In a recent notice on PSX, Systems Ltd (SYS) disclosed that its associate E-Processing Systems (Pvt) Ltd (EPS) has received investment from Bill & Melinda Gates Foundation. SYS did not disclose the acquisition cost or the percentage stake acquired by the Foundation. Nevertheless, we think that this investment is another testament to the (i) management quality of SYS and EPS and (ii) confidence in the company’s vision to digitize payment system in Pakistan (in this case, by providing an alternative payment settlement option to small retailers and the undocumented economy at large). Previously, at the start of 2020, IFC invested US$2.91mn in EPS for a 20% stake. Since then, EPS has increased its retail base massively and also applied for an EMI license from SBP to kick off its Fintech based operations within OneLoad.
EP Systems: From mobile top-ups to payment solutions
SYS has a 44.6% stake in EPS, which is down from 70% at the time of SYS IPO in 2015. EPS is mainly known for its service, OneLoad, which was initially designed for retailers as a single platform to top-up credit with cellular operators or airtime (of telco consumers). Apart from mobile top-ups, OneLoad also earns commission by selling international vouchers (such as Netflix, Facebook and Google Play vouchers) and offers utility bill payment services. OneLoad is presently used by c.50,000 small retail shops across Pakistan and providing services to 7mn nonbanking consumers each month (previously the quantum of transaction was 3.6mn). On top of this, the company has obtained in-principle approval from the State Bank of Pakistan (SBP) to operate as an Electronic Money Institution (EMI) and has launched a pilot project accordingly. So far, the SBP has given in-principle approval to eight Fintech based startups and only two of them are live (Finja and NayaPay)
EP Systems’ last valuation was determined at c.US$14.5mn in January 2020 when IFC acquired 20% stake for US$2.91mn. We believe that apart from the performance of the company, recent investment in Fintech and other tech startups have helped EPS to unlock significant valuation – culminating in the investment by Gates Foundation. Please note that we have not incorporated EPS in our TP for SYS (Dec 2022: PKR950/sh). We have run some scenarios below assuming possible values for EP Systems and per share impact on SYS’ valuation (based on SoTP).
Startup Boom in Pakistan
As of mid-November 2021, there are nearly 3,000 startups operating in Pakistan, many of which have attracted foreign investment. The boom in tech based startups arose following the onset of Covid-19 pandemic, as most industries globally ramped up spending on digital transformation to provide IT based services to customers at their doorsteps. The same scenario played out in Pakistan; and, as of September 2021, Pakistani startups have raised c.US$301mn compared with a total US$140mn raised during 2016-20. Notable companies in this group include Airlift, Bazaar, Tajir, Bykea, Sadapay, and Cheetay (in the Fintech, retail and logistics space). This has showcased Pakistan’s opportunity to overcome deep under-penetration in several industries, and this trend is likely to continue, in our view.
Courtesy – Intermarket Securities Limited.