Hi there!
Before I wrote this post I searched for content related but I couldn't find an answer to my specific question so I'd like to ask for your support.
I need to value a Fintech company which has been 5 years in the market and it's already profitable (as of 2019). It's a lending company (loan originator) of microcredits between USD 28 - USD 188. They fund its operation with just 13 lenders (companies or legal persons). Its main income is not interest (because lenders cost is 22% AE and the company lends at 25% AE) but a technology fee (it is a minor fixed fee charged daily as long as the loan lasts).
I would like to know which valuation methods should be used since traditional methods like DCF and Multiples apparently are not the best approaches for this type of company.
Some people have told me that I should use an EVA valuation approach or a Free Cash Flow to Equity.
I will be very grateful if you can help me.
Thanks in advance!
As I have told on Linkedin, I would personally try to value it as a bank (because it also gives credits) and thus use the EVA valuation approach. I would also do some stress testing, and definitely look into how the Non-Performing Loans metric (NPL) changes over time. Net Interest Margin (NIM) is also what I would consider.
Stated that the fintech is charging a fixed 'technology' fee against the microcredits, you can also use that in interest margin calculations. Then you would probably want to have smaller microcredits as it gives you a higher interest margin.
What is AE?
Sorry it was my mistake. I mean Effective Annual Rate (EAR).
Ok why don’t you do DDM. NIM of 3% seems to be significant to not be considered a major revenue stream.
You can do multiples if you find decent comparable (read enough data). If you do, then look at price / earnings and price / book value and price / tangible book value.
And then precedents....
To who do they charge the fee? Are they licensing the software to other parties or is it just extra margin on the credit?
AER of 22% is insane - if you have a diversified portofolio of credits it should come down significantly?
I’m certain the company OP is referring to is based somewhere in emerging / frontier markets. Only there would you come across interest rates like this
Sure but it’s financiers should be willing to lend them at lower rates?
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