New Bulls in Lesaka’s kraal?

Fintech group Lesaka, driven by demand in the informal sector, has turned the corner and is geared for its next phase of growth. That’s the message from management and investors who have backed the group to transcend its scandal-ridden past.

“The underlying businesses are growing… which tells you that the turnaround is real,” Lincoln Mali, CEO for Southern Africa at Lesaka, tells the FM. “This turnaround looks sustainable and when you look at it quarter on quarter, you’re seeing the growth in very difficult times.”

Scepticism lingers in the market — the share price, at R66, is down about 17% over a year. But Anchor Stockbrokers pegs Lesaka’s valuation range between R82 and R99, while US-based B Riley Securities has a target price of $8 (about R154).

The group, valued at R4.24bn, has a primary listing on the Nasdaq and a secondary one on the JSE. It distributes low-cost financial and value-added services to small businesses and consumers through its banking and payment technology.

Any smidgen of positive sentiment has been hard won.

The company, which began as Net1 UEPS in 1997, rebranded in 2022 to the Setswana and Sesotho word for “kraal”, where livestock, a symbol of security, community and wealth, are kept.

When we started, what were we faced with? Huge reputational issues, cash burn every month, loss-making businesses. No real trust from shareholders

Lincoln Mali

“When we started, what were we faced with? Huge reputational issues, cash burn every month, loss-making businesses. No real trust from shareholders given the fact that there had been years of underperformance,” says Mali, who left Standard Bank after two decades to join Lesaka in May 2021.

Net1’s image was tainted by a 2014 Constitutional Court ruling that the R10bn social grants contract it won two years earlier had been illegally awarded. The company suffered huge losses after the contract was terminated in 2018. The backlash led to an overhaul of its executive leadership.

“So that’s what we faced and the brief was very simple from the board: turn the consumer business around and make it sustainable with growth. Acquire something in the merchant space, integrate it and make it work. Restore all damaged relationships with regulators and stakeholders,” says Mali.

Part of the strategy was to focus on growing local operations — having sold its stake in Liechtenstein-based Bank Frick — and shutting its international payments unit. The group also had to write down and revalue a shareholding in mobile operator Cell C.

Since changing tack, the group is now made up of two main divisions: consumer and merchant. The consumer side focuses on products such as unsecured credit, transactional banking, microinsurance and value-added services through the EasyPay platform.

The merchant unit — making up the bulk of current earnings — now has more than 80,000 informal retail merchants using its cash management solutions, bill payment technologies, value-added services, business funding and card acquiring solutions. Throughput on its devices has grown from R6.9bn to R8.4bn. The consumer business, under Mali’s watch, now has 1.4-million customers.

One strategic investor that has helped to shape the group’s new course is Value Capital Partners (VCP), founded by ex-Brait executives Sam Sithole and Anthony Ball, which has 25%.

“When we invested in Lesaka, we were backing a bold turnaround and a vision of financial inclusion,” VCP’s Monde Nkosi tells the FM. “Under the leadership of Chris Meyer as group CEO, significant progress has been made in that turnaround with the tremendous growth of the merchant division and the return of the consumer division to profitability.”

Meyer’s exit is seen as the end of the first phase of the turnaround.

“The first phase of what we needed to do has been done,” says Mali. “And it’s been done with a sustainable business [in hand] because the underlying businesses are strong.

“The next phase is really about growth. Growth, obviously organically, keeping on driving these engines that we’ve got on the consumer and merchant side. The next phase is really about growth. Growth, obviously organically, keeping on driving these engines that we’ve got both on the consumer and merchant side

Lincoln Mali

“But then also inorganic growth by finding bolt-on acquisitions that either give us scale or add to our suite of solutions, particularly in the merchant space. That’s a big area of focus for us.”

In January, the group acquired Touchsides, a data analytics and merchant services business, from Heineken for an undisclosed sum.

This is expected to complement and boost Lesaka’s Kazang, a payments platform focusing on the informal market that includes buying and selling of airtime and microlending.

The Touchsides acquisition builds on the buyout of the Connect Group in April 2022 through a R3.7bn deal that expanded Lesaka’s footprint in the SMME sector in Southern Africa.

“Most integrations of two businesses … are very difficult,” says Mali, “but ours has been seamless because all the leaders realised what is important.” A large part of the group’s current earnings growth has been driven by Connect Group.

“The informal sector is probably where the biggest action will be,” says Mali. “How can we bring in more scale, more solutions, in that space and compete?” Nkosi, who’s on Lesaka’s board, is bullish about the company’s prospects in the informal market.

“There is a large global trend towards digital financial services and we are seeing the same trend in South Africa. Many spaza shops and small businesses now accept card payments, offer value-added services like remittances, and need working capital financing. Equally, whereas many individuals used to withdraw their income and use cash, they are now increasingly using digital financial services.”

In late 2023, a study by Lesaka estimated South Africa’s informal sector to be worth more than R600bn annually, or more than 6% of GDP. And in that market, the group sees cards as the biggest area of growth in digital payments, hence its push to register more merchants and deploy point of sale (POS) devices.

This also aligns with the fact that the group’s consumer business is largely made up of social grant recipients, whose cards can now transact at POS machines. In addition, Lesaka is looking to capitalise on Postbank’s woes.

Nkosi says VCP welcomed the appointment of Ali Mazanderani, effective February 1, as executive chair of Lesaka.

“Having led highly successful financial technology businesses in several countries, Ali is at the forefront of this growing global trend. We are very excited by Lesaka’s prospects under his leadership,” he says.

Mazanderani, who has been a member of Lesaka’s board since 2020, is a co-founder and chair of Teya, a leading European fintech business. He has also served as a director of other fintech companies — notably StoneCo in Brazil and Network International in the UAE.

In the second quarter to end-December, Lesaka narrowed its net loss by 57% year on year to R50.8m, boosted in part by its fintech business. According to Anchor Stockbrokers, the consumer business “had a surprisingly strong quarter with the merchant side continuing to show quarterly growth momentum as it further penetrates its target market”.

Group revenue rose 13% to R2.7bn y/y, driven by an increase in low-margin prepaid airtime sales and other value-added services, as well as higher revenue from transactions, insurance and lending. This was supported by consumer revenue growth of 16% y/y to R313m, while merchant revenue was up 13% y/y to R2.395bn.

“Lesaka is a profitable and growing developing-economy fintech player with leading market share. We reiterate our buy rating,” says B Riley Securities.