AS DelfinGroup Annual Review

* AS DelfinGroup (together with subsidiaries hereinafter referred to as ‘DelfinGroup’ or the ‘Group’) is a licensed non-bank financial services company founded in 2009 and operates under the brand names Banknote, VIZIA, and Rīgas pilsētas lombards (Riga City Pawnshop). The Group’s core services are consumer loans, pawn loans, and the sale of pre-owned goods, while the services are provided through two channels, i.e. online and the Group’s extensive branch network across Latvia. The Group operates more than 90 branches in 38 cities of Latvia and employs over 300 professionals. DelfinGroup has issued more than EUR 335m in loans and has a total of over 400,000 registered customers.
* The Group is by far the largest player in the Latvian pawn loan market, controlling over half of this credit segment´s market, while it is currently the second-largest non-bank consumer loan lender with approximately 11% market share as of 2021. Primarily based on the historical market trends, consumer lending recovery after the pandemic setback, and developments after revocation of pandemic related restrictions in Q1 2022, we anticipate Latvia’s non-bank consumer loan segment to grow c.a. 8% annually over the next three years. However, more rapid growth is anticipated for the pawn loan market c.a. 18% annually over the next three years, but considerably more modest growth afterwards. Backed by the new capital from the IPO, further development of the product portfolio and both online and offline sales channels, we project DelfinGroup to approximately double its net loan portfolio during the period starting from 2022 till end of 2024, expanding its market share in the consumer loan segment to c.a. 18% and pawn loan segment to c.a. 70%.
* We have approached the valuation of DelfinGroup using a combination of income and market approaches. For the income approach, we used three different models: 1) Discounted Cash Flow, 2) the Residual Income Model, and 3) the modified Gordon Growth Model (GGM), which essentially identifies the fair P/B ratio-based valuation for the Group. For the market approach, we used a peer group valuation, which considers several peer group trading multiples for 2022-2024E. We believe the income approach is better suited for the valuation of DelfinGroup and assigned a combined weight of 80% to different income approach metrics in the total value.
* In sum, we believe that profitable growth along with appealing dividend yields would be the core of the respective investment case. Based on DelfinGroup’s current development and our assumptions, we increase the fair value range (FVR) to EUR 1.80-1.99 per share compared to our previous FVR of EUR 1.68-1.82 per share. Using the current share price and our forecasts for 2022, the Group would be valued at the following 2022E multiples: P/E – 9.2x, P/B – 3.5x, and EV/EBITDA – 8.0x, with the respective ratios declining to 6.2x, 2.6x, and 5.7x by 2023E. Finally, with applying current share price, the Group is anticipated to offer decent annual dividend yields of c.a. 6.5-9.7% over the period 2023-2024E, with potentially higher levels thereafter.
* This report contains a full set of financial forecasts and is useful for gaining an initial insight into the company. Please also refer to the tables and charts in the attachment.