Anyone following the HC threads would probably agree it’s been an interesting few weeks. Between the SP bouncing around, a couple of particularly vacuous posters doing their best to derail sensible discussion, and the recent shoddy ‘journalist’ piece, perhaps it’s been easy to get distracted from the key business case which has brought all of us here. In such moments I find myself constantly returning to both the 31 December Appendix 4D and the SH V-Con Investor Conference of 1 April. It is the latter that particularly enthuses me – I’ve listened to it several times – and I thought to start this week off it might be useful to summarise what I believe are some of the key points KL Khong raised therein. It will hopefully assist to get the conversation back on track as we look forward to the quarterly due end of this month, as well as any other partnerships Aaron, KL, Calvin and co. have been baking in the IOU oven.
I imagine most holders have watched the presentation already, but for those that haven’t it can be viewed here – it’s well worth 16 minutes of your time. Who better to hear it the business case from, than the CEO himself: https://st*ckhead.com.au/st*ckhead-tv/v-con-fintech-huge-scaleability-big-valuations-and-the-buffer-of-post-covid-tailwinds/
With that by way of introduction, here’s my own summary of the key points, and the wonderful opportunity ahead for this company, its management and shareholders.
1. The SEA opportunity The total population of SEA is 655 million people which is twice the size of the entire United States. In 2019 the internet economy was worth $100 billion and by 2025 it is estimated this will have grown threefold to $300 billion. Within these figures, there is a region-wide push with Government support for cashless economies in SEA; by 2024, total internet users are due to rise to 420M. In KL’s words, “this creates a perfect storm” for operators in the digital payments/consumer credit loans/BNPL space.
Of the SEA adult population, 104M are ‘banked’, 98M are underbanked (one bank account but no credit/investments/insurance) and 198M are ‘unbanked’ (no bank account at all). A major issue is that in many SEA countries only one consumer credit facility is allowed over and above a mortgage and/or hire purchase. Credit facilities have high rejection rates and can take up to two months to be processed; this is mostly due to legislation which prohibits banks from enforcing non-performing loans in the debt courts for values less than A$30,000 – hence the banks don’t want to play in this space. This creates a great opportunity for a technically astute disrupter with e-KYC capabilities (Know Your Client, a critical credit and anti-money-laundering check for banks and insurers when taking on new clients) to fill the huge gap in the SME/consumer credit loans space.
I know that @Ryzie has done more work on the wider SEA fintech market opportunity so he may wish to add some colour to this in the comments if necessary.
The key point for me: we’re in the right market at the perfect time, in a company with deep expertise (~20m transactions processed per month in Malaysia along) and long standing (~20 years) customer relationships, where competitors are still in their infancy. IOU’s credit check and e-KYC technology allows users to have instant approval (or a maximum of two days – depending on limit required – rather than two months!). Compared to the typical fintech operating markets of US, Europe, UK and Australia – where the populations are not growing as quickly, and there are multiple mature players and many startups – IOU is in a great place, especially for shareholders with a truly long-term view (5-10 years).
2. The tactical plan IOU is already very strong in the transaction processing space, demonstrated by the aforementioned ~20m processed per month and the longstanding key relationships with major banks, insurers and telcos in Malaysia dating 20 years now. IOU are known by their customers for transaction speed, data integrity and security.
They have a clear strategy to expand into higher value-add services such as bill payments, mobile banking, digital commerce for big brands and merchant networks and of course the BNPL space to address the chronic lack of credit facilities available to most consumers.
The key point for me: IOU are perfectly placed within their existing trusted relationships to upsell additional ‘value-add’ products/services to their customers – who are the big operators. They’re not an unknown entity trying to get in front of procurement teams to spin the tires; they already know who to talk to within each organization to get the deals done. As the world moves towards a data-driven, cashless society, the unglamorous but 100% necessary world of anti-fraud, credit check, KYC clearances, bill payments, etc is going to become even more critical than it is today.
3. Management Overhaul This has been covered in depth elsewhere (@kevin103 can re-cap some of the past history of the successful ICU start up story under Aaron if he wishes), but since the June leadership change and the September re-brand – with 97% shareholder approval! – there has been not only a considerable increase in the market cap, but two meaningful capital raises to existing and new institutional investors. $55,000,000 in the bank and no debt speaks volumes as to the immediate prospects for an experienced operator seeking to grow its product suite to existing longstanding customers.
Since this time there have been numerous key milestones reached, among these:
• EasyStore, iPay88 and MYP1 partnership announcements • BNPL soft launch during March, hard launch in April • $60M in capital raises • And more to come, per KL Khong: “we have an exception pipeline which we are excited about – but this is just the start…” • For more on what has been achieved since the management turnaround, I suggest you return to the post on “FACTS” by @61289439 (can someone link it in the comments please as it’s been a bit lost in the wash).
Additionally, this line always stands out: “We believe our focus on cashflow and profit will be well rewarded by the market, with continued strong trading volumes and generation of shareholder value”.There is also a laser-focus on awareness of, and adherence to, local legislation requirements, with the following examples highlighted:
- Moneylenders Act 1951 (Malaysia) - Malaysia Personal Data Protection Act 2010 - Malaysia Central Bank Requirements for Financial Information - Processing Payment Card Industry Standards PCI DSS (Visa/MasterCard)
The key point to me: look through the ASX announcement page for IOU and see for yourself the significant milestones this new management team are reaching every few weeks. It might not be reflected in the share price from week to week, but as the months pass with the team busy with boots on the ground, we will see the results. The focus on the varied legislation in the region is yet another validation that this is an experienced team who know their market after years of experience, and are thus armed with a much better head start than any international competitor. They have a team with over 50 years’ experience in the SEA payments industry.
4. The Proprietary Platform There are six key functions:
1. Secure communications (secure and easily scalable) 2. Credit-scoring and anti-fraud (critical given the amount of under/unbanked) 3. Customer onboarding (same comment as above – 198M unbanked people in region!) 4. Bill payments (purchase and resale of prepaid inventories i.e. airtime, internet data, electricity, water, parking, insurance – prepayment being a very popular approach in SEA given the lack of credit available to most consumers) 5. BNPL transaction processing (please note: this is just one of six aspects of the platform) 6. Account debiting (services for merchant and consumers, this includes credit/debit cards and e-money payments such as e-wallets, as well as direct-debiting)
The key point to me: in case it’s still not clear to anyone reading this, IOU are not a BNPL company (journalists, please take note). They are a digital payments operation with multiple revenue streams and growth areas, ranging from behind-the-scenes technical operations to allow new customer onboarding for large corporates (e-KYC, anti-fraud, credit checks) to wholesale products (prepaid inventories) and even consumer-facing offerings (credit/debit facilities, bill payments, BNPL).
5. Example revenue figures It’s important to reiterate that these figures are used as an example only, and do not represent forward looking statements or forecasts and should not be relied on as such. With that disclaimer made, I wonder if the numbers used are possibly quite deliberate, when viewed in the context of the capital set aside from the November capital raise for prepaid inventories.
I strongly recommend you listen to this part of the presentation yourself (it commences at the 10:00 mark) but here’s the key gist:
DIGITAL PAYMENTS - IOU can purchase – at wholesale discount cost - $1,000,000 worth of prepaid inventories, which as noted above could be anything from mobile airtime, internet data, electricity/water bills, parking, PAYG insurance and so on. - This $1,000,000 is on-sold to a distribution channel merchant at margins ranting from 0.5% to 1% per week – so they’re making $20,000 gross profit on the sale of $1,000,000 (i.e. they purchased it at ~$980,000). - This inventory held is low risk, i.e. it sells out each week or fortnight, depending on the product, so they’re able to turn it over 4x per month – hence turnover would be $4,000,000 monthly.
These are interesting numbers because, taking their example figures, they could potentially be doubling their annual FY20 revenue just from one strong quarter of prepaid inventory sales (whenever that quarter may occur, now or further in the future).
The key point to me: obviously the danger here is ignoring their disclaimer and using these example figures to make forecasts, but consider that in the November $10M Capital Raise, the company noted that 15% or $1,500,000 would be put towards prepaid inventories. Furthermore, in the February $50M Capital Raise, the company noted an unspecified amount would be put towards “existing operations”. Take that to mean what you will, but I came up with a conservative case as follows, which completely discounts any money from the latter/larger capital raise:
• $1,500,000 allocated to Prepaid Inventory purchases • This amount is turned over every 1.5 weeks (not every week – just to be safe) • So per month this is $1,500,000 turned over 2.6667 times = $4,000,000 • Quarterly this is $12,000,000 revenue generating $360,000 gross profit (3% margin, mid-point of the example GP rate provided of 2-4%) • This does assume there is constant demand for inventory purchases quarter-to-quarter; I am not aware of the accuracy of this assumption but given the lack of credit available to most consumers, it does not seem unrealistic.
BNPL - IOU pays the merchant upfront at a 4% discount, and then collects the full payment from the customer later (including the 4% margin) within a three-month term. - There is no inventory risk here – they’re not holding anything on the books aside from the capital in the first place - $1,000,000 worth of transaction values can generate $60,000 of gross profit over the three-month term (6% margin). That $1,000,000 can be turned over 4x in a year. The cost of capital and non-performing loans erodes that margin so this needs to be closely watched - lessons that have been learned from watching and waiting whilst other BNPL players in Australia, US and UK entered the market earlier, and had to learn the hard way. - The risk is absolutely minimal given IOU’s core business, going back to the ICU days, is doing e-KYC, anti-fraud and credit checks. This effectively makes IOU the premium BNPL offering – with their platform automatically filtering out the bad risk customers.
The key point to me: On that last bullet point, that is precisely why the comments from one particularly HC troll about “the big banks picking the eyes out and leaving all the bad customers to IOU” (or words to that effect) was so ludicrously incorrect. In Malaysia, the big banks, insurers and telcos use IOU’s technology to work out who the good/bad credit customers are! It’s clear to me who is best placed to be able to pick and choose the best credit risk to take on the books.
6. Strategic Partners and Roadmap Consider the crop of companies who currently trust IOU to process their mobile banking and/or utilize their digital payments gateways:AXA, Bank Islam, Bank Muamalat, Bank Rakyat, Bursa Malaysia (strategic partner – disallowed!), Celcom, Citi, Courts, EasyStore, Four Points, Indosat, iPay88, Mazda, MBSB Bank, RHB Bank, Panasonic, Petronas, Public Bank, Sarawak Energy Standard Chartered, Sun Life Financial, Telkomsel, TM, Touch’n’Go.
IOU’s management master plan is to “position IOU as a premium brand (…) exclusively focused on large customer communities, big premium branded merchant networks”. And again, “everything we do is data-driven, there is no guesswork”. And finally, “our focus is on profit and returns, not just our transaction volumes.”
So far all of the above has been focused on Malaysia (population: 31.95M). Take a look at the ‘Roadmap’ slide from 14:50 onwards in the presentation and consider that all of this is going to be replicated in at least two other SEA territories, one of these clearly being Indonesia (population: 270.6M, or 8.4x the size!)
The key point to me: consider the balance sheet as summarized in the Appendix 4D from 31 December 2020. Even before the transformational $50M capital raise of February 2021, IOU had current assets totaling $13,786,065 (see page 11). This is against current liabilities of just $1,503,463. Why does this matter? A simple tool used by many investors to gauge the fiscal safety of a company is to consider the ratio of current assets verses current liabilities. An OK ratio is over 1, i.e. you have more assets than you do debts/liabilities. A good ratio is over 2 (twice as many). An excellent ratio is over 3 – i.e. if your business had zero revenue, you still have enough current assets (“current” means convertible to cash inside 12 months), to pay off your debts three times over.
IOU’s ratio is…... wait for it… 9.17x. (Yes, that's a nine). And that is before we add in the $50,000,000 in capital raised. And our long-term financial liabilities total only $233,457 as well. In terms of being an accounting 'going concern', this business’ balance sheet is as solid as they come.
They are perfectly positioned to execute firstly in Malaysia, and then roll this out to Indonesia and other major SEA markets.
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All in all, the outlook appears pretty rosy to this investor.
Are you worried about the current share price? Personally, I’m not.
I’m looking forward to April, May, June… and all the quarters to come. In my personal opinion, what a great company to be a part of; even better when the market offers me its shares at what I believe are discounted prices.
Thanks for reading, please remember this is all my own research for my own personal use, and should not be construed as financial advice, nor used as a basis for your own decision making. Always do your own research in line with your own financial situation.
Cheers, mondy
IOU Price at posting:
39.0¢ Sentiment: Buy Disclosure: Held
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