded. There are a few key points to the bull case:

• The recent NASDAQ IPO should unlock an entirely new investor base that will wake up to the strong fundamental performance of Kaspi.
• Kaspi’s Super App strategy will allow the business to continue to earn superior returns on invested capital and provide a platform for reinvestment leading to continued growth.
• The stock is cheap. For this level of growth, the stock is still only trading at a P/E ratio of 11.71x.

In my opinion, the statistics point to such substantial value that the majority of work that has to be done on Kaspi is to understand the bear case. The majority of this article will be dedicated to reviewing which of the bear theses have merit and which do not.

The State of the Kaspi SuperApp

If you are not familiar with Kaspi, you are not alone. News of the best business in the Kazakh Steppe has only started reaching a larger audience with their recent IPO. To summarize, Kaspi is a super app unlike anything in the Western world. The closest analog would be Tencent’s WeChat or Meituan in China. For a more accessible comparison, imagine if Amazon, your bank, Instacart, Booking, the DMV, and Visa were all in one app. Broadly, there are three business lines in Kaspi: ecommerce, payments, and ‘Fintech’. Personally, I believe the fintech segment is misnamed – it’s really a banking business focused on gathering deposits and making short-term loans.

Business is booming – still. The growth story of Kaspi is a mixture of adoption, innovation, and the lingering promise of international expansion. To understand the story of Kaspi, there is nothing more important than understanding the runway of the business, i.e., how big can this business really get? Boasting 13.5 million monthly active users, there are still some people in Kazakhstan not using Kaspi given a population of nearly 20 million. So, there is still a runway for growth within Kazakhstan, but further penetration will be increasingly difficult. At some point, you reach the truly endearing Luddites who still exclusively use a landline phone.

Another key to reaching the business’s potentiality is increasing usage within the active users. Growth will come as more and more people live their daily lives through Kaspi – more transactions, more payments, and more everything.

Finally, international expansion could be another catalyst for growth, but one I would be skeptical of. Kaspi’s early international efforts to expand into Ukraine were stymied by Russia’s invasion. Recently, they have made substantial investments into Kolesa which has a large presence in other Central Asian markets such as Uzbekistan.

Too Good to be True?

We have not touched on valuation, so here are some high-level numbers to understand the business:

• Over the past 9 years, revenue has grown at a roughly 44.5% CAGR.
• Over the same period, EPS has grown from 8 cents to $8.64.
• Kaspi has been able to earn 80% to 90% return on equity over the past two years and has been able to earn over 50% returns on invested capital.
• The current P/E ratio of KSPI is 11.71.
• KSPI trades at an EV/EBITDA of 7.96 as of writing.
• KSPI has a roughly 5% dividend yield.

There’s a patent absurdity of the bargain-like characteristics of Kaspi. You don’t need to run a DCF to know that a business growing at greater than 40% should trade at a higher multiple than 10 times earnings… right?

Let’s go over some reasons people are reasonably or unreasonably afraid of investing in Kaspi.

Kaspi the Bank

Kaspi was originally a bank that was acquired by Mikheil Lomtadze and private equity firm Baring Vostok. Kaspi has been able to synergistically issue “Buy Now Pay Later” loans to customers who are purchasing goods through Kaspi’s ecommerce platform. As the business has grown, the higher quality ecommerce marketplace and payments businesses have eclipsed the earning power of the banking business. Still, banking and loans represent roughly a third of the company’s net income. There’s a bit more nuance to any banking business than just the earnings in a given year – mostly how much risk is the bank taking to produce those earnings. Taking a look at the balance sheet of Kaspie over the past few years, it looks like the risk profile of Kaspi’s loan book is low and has withstood a lot of turmoil such as COVID-19 and the aforementioned riots in 2022. However, KSPI has a portfolio of 3.7 Trillion Tenge ($8.3 Billion) in loans to customers which are, by and large, unsecured. Despite the low “cost of risk” to date, there is substantial credit risk embedded in a portfolio like this which may rear its ugly head if a sustained economic downturn occurs. To Kaspi’s credit, these are short-term loans which allow Kaspi to ramp up and down exposure to credit risk to dynamically guard against worsening conditions.

How big can Kaspi get?

How can Kaspi be growing so fast? The GDP of Kazakhstan is roughly $225 Billion (as of World Bank data in 2022) and Kaspi’s market cap of $24 Billion is over 10% of total GDP. How much growth can there be in a country of this size? There is a limit to this growth unless you believe they can replicate this model in other countries. MAU growth is nearly tapped out but let us give Kaspi a credit for their innovation and ability to increase engagement. Let’s take a few reasonable assumptions:

1. MAU tops out at 15 million counting modest growth in the Kazakhstan user base and some regional expansion in countries such as Uzbekistan and Azerbaijan.
2. Engagement and cross-promotion of services increases monetization by 30% per MAU. Kaspi’s launch of new products consistently sees rapid adoption and can be extended to all users quickly. Most recently, the rapidly growing e-grocery business should increase engagement as grocery purchases are a frequently reoccurring activity.

That gives a cap to growth at 44% higher than today’s earning power. Annualizing the past 9 months, Kaspi is on track to earn 824 Billion Tenge. If we take the future growth for granted, then Kaspi could potentially earn 1,186 Billion Tenge per year or $2.66 billion. A company in Kazakhstan earning $2.66 billion may well deserve a $24 billion dollar value making the stock not as obvious a bargain as it may seem – but only if you believe growth will stop.

Geopolitics

An exploration of the bear case would not be complete without a word on the political situation in the former Soviet state. Kazakhstan has historically had one of the more reliable and stable governments in the region. In my opinion, the real fear and loathing of this company come from a general bad feeling that somehow Kaspi will be a victim of some kind of Russian aggression or that equity owners will see another meltdown like in 2022. Taking note of what markets tell us about the riskiness of the country, there is only an equity risk premium in the market of 7.28%. This shows that markets consider the geopolitical risk to be on par with that of Italy. Maybe that is what is embedded in current prices, but there will likely be much more volatility in this market compared to what a Western investor may be used to.

Recent Performance

In the most recent reported quarter, Kaspi continued to impress – growing revenue 51% YoY and net income by 40% YoY. The star performer continues to be Kaspi’s marketplace segment which grew revenue by 85% YoY and net income by 64% YoY. Marketplace revenue is poised for future growth as Kaspi expands its partnership with grocery retailer, Magnum. Despite only launching in 2022, the e-Grocery business has already reached 422k consumers up 3.4x from 3Q ’22. Still, this segment has a long way to go to reach full penetration across the 13.5 million active users on Kaspi.

Looking ahead into Q4 there are a few key things to be on the lookout for:

• Continued emphasis on the payments and marketplace businesses – as Kaspi grows the risk from their fintech segment should be lowered as they diversify into higher quality businesses. This segment may be a drag on growth from revenue and net income, but slowing the growth in this segment should lower the overall risk for Kaspi.
• Integration of Kolesa.kaz and Krisha.kz into the Kaspi platform – The most recent acquisition Kolesa.kz represents a large push into the classifieds market and strengthens their business outside of Kazakhstan.
• Slow down of growth – 50% revenue growth is unsustainable and that is okay. As the business matures, growth should slow but understanding the rate of deceleration should give us a hint towards how much more growth the company can accomplish in the years to come.

Conclusion: Are we being compensated for taking risks?

The age-old question – clearly a high-flying tech company in Kazakhstan is riskier than betting on the SP500 but likely carries the enchanting promise of potentially higher returns. I think the bear case has some merit, but falls short in the end. Growth will not sputter out in any short period of time. Kaspi has relentlessly innovated and started new businesses that have become substantial. The platform they have built can easily scale new services that can increase the value they provide to users in Kazakhstan and beyond. In the long term, as growth continues, equity investors should be properly rewarded. However, at any given point the market may sell off relentlessly and the fear and loathing may intensify. Caveat emptor, but at these prices we would recommend buying shares of Kaspi and holding for the long haul.