Wednesday, 5 April 2017

First Global Data Valuation Matrix

A few weeks ago, I presented a $5.00 target on First Global Data (FGBDF) (FGD.V) by the end of 2018. This target assumed that the company can achieve 5 million users at an average EBITDA per user of $26 by that time. It was based off of a 15x EBITDA multiple, 400 million fully diluted shares and $52 million in cash received from the assumption that all warrants and options would be exercised. Presented below is a chart that displays a matrix of potential stock prices based on a range of 100,000 to 100 million users and an average EBITDA per user from $10 to $90.

The scenario closest to my target price assumes 5 million users at a $25 average EBITDA per user, which leads to $4.82. To get to $4.82 it is calculated as follows:

5,000,000 users x $25 EBITDA per user = $125 million EBITDA
$125 million EBITDA x 15x multiple = $1,875 million enterprise value
$1,875 million / 400 million shares = $4.69 per share
$52 million in cash from warrants / 400 million shares = $0.13 per share in cash
Add back $0.13 per share in cash to get to $4.82

(Read up on what enterprise value means to understand why I add the cash back in this situation - I'm sick of answering questions like this)

If someone thinks that a 15x EBITDA multiple is too high, it is easy enough to change it. If you wanted to use a 10x multiple, all you need to do is subtract the $0.13 per share in cash, multiply that number by 10/15 and add back the $0.13 per share. For instance:

$4.82 - $0.13 = $4.69
$4.69 x 10/15 = $3.13
$3.13 + $0.13 = $3.26 per share valuation based on a 10x EBITDA multiple

FGD's CEO Andre Itwaru has gone on record to state that based off of one million users, he thinks FGD can achieve $146.1 million in revenue and $93.5 million in EBITDA (page 11 of the January corporate presentation). This is a $146 average revenue per user (ARPU) and a 64% margin, leading to a $93.50 average EBITDA per user. Keep in mind this assumes a 50-50 split in revenue between FGD and its partners, so gross ARPU would be $292. Until I see ARPU figures proving otherwise, I personally think that these numbers will be a challenge to meet. That's why my chart ranges as low a $10 EBITDA per user and up to the company's estimate of $90. Assuming a 64% margin, a $25 average EBITDA per user equates to a $39 ARPU.

We know that based on the Google Play install stats that VPayQwik, FGD's app in partnership with Vijaya Bank, is over 100,000 users. I estimate the installs to be at least 130,000. Keep in mind that this is only for India. VPayQwik was launched in mid-September 2016 so the revenue and profits disclosed by FGD for the first nine months of the year was largely based off of the company's North American remittance business. FGD hasn't disclosed how many users it has in North America, but we can assume this is substantial and growing based on the Alexa traffic stats for FGD's business site

So how many users does FGD have? Something well over 100,000 and growing. If FGD has 500,000 users at an average ARPU of $39 and average EBITDA per user of $25, that leads to a $0.60 stock price. Of course, at this early stage FGD won't be valued based solely on current business metrics, but the reasonable expectation of growth since the Indian and North American businesses are robust and the various partnerships announced over the last several months will be deployed soon enough.

I have already stated my belief that the company can achieve 5 million users in a timeline of a little over a year and that leads to substantial upside even if the ARPU comes in at around 25-30% of the company's expectation. Let's look at the long term upside. Let's say that FGD eventually does achieve 100 million users. This could take several years, but it is well within the realm of possibility upon continued execution and deployment of partnerships. 

Let's say that of those 100 million users, a lot of them are low value and that drags down the average ARPU. Given FGD's focus on the developing world that may be a fair assumption. Even if the annual EBITDA per user is a mere $10, the stock price would be $37.63 based off of a 15x EBITDA multiple. If the company is extremely successful and somehow manages to pull off a $90 EBITDA per user on this large base of 100 million users, the stock price would be $337.63 based off of a 15x EBITDA multiple.

I don't know if FGD will ever get to these crazy prices, or if it will be bought out well before then or if I would even hold that long. But at $0.80 this isn't a concern yet. FGD has a ton of upside from here as my valuation matrix indicates.

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