Thanks for sharing your thoughts on Kaspi. What do you think about Kazakhstan’s national payment system and digital currency impact on Kaspi’s business?
I don't think the impact of the digital currency will be meaningful. It is very, very hard to break consumer habits when they are being reinforced numerous times daily. As the saying goes, the digital currency will have to be 10x better in terms of tech and convenience / design to meaningfully displace Kaspi, and I don't see that happening when you have the best CEO in the CIS obsessing over improving the service quality. It is certainly a risk though and will need to wait and see how it all plays out -- if it can actually displace Kaspi's payments across certain verticals that would be a real issue.
Hi IIya, thank you for being so open and honest in your reflections on your investment decisions. I wonder what are your thoughts regarding Kaspi's decision to buy a majority stake in hepsiburada? by the way, just curious would turkish law also require kaspi to buy out the remaining listed shares of hepsiburada on NASDAQ(HEPS)?
Always a pleasure to read what you write - no one on substack is more brutally honest about their mistakes, nor does anyone embody "process over outcome" so much.
I will readily admit that I'm not very familiar with the IT VAR industry. But having a glance at Softcat, I see little topline growth in recent years - negative in real terms - and a 25x multiple. Obviously, they've expanded margins a good bit, but those can only go so far. I look at Kaspi at <10x with a lot of growth ahead, and WOSG at maybe a low-teens normalised multiple with also a lot of growth to come - and I infer you must see the topline turning back to growth at some point. Am I right in my assessment, and if so, what will drive that?
Thank you Matt! I don't think I received your message on WhatsApp? Please let me know!
For the IT VAR space what matters is gross profit, not GII (revenue). Salespeople have gross profit as their KPI and that's what management works around. And it is the right thing to do given the fixed-cost nature of the business. Not gross margins and not revenue -- the focus should be on growing dollar gross profits, and preferably dollar gross profits among existing customers (i.e. expanding share of wallet). If you look at Softcat's gross profit, it was up 11.7% in FY24, 14.2% in FY23, and has never been below 11.5% since FY16. So you essentially have something growing top line in the LDD or HSD. They have recently been reinvesting back into building out their capabilities which I again believe is the right thing to do. Tech layoffs + AI means they have the opportunity to continue running ahead of competitors. And as I mentioned tech and sales capabilities are what really matters for IT VARs. So their bottom line is still growing but nowhere near the pace of gross profit growth. Over time I expect that to change, especially as they continue taking share and becoming even more important in the UK VAR space. So the TSR algorithm is something like HSD bottom line returns which (depending on when you buy) could also be LDD EPS growth plus a growing dividend of over 3%. It is not a buy for me now but at the low 1,300s it very much was. It's not something you're going to get 20% IRRs on but you can just let it run and get LDD IRRs on a very, very good business. At 20x P/FCF I think you get around 10% CAGR at current prices.
Thanks for sharing your thoughts on Kaspi. What do you think about Kazakhstan’s national payment system and digital currency impact on Kaspi’s business?
I don't think the impact of the digital currency will be meaningful. It is very, very hard to break consumer habits when they are being reinforced numerous times daily. As the saying goes, the digital currency will have to be 10x better in terms of tech and convenience / design to meaningfully displace Kaspi, and I don't see that happening when you have the best CEO in the CIS obsessing over improving the service quality. It is certainly a risk though and will need to wait and see how it all plays out -- if it can actually displace Kaspi's payments across certain verticals that would be a real issue.
Hi IIya, thank you for being so open and honest in your reflections on your investment decisions. I wonder what are your thoughts regarding Kaspi's decision to buy a majority stake in hepsiburada? by the way, just curious would turkish law also require kaspi to buy out the remaining listed shares of hepsiburada on NASDAQ(HEPS)?
Always a pleasure to read what you write - no one on substack is more brutally honest about their mistakes, nor does anyone embody "process over outcome" so much.
I will readily admit that I'm not very familiar with the IT VAR industry. But having a glance at Softcat, I see little topline growth in recent years - negative in real terms - and a 25x multiple. Obviously, they've expanded margins a good bit, but those can only go so far. I look at Kaspi at <10x with a lot of growth ahead, and WOSG at maybe a low-teens normalised multiple with also a lot of growth to come - and I infer you must see the topline turning back to growth at some point. Am I right in my assessment, and if so, what will drive that?
Thank you Matt! I don't think I received your message on WhatsApp? Please let me know!
For the IT VAR space what matters is gross profit, not GII (revenue). Salespeople have gross profit as their KPI and that's what management works around. And it is the right thing to do given the fixed-cost nature of the business. Not gross margins and not revenue -- the focus should be on growing dollar gross profits, and preferably dollar gross profits among existing customers (i.e. expanding share of wallet). If you look at Softcat's gross profit, it was up 11.7% in FY24, 14.2% in FY23, and has never been below 11.5% since FY16. So you essentially have something growing top line in the LDD or HSD. They have recently been reinvesting back into building out their capabilities which I again believe is the right thing to do. Tech layoffs + AI means they have the opportunity to continue running ahead of competitors. And as I mentioned tech and sales capabilities are what really matters for IT VARs. So their bottom line is still growing but nowhere near the pace of gross profit growth. Over time I expect that to change, especially as they continue taking share and becoming even more important in the UK VAR space. So the TSR algorithm is something like HSD bottom line returns which (depending on when you buy) could also be LDD EPS growth plus a growing dividend of over 3%. It is not a buy for me now but at the low 1,300s it very much was. It's not something you're going to get 20% IRRs on but you can just let it run and get LDD IRRs on a very, very good business. At 20x P/FCF I think you get around 10% CAGR at current prices.