Lesaka – JSE’s (only?) exponential tech stock is back on track, a play for SA’s informal sector

After the fallout following Net1’s disastrous engagement with South Africa’s welfare payment agency SASSA, the company’s share price fell to a fraction of its highs. The seemingly hopeless case, however, attracted activist shareholders Value Capital Partners and two years later, the private equity turnaround specialist’s efforts are bearing fruit. Financial results for the year ended June reflect a massive bottom-line turnaround. CEO Chris Meyer reckons there’s much more to come, with another strong 12-month forecast and longer-term profit growth of 20% targeted. Given the pedigree of its new managers and supportive shareholders, the company now called Lesaka may well be the exponential growth opportunity South African investors haven’t seen since the glory years of Naspers. - Alec Hogg

Alec Hogg: I’ve known Lesaka Technologies for an extended period, even once sharing a building with them when they were known as Aplitec and then Net One. We were both located in President Place in Rosebank, Johannesburg. Now, under new management and with a fresh approach, it seems the company is heading in a new direction. Chris Meyer, the group CEO of Lasaka, is here to discuss the company’s latest financial results for the year to end June.

Chris, at BizNews’ 10th anniversary, GG Alcock spoke extensively about the misunderstood informal economy in South Africa. He mentioned Kazang, a part of your group. Could you give us an overview of the changes at what used to be Net One, and the direction you’re heading in now?

Chris Meyer: Thank you, Alec. I’m actually in the same building in Rosebank’s President Place, which has transformed. I’d love for you to see the changes we’ve made on a modest budget. My journey with the company began in July of 2021 when Value Capital Partners took a significant minority stake in what was then Net One. They are activist investors but of a friendly and respectful sort. We overhauled the board and management team and set out to redefine the company’s vision and strategy.

The consumer business had been in poor shape, losing substantial money. Our focus shifted to an ambitious acquisition of a company called the Connect Group, which includes Kazang. The aim was to create a fintech platform targeted at small merchants and consumers in both the formal and informal economies.

Ali Mazanderani, one of our non-executive directors, was instrumental in this transformation. Similar business models succeed in other emerging economies like Egypt and Brazil.

From losing a billion rand over three years, we’re now posting our first-ever EBITDA profit in the consumer business. Last year, the group had a R280 million EBITDA loss, but this year we’ve achieved a R490 million EBITDA profit. Our revenues have soared from R3.3 billion to over R9.3 billion.

With a market cap of over R4.5 billion and significant revenues, we believe we’ve built a fintech platform in South Africa that is unrivalled in size and potential.

Alec Hogg: Given the drastic turnarounds in your bottom line, it’s easy to see why you describe this as a transformative year. How did you manage to achieve this?

Chris Meyer: The transformation was multifaceted, particularly on the consumer side. It was as much about culture as it was about business strategy. Previously, the focus was more on the logistics of grant disbursement; the real client seemed to be Sasa rather than the grant recipient. We shifted our focus to consider the grant recipient as our primary customer. This required a new sales approach and customer service mindset. For instance, we relocated our ATMs from branches to retailers and moved our branches closer to where our customers actually shop. The objective was to serve our customers better and be more accessible.

On the merchant side, we saw potential in the Connect Group’s ability to bridge both cash and digital transactions in an unparalleled way in South Africa. We offer services to small and micro merchants, from a digital vault solution to credit propositions. Over the past year, we’ve advanced more than a billion rand in credit to small merchants. With Kazang, we have provided merchants with a device that allows customers to purchase airtime, electricity or make cross-border payments. These devices have grown from 50,000 to nearly 75,000 in the past year, and we’ve also introduced card payment services.

Alec Hogg: One aspect we haven’t discussed is the role of active investors, like Antony Ball. Could you share more about who they are and how they’ve influenced the company, including your recruitment and that of your former colleague at Investec in the UK, Steve Heilbron? Your executive management seems to have significant experience in payments or tech sectors, lured away from highly competitive roles. Could you discuss that dynamic?

Chris Meyer: I was contacted by Anthony Ball in mid-2021. At the time, I was in London and wasn’t particularly familiar with NetOne. My career had mostly been with Investec, focusing on their international operations. Anthony outlined the vision for the company, and I was immediately interested, especially since I had just left Investec and was looking to get more involved with South Africa.

In my experience, Anthony and VCP stand out as the foremost activist investors in South Africa. They have a proven track record of revitalising struggling businesses, offering comprehensive support in areas like governance and strategy. They have been incredibly supportive shareholders, always available for consultations as we navigated the early challenges.

Interestingly, one of my first tasks was negotiating the Connect Group’s acquisition. Steve Heilbron, who I had worked with for years at Investec, was on the other side of the table. Steve had been the driving force behind the Connect Group and initially agreed to stay for up to 12 months after the acquisition. However, he extended his commitment and now runs our merchant division. Along with other valuable team members like our South African CEO, Lincoln Mali, we’ve built a strong team that has been instrumental in turning around the consumer business. I consider myself fortunate to be a part of this exciting journey.

Alec Hogg: Your company’s story doesn’t seem to fully resonate with the market yet, as evidenced by your share price. It’s half of what it was a decade ago and only a fifth of its peak value. Can you explain why that might be?

Chris Meyer: There are multiple factors at play. First and foremost, it’s early in our turnaround journey. We acquired the Connect Group over a year ago and only recently turned a corner with our consumer business, which had been loss-making for the first half of this financial year. This makes investors cautious as they try to understand what we’re building and assess if we can deliver on our promises. Another consideration is that today, we’re releasing results and projecting an EBITDA increase between 37% and just over 40% for next year, growing it to between 680 and 740 million rand. So, our story is still evolving. Finally, we have some significant, long-term shareholders, making our shares relatively illiquid. However, we anticipate this will change as our story gains more attention. In summary, as a business valued at four and a half billion rand with revenues exceeding nine billion, we’re confident that we’re the leading fintech platform in South Africa with an exciting narrative.

Alec Hogg: The International Finance Corporation (IFC), a part of the World Bank, is also a substantial shareholder in your company. This suggests a positive societal impact. However, past issues with Sasa might present a problem. Are they still firmly on board?

Chris Meyer: Absolutely, the IFC is a significant shareholder, holding just under 15% of Lasaka. They’ve been very supportive, aligning closely with our mission of financial inclusion and serving underprivileged communities in South Africa. Their focus on transitioning from cash to digital operations complements our objectives perfectly. The IFC also provides strategic input and advice through their board representation, offering valuable insights from similar markets around the globe. This guidance has been invaluable in navigating our transformation journey.

Alec Hogg: The BizNews community likes to find tenbaggers. I’m not going to presume Lasaka is a tenbagger, but you certainly have got many boxes ticked. It’s a turnaround. It’s new management who’ve been around now for two years. The new management is already proving itself. But most of all, GG Alcock, who the community loves, is talking up the informal economy. Are you a play on South Africa’s informal economy? Because there aren’t too many plays that one can identify on the JSE or where you’re also listed on NASDAQ.

Chris Meyer: First, GG, we hold him in high regard. We spent a lot of time with him. We’re, interestingly, working on an index with him at the moment that we’re hoping to launch in October/November because we feel that everybody’s interested in the informal economy, and there are loads of anecdotal soundbites around the size of the market and the themes within the market. But… it’s difficult to size the overall market and quantify trends within it. We see ourselves as a leading player in the informal market. We see ourselves as one of the dominant players in the informal economy from a financial services provision. I talked about 75,000 spaza shops using our devices, 45,000 card terminals within that, R8 billion of card payments, and R26 billion of value-added service payments have gone through our terminals in the last year in the informal economy. So yes, we are a proxy for the informal market. And I think what’s interesting, you know, as a listed stock, that means we give access to investors, both South African and international, who are looking for access to the story, you know, which is playing out with, you know, incredible growth.

Alec Hogg: The forecasts you’ve put on the table for next year are impressive, but… what about thereafter? In other words, are we looking at scalability – can you leverage it up even further into the future? Is Lesaka one of those exponential stocks that all shareholders love to find? Or is this just the turnaround and will it be more incremental growth from there on?

Chris Meyer: So there are two parts to that. I’ll give you a sense of what we think is a reasonable medium-term growth expectation for our business in a second. But the most important point is that we view the informal economy as largely untapped. As I said, we see ourselves as one of the dominant players in the informal economy, but we still think our kind of market share, if you like, is very small. Thus, the ability or the opportunity to grow in this market is a long-term trend. It’s not, so this is not just about a business turnaround. This is about building something enduring and sustaining in a market that is, to a large extent, still very untapped. And a big part of our strategy is just building deep relationships with the merchant in the informal store. Services and products into the merchant’s business that help them grow and compete. So we talk about helping the little guy. We want to help the small merchant grow their business and compete with what is often offered in the formal economy. And that for us, we see that as tremendously exciting, and the road is a long one. There’s a lot of opportunity. When we talk about the longer-term growth outlook, you know, we’ll talk about this later this afternoon on our earnings call, but we talk about, you know, growing our revenues, we think, consistently longer-term in the, you know, probably 17 to 20% per annum basis, and that will translate into 20 to 25% EBITDA growth longer-term. We do see, you know, in the near term, as I said, in the next 12 months, our EBITDA, we think, will grow. I talked about the high 30s and low 40 percent, but the growth beyond that we see as compelling and exciting.