TRG Pakistan (TRG PA Equity)

Dear Clients,

TRG Pakistan conducted a briefing session for analysts and investors to reflect on the recent operational performance of the company. Recall that TRG announced 3QFY21 earnings of PKR 2.8bn (EPS: PKR 5.1), down 22% QoQ. The main driver of earnings was share of profits to the tune of PKR 3.26bn. The company also announced a DPS of PKR 4.40. 9MFY21 earnings stand at PKR 7.23bn (EPS: PKR 13.2). We present the following key takeaways:

– TRG Pakistan (TRG) owns 45.3% of TRG International (TRGI) through a Series B Preferred stock under USD 49mn liquidation preference. The rest is owned by Pinebridge (20.1%; Series A: USD 46mn liquidation preference), Zia Chisti (9.6%; Series B: USD 10mn liquidation preference) and TRG management (25%; Common at USD 105mn strike). TRGI has a junior debt of USD 57mn.

– The key earnings drivers are Afiniti, eTelequote and Ibex. Where eTelequote entered a definitive sale agreement at USD 600mn enterprise value, expected to close in Jul’21. The current net debt of eTelequote is USD 145mn and an estimated equity value of USD 440mn. TRG International is slated to receive c. USD 309mn from sale proceeds of eTelequote

– Ibex is listed on Nasdaq with a capitalization of USD 380mn at the moment..

– Afiniti, which is the feather in the cap, had the last preferred valuation of USD 2.1bn worth of enterprise value, where net debt of USD 335mn puts equity value at USD 1,765mn.

– The company suggests that given the Afiniti’s unique nature of business mode, there are no direct competitors in the public markets; however, the recent listing of and Palantir provide a high-growth AI/analytics with large addressable markets. and Palantir currently trade at 35x/25x and 41x/32x of 2021/22E revenue while Afiniti is being valued at discounted multiples.

– Afiniti is operating in more than 12 countries with heavy exposure in US and the largest vertical in telecom sector. The business is expanding further in to healthcare, insurance, banking, travel and hospitality. With more than 200 patents at this stage, Afiniti gives tough competition to new entrants to navigate such a gigantic portfolio.

– The management has not yet decided to either list Afiniti or cash flows via other means. They feel no urgency to list the business as it remains adequately capitalized. Series D was done on a guaranteed 25% IRR or USD 1.6bn equity in cash. Series E will have investor favourable terms, specifically anti-dilution protection which helps them shield their investment from losing value. This is alongside other investor protection tools being offered.

– TRGI has an investment value of PKR 26.83bn, PKR 22.26/share for TRG, as per the financials provided by the management.

We currently have a BUY stance on TRG based on our Dec’21 Target Price of PKR 250/share. The company continues to solicit more business by expanding into countries/regions like China. TRG management’s contemplation to maximize investor return with the eTelequote proceeds and reduce business complexities via future listing actions of TRGI and/or specie dividend puts the growth story and investor value maximization in the highest order.

KASB Research

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