Thread by @pbcinc

$SHVA.TA State of the Union or “Trouble in Paradise”. Thread.


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$SHVA.TA, Israel Card Network, is undoubtedly one of - if not THE - best business in Israel for reasons followers will already be familiar with.

2021 FY results blew the ball out of the park and illustrated what a great business looks like.
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Looking forward, what are the challenges facing the business, what is the strategy, and what should we expect as shareholders?

$SHVA.TA informed us they filed for approval to fully separate from #MASAB.
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at slightly worse conditions we were expecting based on past discussions with management and executives.

In addition, SHVA.TA is undergoing a metamorphosis led by the new CEO designed to turn SHVA.TA
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from an operational “bank” subunit into an organization on the offensive, launching initiatives, and building new features.

That’s hugely important for the future of this business.


Let’s begin from the expense side. What should we expect financially?

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While the company filed public filings estimating the full separation from MASAB would cost around 15 M NIS, I think the full cost will be somewhat lower at 8- 10 million additional OPEX+CAPEX per annum.
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Included in this sum I expect some additional hiring not connected with the separation but needed to bring in new talent necessary for the DNA metamorphosis.

this sum includes some additional hiring not connected with the separation but needed to bring in new talent.
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Added to a current expense RR of 60M NIS, expenses could climb to ~70 M NIS on 110M Revenues.

Moving to the top line, $SHVA.TA has benefitted from several one-time backwinds: a. EMV terminals transition, b. Introduction of digital payments by devices and
8/n

c. General digitization of the economy.
It is likely the majority of the benefit from a+b is behind us now, with some residual benefit ahead.

Management is busy working on new future revenue streams. I do not think we will see ANY price hikes at all.

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Very likely, with sufficient time and effort, the company could develop additional revenue streams - some of which could be promising.

At this time, for the short-medium term, I do not see anything significant as yet but will be monitoring development carefully.

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This mainly leaves us with c above. Per the company filings, transaction growth CAGRs at ~9% pa which we expect to continue off of the higher base (~44M pa) or around 4M pa. factoring additional scaling up of some of the small current added value solutions, make it 5M NIS.
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This leaves us with declining profits or 2-year gap to grow profits back to where we are today. I expect management to do all they can to delay all the expenses. They can and likely will pull some levers they have to try and match expenses with revenues
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so profits do not go in reverse.


The button line? At the business core, Op Profit Run Rate is to reset from 50M NIS to an effective ~40 as the company reinvents/rebuilds itself from the #MASAB separation.
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The rest could be quick or staggered, but this process is likely inevitable and will take about 2 years unless some dramatic revenue stream is thought of, designed, developed, launched, and gains traction at a serious scale.
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Current owners are willing to pay ~22 times normalized op profits which are unlikely to display real material growth for the next 2 years or drop in real terms. They are also willing to take on execution risks as SHVA transitions into a different organization.
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I leave it with you to decide if the multiple is reasonable considering the current conditions, if you are comfortable with the risk-reward profile here as well as the downside risks and if the future returns satisfy your IRR bar.

N.I
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