#TrustBuddy: #SME business worth more than current share price

In early 2014, we started to track the number of loans funded by TrustBuddy’s latest acquisition Geldvoorelkaar (GVK). GVK was an important step for TrustBuddy; not only did it expand the company’s geographic reach, it also marked the establishment of a new business area, i.e. loans to small- and medium-sized enterprises (SME). No longer does TrustBuddy only focus on short-term consumer loans, which are frequently criticized by media and regulators. In fact, we argue that following the poor share price performance in recent months, GVK alone is worth at least double the market cap at which TrustBuddy as a whole is trading at right now.

GVK recently passed the EUR 53m mark in capital funded and there are no signs of slowing down. On the contrary, the Dutch government recently decided to remove the maximum cap for money to be invested in the crowdfunding campaigns (including P2P lending) as of 2016. During 2014, GVK increased its total amount lent by 67% during 2014 and reached a total of EUR 28,9m for the year and is the clear market leader in the country.

We know from the presentation material provided in connection with the acquisition, that GVK has a revenue margin on funded loans “approaching 6%”. In its base case forecast, TrustBuddy guided for 2015 lent out capital of EUR 46.7m and net sales of EUR 2.8m (around SEK 26m at current exchange rates). This included the Netherlands business only and does not take into consideration of the planned expansion to Belgium and the Nordics, which TrustBuddy has announced to start during H2 2015. Not to forget that GVK’s business is highly profitable with EBIT margins of around 35%, which would imply a 2015 EBIT for GVK of around SEK 9m.

If we were to completely disregard the value of TrustBuddy “classic” and Prestiamoci (which will be included once the company has received its license in Italy), we can make the following observation:

  • GVK’s business is developing well and the company’s base guidance for 2015 sales of SEK 26m looks conservative. Assuming an EBIT margin of 35%, this implies an 2015 EBIT of SEK 9m. Further assuming a neutral financial net (actually there is a net cash position) and the Dutch corporate tax rate of 25%, this implies a 2015 net profit of SEK 6,75m for GVK.
  • There are currently two alternative financing providers listed on the stock exchange, both in the US. Lending Club (LC) is currently trading at a 2015 EV/Sales multiple of 25x and a PE-ratio of 332x. OnDeck Capital (ONDK), is currently trading at a 2015 EV/Sales multiple of 7x. Analysts expect ONDK to report a loss for 2015 but for 2016, their estimates imply a PE-ratio of 39x.
  • Applying the ONDK multiples on GVK, we get a fair enterprise value of SEK 182m and a market cap of SEK 263m (here we are actually using the 2016 PE-ratio since ONDK is expected to be loss making during 2015, i.e. we are deliberately conservative). We note that by valuing GVK in-line with ONDK multiples, we get a fair average value of SEK 222,5m, or around SEK 0,55 per share.
  • Applying the LC multiples on GVK, we get a fair enterprise value of SEK 650m and a market cap of SEK 2241m. We note that by valuing GVK in-line with LC multiples, we get a fair average value of SEK 1445,5m, or around SEK 3,60 per share.
  • GVK is growing faster and has a higher profitability than both ONDK and LC
  • TrustBuddy is currently trading at SEK 0,65 per share, implying a market cap of SEK 264m.


To even the most sceptical investor, it should be obvious that TrustBuddy’s SME business GVK is right now making up for basically all of the company’s value. And this is actually only taking into consideration status quo, i.e. GVK’s business in the Netherlands. The company has announced that it will roll out SME loans in the Nordics and Belgium starting during H2 2015, so this should actually be added to the calculation above.

P2P lending has a tough standing in Sweden and TrustBuddy is regularly exposed to criticism by Swedish media and private individuals who object the rather high interest cost charged within the short-term consumer lending business. It has gone completely unnoticed that TrustBuddy has established a new business area with the acquisition of GVK. A third business area will be added as soon as Prestiamoci joins the group, which is expected to happen during April. Prestiamoci is active within long-term consumer lending.

We think that the P2P SME business was a brilliant investment for TrustBuddy and we look forward to the rollout in the Nordics and across Europe. Management has come a long way in restructuring the company. We would highly welcome insider purchases by top management and especially the newly appointed Board in order to show conviction into their strategy. This would give the market a needed sign of confidence which is currently completely missing in the share.

Nordic Investor

#Nexam: CEO’s first 100 hundred days

This morning Nexam’s recently appointed CEO Anders Spetz sent out a summary about his first 100 days on the job:

Most of you who are interested in Nexam Chemical, have noticed that we have been moderate with our communication so far this year. As the new CEO, I have chosen to consciously use my first hundred days to form a proper understanding of the business. It is clear that we, during the last year, not have been able to deliver on our own and others expectations. With this background it is even more important to know where we stand.

Just as I expected, I can now say that there is a lot that is working well. Pleasingly to say, the potential in our technology, as a platform for creating customer value, is one of these areas. This is confirmed again and again in the activities we are engaged in, together with our partners, in order to reach the market with our first volume products.

However, I have also noticed that there are a lot of areas where I am not at all pleased with our efforts so far, and these are the once we will focus on in the future.

The management team and I have, for the last two months, made a thorough analysis of the business. The work has been done from both a technical as well as a commercial perspective. We have reached a number of conclusions which will result in a number of changes within the company. In simple terms, the business so far has focused too much on the development of new molecules with exciting features and less on how these should be applied to create concrete customer value. The main changes that we are implementing is that we go:

  • from a slow, perennial, business development cycle, primarily focused towards research and development clients, to a faster, semi-long, business cycle, where we approach customers within the areas of conversion, compounding and recycling of plastic, i.e. we broaden our customer base by moving forward in the value chain.
  • from a laboratory operation, focused on developing new chemistry and new molecules, to a more concrete application development, focused on customer value and customer benefits.
  • from an organization where most of the resources work with development, to an organization where a significant part of the resources are allocated towards sales and application support.

Now, we are building a small but skilled and motivated team with the capacity to drive Nexam Chemical’s commercialization process.

As a first step in this process, I am very pleased and satisfied to announce that Lars Öhrn has chosen to join us as our new CMO (Chief Marketing Officer). Lars brings to Nexam Chemical a solid marketing and sales experience from the plastic industry that we intend to address. He has held a number of senior roles both within polymer manufacturing and plastic processing companies. His most recent position was as Market Application Manager with Borouge in Abu Dhabi. Lars’ knowledge and insight of how to generate value for the customer and the in-depth knowledge of applications, contributes greatly to drive our efforts in the right direction.

Our NEXIMID® business develops positively within high-performance polymers, especially for polyimides. However, this is a relatively small market with limited volume and profitability potential. During the current year, we will put more resources into delivering a strong “proof of concept” with our technology in the prioritized high-volume segment. A first step is commercialization of applications within PE-pipes, and a variety of film and foam, based on PET, PE and PE.

We have also, in parallel with the re-focus towards market and sales, reviewed the company costs. Together with the management team I have initiated a cost reduction program, which significantly will reduce our costs already during this year.

As can be seen, and here I want to be clear, I think Nexam Chemical should have progressed further than we have in terms of commercialization of our technology. We have put too little emphasis on in-depth analysis and evaluation of our customer offers and have been unable to focus on the right market segment. Our sales efforts have been fragmented with activities on a far too low level. With this said, it is always easy to be wise after. To develop Nexam Chemical’s type of business takes time, longer time than we have earlier thought and communicated.

With this update, I hope to provide Nexam Chemical’s shareholders and business partners an up to date picture of where the company stands right now. Also, I want to emphasize that my first hundred days are over and now I have, together with the management team and the board, set a clear agenda and activity plan on how to go forward. Currently, we are working intensively in order to demonstrate to our customers and other stakeholders that, by using Nexam Chemical’s chemistry, it is possible to create significant customer value and also value for all of us having an interest in Nexam Chemical!

Anders Spetz


#Opus: CEO talks expansion and possible takeover

It’s been a bumpy ride for the share of Swedish vehicle inspection operator Opus. In an interview with news agency Direkt, CEO Magnus Greko talks about several short-term factors and misunderstandings that have contributed to this.

To be honest, we were probably a bit too optimistic ourselves. We signed several new contracts and underestimated the time it would take to get things in place. However, we are talking about minor time adjustments, not about any doubts about the profitability potential.

One negative factor has been, somewhat ironically, the fact that the California business developed better than expected, according to CEO Greko. Opus managed to conquer more than 50% of the market for vehicle inspection equipment rental. “I think we’ll end up with around 4000- 5000 contracts (out of 8000 possible). We did not envisage such a success“.  The downside with the rental business is that it has a high capital employment and high initial costs for provisions for the sales people, which can affect margins negatively in the short-term. The advantages are, however, tremendous says CEO Greko: “Profitability is good during the first 5 years, despite the fact that we are deprecating the equipment during that period, After that, profitability is very good. Cashflow-wise we have a payback period of 18 months.”

Other external factors that have been a disappointment for the market were the decision by British Columbia in Canada to discontinue its mandatory inspection program for cars and that Colorado extended the period up until an initial inspection is mandatory from 4 to seven years. Furthermore, there has been a restart of the tender process in Illinois, where Opus had already won the contract. Last but not least, concerns have been raised as to whether Opus will be able to renew its contract in Missouri.

Says CEO Greko: “We only go out with information that we deem to have an effect on the share price. But we will be more detailed when it comes to informing about developing going forward.” In Colorado, Opus is actively trying to compensate the reduced amount of inspections with higher effectiveness and CEO Greko says that Q1 numbers will show an initial indication as to how this has been successful.

The fact that Illinois is redoing its tender process should not be seen as criticism towards Opus, according to Greko. Applus, the previous owner of the contract, protested against Opus’s success and at the end they managed to convince the state to restart the process. Says Greko: “Applus is headquartered in Chicago and is probably well connected politically. Criticism has been primarily towards the environmental department.”

As Nordic Investor has mentioned several times before, a positive item for Opus is the higher USD/SEK exchange rate, something that CEO Greko says has not been noticed by the market sufficiently: “We have a large exposure towards the US dollar and we are not hedging our currency flows. There are some dollar-denominated loans, which get more expensive with a rising dollar, but overall we benefit from  a weaker SEK.”

In terms of future expansion, CEO Greko sees no lack of interesting opportunities: “We have a large pipeline. The problem today is rather to choose the ones we want to reject.

Besides its traditional vehicle inspection business, Opus has also entered the equipment rental business which could be expanded in the future, according to the company. Furthermore, Opus offers related services such as remote emission control . At the same time, the company is working on add-on services, such as payment services for registration fees. Says CEO Greko: “I believe that we could also offer other inspection services, e.g. control of imported vehicles. That is a market that is growing. We will also focus more on the driver, maybe assisting with driver’s licenses.”

In terms of geography, Opus has only recently entered Asia, by signing a 30-year contract for the inspection of commercial vehicles in Pakistan. The next step in the country is the introduction of mandatory inspection of personal vehicles, and the CEO hopes that Opus is in a good position, once that happens. He also wants to see the Pakistan contract as a door opener and is closely examining the markets in India and China.

Opus has also a list of projects in South America. As of today, the company is operational in Peru, Mexiko and Chile. “The ambition is to grow in these countries of course. We are also looking at Brazil and Argentina, but the challenges are big there.

In an interesting twist at the end of the interview, CEO Greko mentions the company’s size as a problem when it comes to expanding the business. Several competitors are several times the size of Opus and have a different kind of financial muscles. Asked whether that makes Opus an attractive takeover target, CEO Greko says:” Opus is a publicly listed company in Sweden which has the future going for it. We like to challenge the big boys but if somebody wants to present a bid, it needs to be very attractive.

Nordic Investor

#Thinfilm’s #NFC innovation praised by media

Thinfilm’s share price performance has been nothing else than disappointing ever since its resisting to Oslo main list a few weeks ago. The massive sell-off of more than 20% was triggered by insiders selling shares that they had just acquired via utilising subscription rights. While it is always a shame when insiders sell shares, we think it is important to note that in this case, they actually net increased their holdings in the company, i.e. they subscribed to more shares than they actually sold.

Obviously, we are quite disappointed with the performance of this stock so far but we believe that it is a good time to revisit the operational successes that are actually taking place. On March 12th, www.computerworld.com published a great article on Thinfilm’s recent deal with Diageo which we want to share with you here:

Last month, printed electronics specialist Thinfilm and beverage conglomerate Diageo wowed the crowd at the Mobile World Congress in Barcelona with the debut of a “smart” prototype of Diageo’s Johnnie Walker Blue Label whisky bottle. The bottle was equipped with a printed near field communication (NFC) sensor tag supported by Thinfilm’s new OpenSense technology. All the consumer has to do is tap his or her smartphone to the tag, which is encoded at the manufacturing site, and it can tell him or her if the bottle has been opened or not and where it originated in Diageo’s supply chain. For the whisky connoisseur — or techno geek for that matter — it is a dream come true.

It is not a bad deal for Diageo either, which, besides having greater insight into its distribution and retail operations, also gets the opportunity to further engage with its customers. The tag is configured so when the consumer taps it with his smartphone it also serves up promotional offers or cocktail recipes and paring suggestions.

But this is just the start, Thinfilm CEO Davor Sutija tells me. The printed integrated circuit — the backbone of Thinfilm’s OpenSense product — has the potential to remake the food monitoring and safety industry by offering closer tracking of products at the individual level. It could speed up adoption of the Internet of Things by being a cheap source of sensors. Finally, it could relegate traditional radio-frequency identification (RFID) and QR-code based solutions to the dustbin of tech history by providing a less cumbersome method of tracking.

It’s quite a big claim so let’s start at the beginning.

Headquartered in Oslo, Norway, Thinfilm focuses solely on printed electronics. It launched in the mid 1990s as a subsidiary of Opticom to develop all-plastic memory devices. By 2012, though, its mission had evolved and gained international acclaim with a printed integrated system that combined memory, sensing, logic and display. Today, its competitive niche is developing very low-cost electronic components, such as tags and sensors, via a high-volume, roll-to-roll printing process.

We are a tech company that is pioneering the use of printing to create integrated circuits — that is, the hardware elements in commonly-used electronic devices,” Sutija says. Invisible and largely considered commoditized, integrated circuits in fact can make up a significant value of a product.

The electronics in cars, for instance, are 23% of the automobile’s total value, Sutija says.

The problem is the industry can only manufacture so many microprocessors in a year — 20 billion or so, he continues. For IoT to take off, that number needs to be in the trillions. And that is where printing comes in.

It is also how IoT will scale up to target consumer products on an individual level, like the Johnnie Walker bottles. Imagine having such sensors attached to any product about which the consumer would like to know more, such as, say, that expensive “wild caught” salmon, which may or may not be, in fact Atlantic farmed, or the vitamins that may or may not be stuffed with filler ingredients.

This desire for information about a particular product — where it’s been, where it was made, who made it and with what ingredients — is a huge untapped need, Sutija says.

A study conducted in September 2014 by Strategy Analytics’ for the NFC Forum supports that view. The study, summarized on the Active & Intelligent Packing Industry Association website, found that U.S. consumers have a strong interest in using NFC technology for a variety of applications other than its “tap and pay” abilities.

The survey asked 1,038 participants about their interest in using NFC in six different retail scenarios including accessing information about merchandise and store inventory; 64% reported having some level of interest.

The survey also backs another contention of Thinfilm, namely that existing solutions such as RFID and QR are not equipped to handle this kind of scenario, at least on a wide scale. The Strategy Analytics survey found that in five of the use cases, more than twice as many consumers preferred NFC to alternatives, such as QR.

Granted some, perhaps many, manufacturers and retailers may not want to open the kimono to its customer base. For now they can continue with the status quo but both laws and consumer demand is heading inexorably in the direction of complete supply chain transparency.

Consider the conflict minerals requirement that was part of the Dodd-Frank legislation, and that was recently put into place by the Securities and Exchange Commission. It requires companies that use minerals determined by the Secretary of State to be financing conflict in the Democratic Republic of the Congo or an adjoining country to be disclosed to consumers. Granted, its fate is still unclear as the industry continues to push back with legal challenges, but many companies went on to meet the requirement anyway last year.

Not that Thinfilm or anything similar could help in this scenario — somehow I don’t see militant groups helpfully attaching sensors to mark their presence on what is seemingly a benign shipment of minerals. But as demand picks up for more transparency, such renegade global players will be among the few that don’t take steps to shed light on their products’ origins and supply chain journey. And surely the rest of the world’s manufacturers will not want to be seen as keeping the same company.”

#P2Plending sector valuation update (#TrustBuddy, $LC, $ONDK)

It is soon two months ago since we compared the three listed alternative finance providers, TrustBuddy (TBDY:SS), Lending Club (LC) and On Deck Capital (ONDK).  Since then, the companies published their FY 2014 reports and we have seen a positive development in the stock market in general.

Now that analysts have updated their estimates, we thought it was a good time to update the peer group valuation for the sector:

  • According to data provided by Yahoo Finance, analysts expect Lending Club to report 2015 revenues of USD 379m and an EPS of USD 0.06. In combination with an enterprise value of USD 9.21bn and a share price of USD 19.50, this implies a 2015 EV/Sales multiple of 24x and a PE-ratio of 325x respectively. For 2016, the numbers are 15x and 93x respectively.
  • For On Deck Capital, analysts expect 2015 revenues of USD 255m and an EPS of -0.15. In combination with an enterprise value of USD 1.53bn and a share price of USD 19.5, this implies a 2015 EV/Sales multiple of 6x and a negative PE-ratio. For 2016 the numbers are 4x and 35x.
  • There are currently no analysts covering TrustBuddy so we are forced to use our own estimates. In its recently published quarterly report, TrustBuddy stated that it is committed to report a profit for 2015, following investments in IT and its organisation which burdened 2014 numbers. With a current enterprise value of SEK 322m, TrustBuddy is currently trading at a 2015 EV/Sales multiple of around 2.5x and a 2015 PE-ratio of around 135x. For 2016 the numbers are 0.2x and 9x.

Here is the peer group valuation in summary:




TrustBuddy looks tremendously undervalued compared to its listed peers. This is partly due to the fact that it is listed in Sweden and that no analysts are currently covering the company. It is, simply put, still under the radar of most international investors. However, TrustBuddy is actually the most diversified of the three listed companies and we believe that it is only a matter of time until this mispricing will disappear.

Nordic Investor

#TrustBuddy: February another record month for #P2P

www.altfi.com reports today that February 2015 was another record month for the UK P2P platforms.

The big story in the UK Liberum AltFi Volume Index for February was the obliteration of the previous industry monthly volume record by 21% (GBP 35m). Over GBP 200m was originated by UK platforms in a single month for the first time ever. The previous record was only set in January, meaning that we have now witnessed four consecutive record origination volume months – the industry continues to grow at a phenomenal pace.

At the end of 2014, based on the growth trajectory at the time, AltFi Data predicted industry growth of 85%. With GBP 372m originated in the first 2 months of 2015, growth continues to accelerate and at the current run rate, the industry is on track to double its 2014 lending in 2015.

The strong industry performance was made up of several impressive individual platform performances. 6 platforms had a record month of their own, including Funding Circle (£38.4m), SavingStream (£5.3m), Folk2Folk (£6.7m), LendInvest (£39.5m), Landbay (£1.3m) and Crowdcube (£9.5m).

LendInvest’s performance was particularly impressive, originating the most within the industry over the month. The platform also eclipsed its previous best origination month, set in July last year, by almost 50%. The timing is particularly good for LendInvest, with the platform announcing its intention to IPO earlier in the month. Perhaps the spike in transactional flows has been spurred on by the decision of the platform to lower its minimum investment amount, effectively opening it up to a wider pool of investors.

Second and third place in terms of origination volume was hotly contested, with Funding Circle and RateSetter both lending just over £38m and RateSetter just squeezing into second place by less than £150k.

Europe’s leading P2P platform TrustBuddy is in the middle of setting up shop in UK and therefore not included in the index yet. Nevertheless, the year has started equally pleasant for TrustBuddy with Geldvoorelkaar, its recent P2P SME business, surpassing the EUR 53m mark in capital lent.

Nordic Investor


#TrustBuddy: #Zopa turns 10, #P2P prospers

10 years ago,  the first peer-to-peer lender was founded in a barn in Buckinghamshire in March 2005. That was Zopa which has now lent nearly £750m, and expects to hit £1bn this summer.

Meanwhile the peer-to-peer finance industry has blossomed throughout the world with the global industry now worth more than $10bn.

Zopa says it has lent money from more than 58,000 individuals across Britain to more than 107,000 individual borrowers for cars, home improvements and paying off existing debts. The company has delivered an average rate of return of 5.6 per cent after fees and any losses from bad debts over the past ten years to its lenders.

Giles Andrews, Zopa CEO and co-founder, said: “We created Zopa because we saw the potential to bring people together over the internet without having to go through a bank. This has prompted a revolution in the financial sector worldwide.

Based on the average return of 5.6 per cent after fees at Zopa, if you had put £10,000 in Zopa on the day it was founded, that stake would now be worth £17,000 assuming that all funds had been relent, the company claims. Over the same period the FT-SE 100 climbed 96 per cent, so £10,000 invested then would now be worth £19,600.

But the same amount in a UK savings account would only have grown to £13,600 with an overall return over the decade of 36 per cent. House prices? They’ve gone up by just 23.7 per cent in comparison, growing £10,000 to £12,370.

Investors who want to invest in the fast growing P2P lending industry from the equity point of view have the possibility to do so. The current listed names are Lending Club and OnDeck Capital in the USA and TrustBuddy in Sweden. TrustBuddy was the first ever P2P lending provider to be listed on the stock market and is Europe’s leading player. Its valuation is only a fraction of the US peers’, so investors would be wise to seriously consider building a position in the company.

Nordic Investor

#Thinfilm: Potential highlighted in #Forbes article

Forbes published an article about Thinfilm the other day. We find it interesting enough to quote it here:

When people think of IoT technology they usually think of silicon based sensors made by semiconductor companies. These types of sensors can be found tracking data on airplane engines, wind turbines, medical devices, and many more internet connected devices. The problem with silicon based sensors is that they are not feasible for cost sensitive items or items in small or bendable packaging where embedding sensors just won’t work. To solve this problem, a company called ThinFilm has created printed electronics. ThinFilm creates sensor technology that can be printed on smart labels for a fraction of the cost of silicon sensors and can be attached to a variety of packages that previously had no way of being tracked in real time.

When to use smart labels

There are many use cases for printed sensor technology. While today’s grocery industry has standardized on bar codes, this technology is limited in what data it can store. Product packaging can also run up to 30-40% of the cost of some products so solutions that alter the packaging process are often not feasible. Printed sensors can be attached to any package, even packages that may bend and can provide real time information about location, temperature, movement, moisture and much more. With printed sensors, companies can check temperature to prevent spoilage or validate the freshness of a product. Smart labels are often used to validate the authenticity of a product as well.

In the healthcare space, smart labels can track the usage and disposal of pharmaceuticals as well as help control inventory. Smart labels are also being attached to clothing where they can check body temperatures and dampness of bandages or adult diapers which help in assisted living scenarios. Logistics is another key area for smart labels. In the past, logistics companies may have attached an RFID tag to a shipping crate containing small, perishable products like medicine, yogurt or meat. With smart labels, tracking can be performed at the individual item level by simply applying a label to each individual product. This allows companies to get insights down to the item level rather than the shipping container level.

All about small data

I have written a number of articles about Big Data and IoT. Printed electronics is all about small data. What I mean by that is smart labels collect information for a handful of attributes and focus on use cases that require action when those attributes change. That is very different than the model where sensors collect massive amounts of data that is centrally managed and analyzed for patterns. In most cases, these sensors are trying to detect specific patterns such as a temperature exceeding a threshold or a product becoming moist. Big data is often used to perform predictive analytics or to apply machine learning techniques. Small data is much more prescriptive.

Still work to do

Printed sensor technology is an emerging technology. Currently it is limited to the amount of memory it can hold. For most use cases, storing a small number of attributes to track is ideal. Today the labels cost only a few pennies but expect this price to fall further if the technology becomes widely adopted. Broad adoption will lead to mass production, which will drive prices down. ThinFilm recently announced a partnership with Xerox to enable mass production as they prepare for industry wide adoption in the near future.


Sensors come in many shapes and sizes. Traditional silicon based sensors are a great fit for many IoT use cases but remain more expensive and less flexible than a new breed of printed sensor technology. Printed sensors are becoming an affordable, innovative alternative that might just radically change the landscape for Internet connected things.

#TrustBuddy: #PwC bullish on #P2Plending

Pricewaterhouse Coopers is out with a study on “how peer-to-peer lending platforms are transforming the consumer lending industry“.

Says PwC: “Although still in its infancy as a market, US P2P platforms issued approximately USD 5.5bn in loans in 2014. The banking community is justifiably taking notice of these emerging competitors. P2P lending’s expansion into mortgage and other asset classes means that P2P is no longer merely a way to obtain small-dollar-amount personal loans, which banks might not see as core to their business offering, but instead is a potential threat to banks’ existing customer bases. The lower cost-structure associated with online originations creates the potential for P2P platforms to offer borrowers attractive rates.” PwC’s analysis indicates the market could reach USD 150n or even higher by 2025, i.e. 27 times last year’s size.

US peer-to-peer lending platforms’ origination volumes have grown an average of 84% per quarter since 2007. Despite this rapid growth, the current volume represents only a small fraction of the eventual potential market for P2P lending, and the Federal Reserve Bank of Cleveland notes that the market is poised for further growth. As these lenders become more mainstream and diversify into other asset classes, which many are just now beginning to consider, they will have the opportunity to reach vast new segments of untapped market potential.

Projections for the longer-term growth of the peer-to-peer market vary considerably, with one venture capitalist projecting volume as high as $1 trillion by 2015. PwC’s review of the potential market indicates that reaching $150 billion by 2025 would not only represent a significantly slower growth rate than that seen in the past few years, but could be achieved even without the potential for growth into other asset classes. To reach this figure, peer-to-peer lending platforms would need to capture 10% of the $800 billion in revolving consumer debt and 5% of the $1.4 trillion of non-revolving consumer debt held by financial institutions. Although this would be a substantial undertaking for peer-to-peer lending platforms, it’s a realistic scenario given their explosive growth rates. The International Organization of Securities Commissions estimates that global peer-to-peer originations could exceed $70 billion within just the next five years, with the United States currently leading the way as the largest market.

PwC comes to the conclusion that consumers are hungry for a simplified, streamlined lending process, and peer-to-peer companies are capitalizing on this need — creating a loyal and growing following. It’s this recent growth, and future growth potential, that has banks taking notice. Peer-to-peer lending has already begun its expansion beyond simple loans largely used by consumers to consolidate credit card debt. Auto loans and mortgages — once the territory of “traditional lenders” — are now part of some trailblazing peer-to-peer lending platforms’ offerings.

Many financial institutions are beginning to examine the changes that are on the horizon. As a new competitor, P2P companies could shake up the market; but along with any disruption is the potential for opportunity. The question financial institutions should start considering is whether their organizations will collaborate or compete with peer- to-peer lending platforms.

We at Nordic Investor believe that Europe’s leading player, TrustBuddy, is well positioned to benefit from the latest trends and developments. Following its recent acquisitions of SME P2P lending provider Geldvoorelkar and long-term P2P consumer loan provided Prestiamoci, TrustBuddy offers the whole spectrum of P2P lending and is aggressively expanding across Europe. What makes TrustBuddy all the more interesting for investors is the fact that its valuation is significantly below its listed peers in the US, Lending Club (LC) and OnDeck Capital (ONDK).

Nordic Investor

#G5 Entertainment: Focus on topline

Sweden listed mobile gaming developer and publisher G5 Entertainment published its Q4 2014 report on Tuesday, February 24th. Revenues of SEK 57.7m were up 101% y-o-y and stronger from us expected, while EBIT excluding non-recurring items of SEK 2.9m once again came in below our expectations. Despite the significant sequential revenue increase of 29%, the adjusted EBIT margin increased only 70bp sequentially to 5.1% in Q4 2014. Elsewhere, there was little in the report that surprised in either way.

G5’s CEO Vlad Suglobov states in the report that the focus on effective marketing continues to benefit the company. Investment in user acquisition (UA) enables fast topline growth, but it does obviously put pressure on profitability. According to G5, users acquired in a given month, will generate a return on that UA investment over an extended period of time, usually for months and possibly years to come. We believe that this remains to be seen. Consumer loyalty in mobile gaming is at least questionable, in our opinion, given the vast supply of games and constant flow of new games. While we certainly appreciate the rapid topline growth, which was actually ahead of the market growth during 2014, we hope to see a better balance between growth and profitability going forward.

Today, www.introduce.se published an interview with CEO Vlad Suglobov:

Q: Can you please comment on the growth in Q4 and why your growth was somewhat higher than your preliminary one?

VS: The growth pace in Q4 is a result of the chosen strategy to focus on achieving the highest possible organic growth, while the opportunity is available. We have been talking about it for some time, that our increasing investments in marketing are fundamentally profitable and lead to faster growth, and Q4 results prove that point. It takes some time to monetise users we are acquiring. It takes effort to acquire and retain the right kind of users and to do it in a fundamentally profitable way. To me, Q4 results validate both the strategy we have chosen and the method we are using.

As one can probably see from the report, by looking at substantial growth with thin profit and cash flow margin, the management now has a very good control of the company’s profitability and cash flow. We have very substantial monthly marketing budget at this point, covered fully by the cash flow from operations. These marketing costs are a variable cost, at management’s discretion. Part of these costs are marketing costs that replace the players that naturally fall off from our audience in the normal course of business. And another bigger part are the costs that bring in even more players. Think of this latter part of marketing expenses as a throttle pedal. We could push it even further and go into negative cash flow and profit, in order to speed up the growth even more. Or, we could ease up on the throttle, and immediately improve the margins and the cash flow, at the expense of the growth pace. I can argue that even substantially easing up on throttle and reducing UA expenses will not lead to declining sales, as we are still acquiring the large number of new users organically, through the exposure in the application stores. This throttle of marketing expenditure can be adjusted on a day by day basis, so there’s a great degree of management control over this “throttle pedal”. What we choose to do is accelerate this company at the optimal pace, so that we could do it organically. As I mentioned in the report, it is our chosen strategy of the moment to not go into substantially negative or positive profit/cash flow zones, but to maximize the growth through organic means. And I think Q4 results is a great demonstration of how it works.

Our preliminary sales information is not precise by nature. By the time we provide this information, we have a good understanding of how the sales look like, but we still don’t have the very final reports. There can be discrepancies, therefore, and it’s normal. Substantial last minute changes in the exchange rates can also affect the outcome, and I believe this was one of the major reasons in this case.

Q: Excluding turnover and profits, what is the biggest gain from the increased number of players and usage of your games?

VS: The driver of the revenue growth are sales of F2P games. The growth of F2P games revenue is driven by the underlying growth of the active user audience, and the underlying growth of monetisation per user, and user retention. The active user base is growing due to our marketing efforts. The monetisation per user is growing both through the focus of the marketing on acquiring fundamentally profitable users, and through the efforts of the development to continue improving games through regular updates. In our case higher revenue is a key to the possibility of higher profits, as we can increase the sales of our games without increasing underlying fixed costs of the company. In general case, the cost of acquiring new users needs to be kept proportional to the revenue, but the cost of producing new content and improving the game is pretty much fixed as monthly burn rate.

Q: You discard your margin ambition of 30%, which is reasonable considering your new turnover reporting including provisions. Can you comment why you didn’t lower the ambition instead of removing it?

VS: As I explained in the report, both the board and the management want to make G5 a bigger company, and we believe this is in the interests of the shareholders. Being a larger company, with larger audience, has a number of important advantages, including the possibility of higher profits and profit margins. G5 is in the unique and very good position right now. The company can grow fast organically, the management knows how to do it, and shareholders can see from Q4 results that it’s working. It’s not like this is something every other company in this business has. Some other companies are actually struggling to achieve any growth, by any means. We have to use this position as long as it lasts. It will be over at some point, no doubt about it, and then we’ll focus on profits. But we want to make sure that until that moment happens, we go full speed. In this situation we felt that removing the margin target would be the right course of action. It is still the target we like, we just can’t commit to achieving it in a specific time frame, given the situation we have. And it felt even more right to do it at this point because of the upcoming change in revenue recognition.

Q: You have great success with The Secret Society, is this helpful attracting more third part developers?

VS: G5 always had great reputation among developers. At some point we worked with over 80 developers while focusing on unlockable games. We paid and continue paying substantial royalties to our partners. We are receiving numerous proposals from developers, every day. We are also committed to our long-time partners, very talented studios that we continue working with. The quality bar is pushed up constantly, and in the F2P business there’s much more focus on quality and experience, rather than quantity. Our team has developed very good understanding of how F2P games work and how to achieve success in this area. We can help studios achieve success in F2P games, like we did with TSS and other games. This brings developers to us.

Q: Can you comment on your fixed costs, and how much you can grow with the current organizational size?

VS: At this point there’s not much connection at all between our fixed costs and how big the sales of our games can grow. I think we could double, triple or quadruple the revenue with about the same number of employees. There is a certain standard of how much content and how many updates a game needs, but it’s based on the game play experience of a player within the game. It does not matter if a game has 10k daily users or 1M daily users, one player still needs the same amount of content to be happy. The pressure to increase fixed costs in development comes from the number of games in development/support, and from gradually increasing production values. Right now we have enough staff to take care of the games we have released and in development, and the pressure to increase budgets has slowed down after the transition to F2P was accomplished. The situation is similar in the marketing and other functions, where fixed costs need to scale proportionally to the number of games actively managed, but not the audience or the sales levels of particular games. Marketing 10k DAU game and 1M DAU game would not use substantially different amount of resources, at least in my experience. And if the games are of high quality, even player support function does not need to be scaled proportionally to the game audience

Q: Once the aggressive investment/growth phase ends, what are the profit margins one can expect from G5?

VS: This is going to depend on a number of factors, and the biggest ones would be how big G5 gets by then, how our portfolio composition is going to look like by then, and how good the games in the portfolio are going to be by then. The overall size is important to offset the fixed costs. The bigger we are going to be, the higher our gross margins would be. The more successful 1st party (G5’s own) games are going to be in our portfolio, the higher possible profit margins are going to be, as on these games we do not need to share revenue with other companies. And the better the games would be fundamentally, the less UA expenses we would need to incur to maintain and grow the sales. One could build a model which takes the assumption of certain revenue share (0% in case of 1st party games), certain UA expense level in proportion to the game revenue, certain composition of the portfolio, and certain fixed expenses, and calculates the profit margin that is possible given certain annual revenue. We actually do have such model internally. It shows a range of possible outcomes depending on the assumptions, it allows for very positive yet realistic scenarios, and we are navigating the company to the scenario which will provide good returns to the shareholders.


Investing up North

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