Kaspi.kz - Cracking the Fintech Conundrum

In recent years, Kaspi.kz has evolved into a highly integrated and profitable closed-loop digital ecosystem, a rare gem within the global fintech context. Hand in hand with this process has been a track record of innovation that has led the digital transformation of how Kazakhs use financial services and shop. Kaspi.kz's mobile ecosystem counts over one third of the population as daily users, and access to this sticky customer base is now drawing in many merchants. There are, though, challenges ahead, as Kaspi.kz looks to transplant its domestic model to other markets in pursuit of longer-term growth. However, the management has so far proved adept at executing and monetizing, with earnings on track to top $1 bln this year. We initiate coverage with a target price of $159 per share and a BUY recommendation based on a SOTP valuation. In a world of often-inflated fintech valuations and hyperbole, even after its tremendous post-IPO rally, Kaspi.kz's 2023E P/E of 13.7 does not feel stretched. > Cracking the fintech conundrum. One of Kaspi.kz's defining features has been its ability to crack the conundrum of profitably merging credit, payments and e-commerce within a single integrated and largely closed-loop platform for its almost 11 mln users. It dominates P2P payments, has embedded its own financing options, led by BNPL, into its market-leading e-commerce platform and, through Kaspi Pay, has developed a QR-payments platform that disintermediates payment rails and dramatically lowers fees for merchants, forming the hub of its emerging merchant ecosystem.> Dominating in underpenetrated markets, but will need international growth. Kaspi.kz dominates what remain relatively underpenetrated domestic markets, with 7% consumer loans/GDP, e-commerce 9% of total retail, and digital payments (ex-P2P) just 24% of GDP. Looking a few years out, however, international expansion is likely to be needed to sustain robust growth, with Ukraine the first real acid test, and it will be hard replicating what Kaspi has built domestically.> Operating leverage supports 35% 2022E-23E earnings CAGR. We project a 35% 2022E-23E EPS CAGR, as the operating leverage within Kaspi.kz's ecosystem should enable it to maintain a net income margin of over 45%. The share of marketplace and payments in earnings should continue to rise, accounting for almost 64% of the total by 2023. > Target valuation not stretched at 16.5 2023E P/E. Our SOTP valuation derives a target 2023E P/E of 16.5, which we don't see as stretched given the quality and profitability of the franchise. This implies a 10-15% discount to our fair value for TCS, our coverage's other fintech gem. We see this as justified by a more challenging longer-term growth outlook and low stock liquidity, with a US listing a possible catalyst for the latter.