To The Moon

$Kaspi.KZ(KSPI)$

Kaspi Overview

Kaspi ranks among top companies like Visa and ASML when evaluated for financial performance and valuation. The company shows consistent revenue, free cash flow, and EPS growth, positioning it as one of the best investment opportunities. However, risks include geopolitical uncertainties, the unpredictable regional business environment, and Kazakhstan’s relatively low (though improving) corruption perception ranking.

While Kaspi’s financial health, growth, dividends, and valuation are appealing, investors must consider the potential impact of regulatory scrutiny and the region’s inherent risks. Whether this is a hidden gem or a risky bet depends on your confidence in the company’s story and your knowledge of the region.

Rephrased Culper Research Report Summary

This might be one of the most intriguing investment opportunities in a long time, but it’s not without complexity. Culper Research, a short-selling firm, recently published a report on Kaspi, the largest payments marketplace and fintech ecosystem in Kazakhstan. The report accuses Kaspi of misleading U.S. investors and regulators, particularly about its claims of having no ties to Russia. It warns that as sanctions tighten against entities aiding Russia’s wartime economy, Kaspi could face significant challenges. Following the report, Kaspi’s stock dropped 16.8% in a single day.

So, is Kaspi, a fast-growing company planning regional expansion, a fantastic investment opportunity, or are the short-sellers right in calling it an overvalued trap? Let’s dive deeper into the company’s performance and outlook by examining five key aspects: past results, investor activity, financial health, growth, and dividends.

If you had invested $11,000 at the end of 2020 during Kaspi’s IPO on the London Stock Exchange, you could have purchased about 18 shares. Today, those shares would be worth approximately $1,931. Including $333 in dividends earned during this period, your total returns would amount to $2,264—an impressive gain of 126%. However, past performance does not guarantee future results, so it’s important to assess other factors.

Investors Overview

• Insider Ownership: Individual insiders own 44% of the company, aligning management’s interests with shareholders.

• Insider Transactions: There have been no insider purchases in the past year.

• Super Investor Ownership: Poland Capital Management, a notable investor, recently purchased 9,686 shares, indicating institutional interest, though the position remains relatively small compared to its $40 billion under management.

Earning Overview

Revenue Growth: An annual growth rate of 38.2% demonstrates strong business expansion. In Q3 2024, revenue increased by 28% year-over-year (YoY) to KZT 650 billion. For 9M 2024, revenue grew by 34% YoY, reaching KZT 1,870 billion. Free Cash Flow Growth: Growing at 41.8% annually, though volatility in recent years warrants caution. Earnings Per Share (EPS) Growth: A robust 59.2%, indicating improving profitability.

Fundamental Analysis

Revenue Growth: Kaspi.kz has shown consistent revenue growth, with a compound annual growth rate (CAGR) of approximately 38.2%. This indicates strong operational performance and market expansion.

Net Profit Margin: Kaspi.kz boasts an industry-leading net profit margin of 51%, significantly above the sector median of 22.4%, demonstrating operational efficiency and cost management.

Return on Invested Capital (ROIC): A robust ROIC of 40.6% highlights excellent capital allocation and value creation for shareholders.

Debt Management: The company’s debt is manageable, with free cash flow sufficient to cover long-term liabilities in a matter of months, reducing bankruptcy risk. The company’s long-term debt could be cleared in just a few months using its average free cash flow over the past five years.

Free Cash Flow (FCF): With a 41.8% growth in FCF, Kaspi.kz has ample resources for reinvestment, dividend payments, and potential share buybacks.

Return on Invested Capital: Kaspi boasts a strong median return of 40.6%, reflecting excellent management efficiency.

Share Buybacks: Since the 2020 IPO, Kaspi has repurchased 1% of its shares.

Guidance

Kaspi.kz remains on track to achieve its full-year 2024 guidance, expecting approximately 25% YoY growth in consolidated net income. The company anticipates accelerated growth and higher profitability in Q4 2024, bolstered by strategic initiatives and seasonal factors.

International Expansion: Kaspi.kz acquired a controlling stake in Hepsiburada, a leading e-commerce platform in Türkiye, expanding its market reach to 100 million people. Payments Platform: Projected to achieve around 20% year-over-year revenue growth in 2024, driven by increased consumer adoption and transaction volumes. Fintech Platform: Anticipated to see approximately 20% year-over-year revenue growth, supported by strong customer demand and a stable economic environment.

Rephrased Culper Research Report Summary

This might be one of the most intriguing investment opportunities in a long time, but it’s not without complexity. Culper Research, a short-selling firm, recently published a report on Kaspi, the largest payments marketplace and fintech ecosystem in Kazakhstan. The report accuses Kaspi of misleading U.S. investors and regulators, particularly about its claims of having no ties to Russia. It warns that as sanctions tighten against entities aiding Russia’s wartime economy, Kaspi could face significant challenges. Following the report, Kaspi’s stock dropped 16.8% in a single day.

So, is Kaspi, a fast-growing company planning regional expansion, a fantastic investment opportunity, or are the short-sellers right in calling it an overvalued trap? Let’s dive deeper into the company’s performance and outlook by examining five key aspects: past results, investor activity, financial health, growth, and dividends.

Past Results

If you had invested $11,000 at the end of 2020 during Kaspi’s IPO on the London Stock Exchange, you could have purchased about 18 shares. Today, those shares would be worth approximately $1,931. Including $333 in dividends earned during this period, your total returns would amount to $2,264—an impressive gain of 126%. However, past performance does not guarantee future results, so it’s important to assess other factors.

Free Cash Flow

As of December 2024, Kaspi.kz reported a free cash flow (FCF) of approximately ₸1.06 trillion for the fiscal year ending December 31, 2023. In the third quarter of 2024, the company achieved a free cash flow of ₸163.43 billion, marking a significant increase from the negative FCF reported in the same quarter of the previous year. These figures highlight Kaspi.kz's robust financial performance and its ability to generate substantial cash flow from operations.

Dividends

• Dividend Yield: A high yield of 7.1%, offering shareholders $744 annually per share.

• Payout Ratio: At 69%, the payout ratio exceeds the desirable range of 20-50%, raising concerns about sustainability.

• Dividend Growth: With dividends paid only since 2021 and inconsistent amounts, stability is a concern.

Risks and Challenges

Economic Risks Currency Volatility: As a Kazakhstan-based company, Kaspi.kz’s financials are heavily influenced by the Kazakhstani tenge. Fluctuations in exchange rates could affect profitability, especially as it seeks to expand internationally. Inflation and Consumer Spending: Rising inflation in Kazakhstan could dampen consumer spending, affecting Kaspi.kz’s marketplace and payments revenue.

Financial and Market Risks - Stock Price Volatility: Recent controversies, such as the short-seller report by Culper Research, caused a sharp drop in stock price (16.8% in a single day). Such volatility can deter investor confidence. Dividend Sustainability: While the company offers attractive dividends, its high payout ratio (~69%) raises concerns about the sustainability of these payouts in the face of economic or operational challenges.

Corruption and Governance Concerns - Corruption Perception Index: Kazakhstan ranks 93rd globally on the Corruption Perception Index. While improving, this ranking indicates risks in regulatory compliance, governance, and transparency. Insider Ownership Dynamics: While insider ownership is high (44%), limited recent transactions by insiders may signal hesitation about future prospects.

Valuation

Kaspi’s price-to-earnings (P/E) ratio of 10.3 suggests a low valuation relative to earnings. Using a discounted cash flow (DCF) model with conservative growth assumptions, intrinsic values range from $82 (low) to $195 (high) after applying a 30% margin of safety. With the current share price around $14, Kaspi appears undervalued.

In September 2024, Kaspi.kz faced allegations from Culper Research regarding its operations, leading to a significant stock price decline. Despite these challenges, Kaspi.kz has demonstrated resilience, maintaining strong financial performance and growth prospects. Analysts project a 27% earnings increase for 2024 and a 22% rise in 2025, reflecting confidence in the company's business model and market position.

Market sentiment

Short-Seller Allegations: The Culper Research report accusing Kaspi.kz of misleading investors about its exposure to Russia has cast a shadow on its transparency and corporate governance. The resulting 16.8% drop in stock price after the report reflects the market's sensitivity to such claims.

Dependence on Domestic Market: Kaspi.kz’s heavy reliance on the Kazakhstani market makes it vulnerable to local economic downturns, regulatory changes, or political instability.

Conclusion

Kaspi.kz showcases strong financial health, growth prospects, and market leadership, it operates in a complex and dynamic environment. Investors should weigh these risks against the company's strengths and potential opportunities. Understanding the geopolitical, economic, and operational landscape will be key to making an informed investment decision.