Investment Analysis | Sygnus Credit Investments
Though still in in its infancy, Sygnus’s financial performance subsequent to its Initial Public Offering (IPO) in May of 2018 has been exemplary. In financial year (FY) 2019, the company’s first full year of operation year subsequent to its IPO, the company reported net profit of US$2.05M. It is our opinion that the company’s ability to garner this level of profitability was a direct result of the management’s ability to execute its strategy to cater to the underserved medium sized enterprises niche market while remaining strident in its efforts to minimize credit losses (i.e. loan defaults).
It is our opinion that a continued execution of the aforementioned strategy coupled with the already in place technically savvy staff compliment capable of underwriting various credit solutions to cater to Sygnus’s myriad of potential clients, should continue to serve the company well going forward. We anticipate that traditional lenders (i.e. banks) may pose more of a competitive threat in the future given the recent spotlight which had been shined on the need for credit solutions geared towards SMEs. However, it is our opinion that the full manifestation of that competitive threat will not be instantaneous. Traditional lenders will need time to build out a lending framework for SMEs while simultaneously adjusting their risk management framework to accommodate those solutions. Additionally, traditional lenders may need to enhance their personnel’s skillset for them to have the necessary competencies to competitively service the dynamic SME market. Consequently, it is our opinion that in the short term the competitive threat that Sygnus may face is likely to remain low to moderate. However, in the medium term the competitive threat is likely to increase.
Nonetheless, despite the medium term risk we remain bullish on Sygnus’s in the short term. We anticipate that the company return to the market in the interim to raise capital. The Board of the company has approved the raising of J$1.20B (or US$ equivalent) of additional capital in debt. We anticipate that this new capital will be deployed in additional investments (i.e. issuance of loans). We anticipate that this raise will take place by the end of the send quarter of FY 2020 and will enable to company to structure additional credit solutions, thereby growing the company’s loan book. Consequently, we forecast that the company will generate profits of US$3.05M in FY 2020 as a result. This would represent an almost 50% increase in profitability relative to the company’s performance in FY 2019. Consequently, we arrived at a fair value of J$30.71. Relative to the closing price of J$23.52, the fair value would represent potential capital gains of 30.59%. Therefore, at this time we are recommending Sygnus Credit Investments as a BUY.
|Closing Price 07/10/2019||J$23.52|
|Estimated Fair Value||J$30.71|
|Estimated Dividend Yield @ Current Price||1.45%|
|Potential Total Return||32.02%|