Jul 2024: Wise Plc – Mr Market’s archenemy

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Wise Plc – Mr Market’s archenemy

July 2024 (756p)

 

Those wanting an introduction to what Wise plc does and Holland’s assessment of its operations line by line will be disappointed by this piece. We love finding new ideas, researching great businesses and thinking hard about the models they use. Our days of regurgitating much of what such companies spell out in their financial reporting is however behind us.

We are delighted that our research readers have become highly knowledgeable investors in their own right – they now know what we seek. As a result, this piece is for those already well versed in our approach/writings. We start with a word on the importance of pattern recognition. We then share a small businessman’s story of FX frustrations. Finally, we make some observations about Wise including a discussion of Mr Market’s archenemy… deferred gratification.

Pattern recognition

More and more we see this job as pattern recognition. Having studied hundreds of businesses, we now know what we are looking for pretty clearly. If we have to work too hard to polish the rock in front of us, chances are it is not a diamond. Precious stones tend to be obvious quite early on to the trained eye. That was our assessment when looking at Nubank earlier this year and we are delighted to report that we are coming to a similar conclusion on Wise plc.

Available on request are Wise’s last two R+A with our scribbles all over them. We could spend a week lifting many of the right messages out to craft a 30-page note recommending the share, but we will resist. Instead, we will shortcut the process and recommend readers look at these documents and listen to the company’s results call here themselves. Hopefully you will quickly read/hear many echoes of Holland past work on lowest cost producers. Also, on ‘Counter-positioning’ and ‘Scale-Economic-Shared’ business models. Much of what we have observed in our Netflix, Amazon and Nubank work we think is very relevant to any assessment of Wise. A few appropriate extracts from these pieces are shown below.

Counter-positioning

Sometimes it is hard to remember where you first heard something. We had read about counter-positioning before reading 7 Powers, but the book’s work on it we thought useful. We have certainly seen a great deal of real life counter-positioning via the challenger businesses we follow in Ryanair, JDW, Amazon, Schwab etc. 7 Powers articulates well the common traits that these businesses often display and how they impact incumbent players. Helmer brilliantly refers to the five stages of how incumbents react to counter-positioning. They are listed below:

1. 1. 1. Denial
      2. Ridicule
      3. Fear
      4. Anger
      5. Capitulation (frequently too late) Source: 7 Powers, Hamilton Helmer

These are excellent and so true. Your author as an ex-airline analyst saw these close at hand when British Airways or Lufthansa was often asked about Ryanair in its early days. Denial and Ridicule were common. With Ryan’s intra-EU market share now at 16%, such companies are at the capitulation stage! Whilst we did not hear Blockbuster answer questions about early-stage Netflix, we can only imagine their replies were similar. Denial, Ridicule, then in their case bankruptcy.

Power Progression

The second area of Helmer’s work we think appropriate to highlight for Netflix is what he describes as ‘power progression’. This is his way of thinking how a Sustainable Competitive Advantage (SCA) is being developed. Holland’s approach has been to look for a SCA of some form and also the presence of owner managers. Helmer links the two. For many years now we have watched great owner managers innovate and pivot businesses. Helmer rightly describes “Innovation as the first step to gaining some sort of power.”

Whilst this is not rocket science it is a useful mental tool as we see the best owner manager’s change and adapt to new market positions. What they of course are looking for is a SCA in the future environment. We have now seen more than a few owner managers make such transitions. We have also seen Mr Market often terrified of the potential consequences during such a period of flux. (Next moving online, Facebook’s Meta/AI investment, Frasers stopping discounting++).

Source: Holland Advisors: Netflix – The Discovery Channel, April 2023

A Snowball…

An investors job in such a situation is not to re-invent the wheel. Instead, it is to assess whether the business in front of them is powerful and if so, to then think logically about what might happen next in its rollout. To be considered a “Snowball” in investment terms you need to possess a few traits that make the superiority of your business model over peers self-evident. Not exclusively these traits will likely include:

• • • Lowest unit cost
    • Differentiated product
    • High customer centricity
    • A financial model that affords growth (i.e. good ROIC)
    • A visionary owner manager that knows what levers to pull

More succinctly put you need to be a horse (business model) of an exceptional standard who is being ridden by a great jockey (manager).

Source: Holland Advisors: Nu Holding – A snowball at the top of a long wet hill, June 2024

Imagine an amazing dinner party

Imagine an amazing dinner party. Seated around you are Peter Lynch, Jim Collins, Nick Sleep and Phil Fisher. Charlie Munger is of course at the head of the table. These are the giants on whose shoulders we stand and often we reference our learnings from them. As you join us researching Wise, imagine these five only discussing Wise Plc for an hour or two. Each, we think, would find a powerful trait to like about it…see if you can spot all five. Oh! and Hamilton Helmer popped by too!

A Story

Here is a story of frustration and opportunity.

“I am better businessman because I am an investor and better investor because I am a businessman” Warren Buffett

Your author started his own company many years ago now (c.2008). In doing so he became a sole trader in an industry where almost all his peers worked for large organisations. This (very) small company status allowed the true analytical independence he sought, but it came with a great many other frictions. Compliance, Companies House registrations, accounts, payroll and VAT are just a few. Business banking and FX are another. Holland Advisors is Sterling based but receives and makes payments in US dollars (e.g. Bloomberg only accept dollar payments from UK clients despite charging c.£30k pa!) Separately from his day job your author is lucky enough to have personal investments overseas and a house in France (with a Euro mortgage). This means he has lots of insights into currency transfers in the personal and small business banking areas.

Small business banking has many hidden fees and frictions around FX. What is particularly galling is that true FX spreads are tiny, and the cost of execution is virtually zero. As such bank charges in such areas are just them gouging their sticky customers for providing what is actually a risk-free service. All banks only really want your main small business account, and even your core bank will often not offer a deposit or a non-home currency account. (We asked ours a few years back for a dollar account. They just said ‘no’). If banks do offer extra accounts, these can come with sizeable charges. Companies like Caxton exist and can be used for better FX rates, but this means that transferred monies are either not coming from or being delivered to the small businesses/individual’s account. As a result, those (other banks) making or receiving payments will often not accept them from an intermediary (like Caxton) whom you are using to save on FX spreads. The result is that you are forced to accept and make payments from your local currency, thus incurring inflated spread and fees.

Interestingly the same restrictions exist more and more at the individual level also. Two years ago, your author sold some US$ based shares with a wealth manager. Planning to invest in something else in Dollars he asked the wealth manager to transfer these monies into a personal Dollar account (which had taken him quite a while to find and open!). The wealth manager refused – despite all investments and bank accounts being in the authors’ name. The reason given: “There is only one bank account nominated to these investments and that is the Sterling one”. The result was your author incurred two expensive Dollar/Sterling FX transactions to appease money laundering/wealth manager imposed rules.

The same money laundering rules were given when you author tried to repay part of a Euro mortgage. His domestic bank refused to disclose the rate (or spread) they would offer until he started the transfer. Additionally, the receiving bank insisted he prove (for money laundering purposes) where the funds had come from. They would then only accept delivery from that source, i.e. the Sterling account.

In short, your author is fee aware when investing or using banking services both in his business and personally. Particularly so when using services that he knows are zero risk and zero cost to the bank (FX vs say a personal loan).

Whilst he is lucky that the investment sums in his home and business life are larger than they were vs say 20 years ago the level of friction he incurs is enormous and far greater than the past. (e.g. 20y ago NatWest enabled him to have personal Euro and Dollar accounts for no charge. NatWest closed all of these in its post-2008 cutbacks).

We suggest personal/small business banking FX frictions are likely due to:

• Tough money laundering regulations that make life logistically much more difficult for ordinary citizens and the banks
• Banks/wealth managers, who have seen other profit pools disappear, being canny about protecting others (of which Treasury and FX are less visible to the client)
• Domestic banks/wealth managers with sticky customers have not sought to help clients with the issues that arise from FX and money laundering. Clearly, they see such rules as a way to re-enforce the status quo to protect risk free profits made at the customers’ expense
• Existing banks use old, slow, expensive systems and don’t specialise in FX thus have low volumes making them doubly inefficient
• It is interesting that in a world of digital banking, FX functionality at big banks is worse than it was 15 years ago
• Clearly into this void companies like Revolt, Monza and Wise have found easy pickings

Imagine

Part of this investing job is jumping forward a decade and imagining what life, businesses and customer experiences will be like. Then working your way back from that. (NB: It is crucial that any such future assessments are based on a logical extrapolation of today’s offerings rather than crystal ball gazing). Investor experience in the last decade in sectors like entertainment (Netflix) and online shopping (Amazon) are good examples of this need to ‘imagine’. Ten years ago, extrapolating the future of such industries and companies was not an easy task, but it was possible. It was this type of thinking and a little pattern recognition that led to our recent enthusiasm for Nubank.

Here is a business offering a Mexican deposit account with 15% interest rate vs competitor offerings at 4% (Base rate is 12%). Whilst in time Nu’s deposit rate will likely fall to 8-10% it will still dwarf what incumbent banks are offering. It is doing this using its scale and very low unit costs, sharing those with customers via generous deposit rates. Whilst many might see this as unproven Nubank won 80m Brazilian customers using this disruptor model. This suggests to us something new and powerful might be emerging. By their droves, and word of mouth customers are flocking to it.

Our enthusiasm for Nubank is that we can see a potential revolution in its customer offering vs sleepy, fat banking incumbents – who for years used customer stickiness to maximise profits.

Enter Wise Plc

Everything we have read about Wise as we have researched it, suggests something similar is happening here also. If Nubank is tackling the inflated branch cost structure that customers no longer wish to pay for, Wise is targeting the greedy risk-free, opaque FX pools of profit that banks quietly pocket at the expense of their loyal customers.

This company was founded by those who experienced the same unnecessary costs and friction we have in riskless home and work FX transactions. As a result, they set about trying to:

1. Reduce the friction of such transactions by building their own (now hard to replicate) network
2. Reduce the cost of such transactions, passing on their economies of scale where they can in ever lower fees charged to customers (see recent price cut)
3. Embarrassing the main banks by highlighting the hidden spreads and charges they make. In contrast making their own fees super-transparent off middle market FX pricing

This is classic disruptor behaviour. Wise looks to be a classic ‘7 Powers’ counter-positioning disruptor, who is building a powerful a hard to copy scalable network. They look already to be one of the lowest cost providers of FX. Also, they are passionate and determined to use the economies of scale their model has created to share with customers lower prices and better services. This evolution of the business model is the power progression we wrote about in our Netflix piece. The company is moving from one Sustainable Competitive Advantage to another as it grows.

Disruptor > Network Economics > Scale Economics Shared

We have written much on all these traits and hope those reading up on Wise find them self-evident quite quickly.

Deferred gratification

Its obvious that deferred gratifiers do well over the long pull, versus those impulsive children who have to spend on Rolex watches, or other folly.

People are either born deferred gratifiers or they are not, and recent scientific work has been done to prove that. Charlie Munger: https://www.youtube.com/watch?v=-QobRyiXFl4

We will not discuss our views on deferred gratification once again. What we will say is how clearly it was on display in Wise’s recent results presentation. The company talks openly about the winners in the FX space being those with best and biggest end network.

“The market leader over time will be the provider of the cheapest, fastest, most convenient service with the broadest coverage. This will only be achieved by building the best global infrastructure, so we will continue to re-invest every year” Kristo Käärmann, Wise CEO and Founder, June 2024 analyst meeting

When asked about price elasticity the company are happy to accept that they do not know what it is like in the short term, but longer-term price reductions are the lever to drive future growth.

• “We see the biggest driver of the business as new customers…
• “The biggest driver of new customers is word of mouth/recommendations…
• “and the biggest driver of recommendations is the fact that we are so much cheaper and more transparent than the banks or anything else that is available”

Kristo Käärmann, Wise CEO and Founder, June 2024 analyst meeting

The company is giving back to customers almost all the recent operational gearing its network has delivered. This is evident in:

1. The price cuts it just announced for FX transactions
2. The guidance it has reiterated with investors for 13-16% future underlying PBT margins, i.e. much lower than those just reported (c.40%)
3. That its long-term revenue growth of 15-20% is net of price reductions, i.e. it expects volume to grow at a faster level, but ongoing price reductions will reduce reported revenue growth
4. Its actions on current accounts to pass back to customers the bulk of interest Wise earns on their balances.

For a banking sector analyst all this giving away of profits might be hard to comprehend. Indeed, why on earth would a company give up jam today for an uncertain future level of growth. Especially when optically, there is no improvement expected in future growth as the company has not changed the forecasted growth rates it still expects….? We think we know the answer to that open-ended question. Such re-investment ensures future dominance and crucially a lack of fade in the growth rate. These two traits we see often in our best Scale Economy Shared businesses.

Lack of fade

“…the fact that a firm is quite large already does not necessarily tell you that its growth rate is set to slow. The widely held presumption that regression to the mean begins the moment the analyst picks up their pen, risks being wrong footed as a result” Nick Sleep, Nomad Partnership letters

The lack of fade in growth is the unseen powerful driver that never makes it onto any analyst forecast of a growing business, despite such company’s re-investment for that exact purpose.

This we think is at the forefront of Wise’s owner-manager minds when they chose to reduce profit margin forecasts to again further reduce customer prices. Mr Market clearly did not see things that way which its why the share price fell. Valuation aside, this suggests to us opportunity as the wider investing market clearly doesn’t understand the re-investment model the company is pursuing. Ergo, it also doesn’t understand the likely ongoing high levels of sustainable growth that such a course of action points toward.

Operational gearing

Markets love positive operational gearing (i.e. when more profits end up being made for the same level of sales). By contrast they hate investment periods that reduce profits, often marking the shares down as they did with Wise a few weeks back. Whilst some profit falls resulting from investment are genuinely bad news, others can be the opposite as today’s profits are being reinvested clearly to drive loyalty, a differentiated product/service and thus ultimately more growth in the future.

Those who feel inclined can overlay Amazon’s EBIT margin onto its share price chart. For all of investors detailed understanding of that company, its shares are still marked down every time an investment phase comes along (2013-2015 or 2021-2022). As Munger says ‘it is really hard’ to get the deferred gratification idea in your head; either you have it, or you don’t. Those that do think on different time frames often make outsized gains when the delayed end point finally arrives.

To listen to Wise recently explain why it is reducing prices and the analyst questions that followed was fascinating. As we stated above this is clearly a company that understands the outsized gains that will be made by the dominant future network in this sector. To have the greatest chance of Wise being that company, now is clearly a time to invest, thus ensuring a powerful cycle of more scale, lower unit costs, and more potential re-investment. Many investors and analysts seemingly just want jam today.

An important long-term understanding for Wise investors we think is to realise that it will probably not always be this way. Investment today and for the next 5-10 years is right if building an unrivalled FX network. But we suggest it will create positive operational gearing that will be too great one day to all be re-invested.

As a precedent for readers to consider we show Netflix’s historic EBIT margins below. After decades of investing to establish a dominant industry position, powerful operational gearing has now emerged. This is shown below and in the recent Q2 results that reported a 28% EBIT margin! This is occurring whilst delighted customers still feel they are getting great value. High gross margin network businesses that end up dominating their space with scale end up being high EBIT margin businesses we observe. But the best, most resilient ones are very, very, slow to get there. Wise gave us just a glimpse of this future operational gearing in March 2024 with 40% margins!

Fig.1: Netflix historic EBIT margins

 Source: Bloomberg

Network power

Whilst no two businesses are the same, Wise reminds us of Netflix a little. The network build is crab like, part owned, part third party. Third party functionality (Netflix bought in content?) is a way to give customers what they need today. A developed owned network, that has end-to-end connections as Wise has established in countries like UK, Australia and now Japan, is time consuming and hard to build. But it creates a more powerful long-term customer offer and a more powerful, scalable low unit cost network. One that is also resilient to outside challengers (analogous to Netflix In-House content?).

We think the fact that Wise now has many partner banks who are using its wholesale platform is a telling revelation. Clearly these banks know this industry well and have concluded that Wise is a better, cheaper alternative to the existing networks they used before. This platform arm of the group also gives it potential massive leaps in scale, thus lowering further unit-costs. This is a powerful scale driver that the likes of Monza or Revolt, if only retail customer facing, cannot match.

Why here?

As an aside we think it interesting that all these FX businesses have been built in Europe/UK. The USA is a wonderful market to expand a business in, but it does not have a money transfer problem. Europe does, especially with many overseas workers from inside or outside the EU/UK. As we observed in our story above, money laundering type regulations have been used to re-enforce many of the barriers to entry/innovation that were already in place. In short Europe needed a money transfer solution 10y ago, so a few emerged. Who dominates ten years from now however we think will be a function of:

• Who achieves greatest scale to ensure the lowest unit-costs
• Who re-invests the most offering best service and value
• Who solves customer problems (like money laundering)
• Also, who consumers end up trusting the most.

From our limited work on Wise and its competitors thus far, Wise score highly on these metrics.

In the many podcasts we have listened to with the founders of Wise being interviewed a few other points emerged. The first was customer trust.

Trust

Wise very early on stumbled across the importance of fee transparency, i.e. it was not about the absolute cost of an FX transfer for customers, it was that the banks were hiding these costs in fake FX rates. They still are! By disclosing spot rates and fees separately the company has built great customer trust. Its ongoing fee reductions clearly re-enforce that further. Its actions now to return c.80% of account interest income to consumers will add another level of trust we suggest.

Wise was founded by Estonians. It was a new country (post USSR break-up) with new digital banks and a well-functioning mobile telco network. Unlike established EU countries it did not have a long-in-place banking system that needed to be bypassed. As such the founders could see how the FX transfer system could and should work. This reminds us of the work we did on Spotify – how Scandinavia’s huge early investment in home computer and fibre networks laid the foundation for music streaming’s development and ultimately Spotify’s early mover advantage.

Jim Collins meets Phil Fisher

Attached to this note is our one page summary of Built to Last, by Jim Collins. The cultural traits he outlined are powerful and clearly visible when researching Wise. The company is mission led with a strong core ideology and clear staff buy in:

“Everyone who joins has to be aware that this is what they are getting involved with” Kristo Käärmann, Wise CEO and Founder

There is also some interesting product evolution happening at Wise. Some years ago, we studied Next through Phil Fisher’s eyes, noting the importance of internal innovation (Online, Label, Total Platform). “Can a business build new growth legs organically?” This was the question Phil Fisher asked of a growth company some 60 years ago. The same question is still very instructive today.

Wise’s expansion into accounts, cards and a wholesale platform are all new in the last few years. All look to be powerfully resonating with very different customer bases (individuals, small business and large banks) and doing so across many geographies. Each of these products and their potential reach is exciting to consider. What is more impressive still is the innovation culture that saw each emerge and grow. We think Phil Fisher would approve.

Fig.2: Wise Plc. A Truly global company

Source: Wise Plc Investor Presentation, June2024

Such innovation and breadth of product offering by client and geography we think have some powerful impacts on the sustainability of growth. In turn this has implications when investors assess the price they might pay for such a company.

A ‘real’ Robin Hood account

The specifics of how Wise has approached the economics of its client accounts we think interesting and further revealing of its culture. This NIM investment line was not one the company foresaw at its flotation only c.3years ago as interest rates were so low. However, that changed post-global interest rates rising. Rather than pocketing the resulting interest income Wise earns on cash customers are happy to leave with Wise, it has found a targeted way of sharing these economics with customers. Wise will keep the first 1% earned on clients’ assets to cover costs. After that it will split the rest 80/20 in the customer’s favour. As a personal and business banking customer this is just remarkable to read. This company is trying to save me money in the annoying/expensive world of FX transfers (both large and small). They now also will share with me the economics they earn from my money held with them. The is Scale Economics 101.

Fig.3: Wise Plc 2024: Profit pools and re-investment – much more to come

Source: Wise Plc Investor Presentation, June 2024

Our excitement for Nu Holdings comes from seeing them deploy the Scale Economy Shared model in Brazilian and Mexican banking markets and the long-term resulting in customer wins that we think will come from such actions. Wise is doing exactly the same thing in its FX fees and bank accounts. In time we think customers will love such actions and will reward the company handsomely with strong growth.

That the company had to think about its financial model in a whole new way to manage and reinvest these free profits that turned up when interest rates rose is impressive. It speaks to a nimble management team, that is hungry for innovation, but true to its customer centric core principles. That such changes make the company a little harder for analysts to model we welcome as we think that can create an investment opportunity.

Fig.4: New layout – same SES story!

 Source: Wise Plc Investor Presentation, June 2024

We are pleased to see the company invest heavily in network development, product R+D, customer service and of course lower prices. Analyst questions seeking to model near term operational gearing miss this point – badly.

Evangelical customers & investment

Two thirds of the company’s new customers come to them by word of mouth. We have often repeated that we like companies who want to ‘delight customers’, creating ambassadors for themselves. Wise clearly already has that status.

Fig.5: Evangelical customers do all the selling

 Source: Wise Plc Investor Presentation, June 2024

Evangelical customers are very different to those who get some sort of kick back from a referral. Wise has the former with word of mouth spreading about how cheap/good its service is. Often such word of mouth referrals happen in a single country. For Wise to be experiencing this globally points to how well its offering travels and resonates. With this and customer experience in mind the company is rightly focused on investing hard and clearly trying to make sure new customers that discover them are wowed and the word of mouth referral cycle keeps turning.

Truly global

Wise today now offers great value innovative products and is profitable on a global scale. These are powerful drivers when combined and we think extrapolatable (#ref Peter Lynch…). Investors will see many businesses with large TAM’s and small current market shares. Rarely are these market shares truly global in spread we observe. Wise is Proven, Profitable and Probably likely to keep growing with good returns from here. Some UK, US based investors, might not see the enormous friction that still exists in money transfers in almost all emerging economies. Wise could be a very powerful network for such economies poised for strong secular growth.

Wise Plc’s earnings power

Wise reported PBT of £481m (PAT of £355m) in the year to March 24. It also disclosed underlying revenue and PBT of £1,176m and £242m respectively for an implied 21% margin. With more price re-investment occurring post year end, this underlying PBT margin is guided to be 13-16% in future years. Underlying revenue is also guided to grow 15-20%.

These growth and margin measures having not changed since the IPO in 2021. The share price fall that followed was investor’s reaction to the company choosing to re-invest its huge operational gearing back into the business rather than pocket it. This, we think, is Mr Market vs a Deferred Gratification fight in real time! Indeed, the difference between a 41% PBT margin (£481m) and a 13-16% is a huge gap.

How we think about Wise’s long-term earning power

Wise could easily carry on with the high profit (41% margin) model and still be successful. The investment it is making is thus highly discretionary, but clearly being undertaken to ensure strong future growth. It is also being made by highly aligned long-term focused owner-managers. They clearly see such investment as accretive to the business’ intrinsic value. That said they are not dreaming up faster volume/new customer growth rates to justify such spending even if they think them possible. The periods of higher margins Amazon made in its past (c.5% in retail) and of depressed margins during heavy investment are instructive. The higher margins can be a useful look through benchmark of what such businesses can earn in a more steady-state environment, nearer end games of scale.

We showed earlier what is now happening to margins at another network asset that has found a true scale advantage (Netflix). We would also note that Wise, as a high gross margin digital only business in time will very likely see high operating margins also. The year end March 24 was just a taste of that before the investment spigots were turned back on. Indeed, the company openly admit to the business having significant operational gearing when at scale.

Wise’s account policy of returning 80% of interest income over 1% we think a brilliant innovation and could be very powerful in driving future growth. We also think it will provide a constant boost to the group’s reported profits over and above the underlying profit they are targeting. We will discuss this issue with the company, but for now think the 6% (£73m) lift in PBT margin in March 24 that came from its 20% share of interest income a useful guide. If an investor thinks interest rates are now at/near new normal levels (as we do) then this additional earning will be a constant feature for the company.

Some numbers – Earnings power 1

Simplistically therefore we will pick the following metrics on which to assess Wise:

• 25% pa revenue growth as we think volume growth will be stronger than forecast
• 15% underlying PBT margin (company range of 13-16%)
• +5% boost from ongoing excess interest income
• = Look through PBT margin of 20%

Using these metrics and looking out to March 26 and March 27 after a 25% tax rate, results in net income of £275m and £345m respectively. (£1.17bn x 1.25 x 1.25 x 20%/0.75 = £275m).

In turn resulting in PE’s of 24x and 19x (if we knock off £1bn of excess cash from the £7.7bn M.Cap). Arguably this is a reasonable proxy for the sort of profit numbers the group might actually report on these dates, albeit we have picked a faster growth rate to try for a little more realism we think.

Some numbers: Earnings power 2

But like a Netflix, or Nubank, should we not make some adjustment for our belief that one day, end game margins will be higher. It is clear the group is investing very heavily. Price cuts and 24% of staff (£100m) working in product development are clear evidence of that.

As such we observe:

• Considered vs the £481m profit just reported the company is valued at 18x PE ex-cash
• If in March 26 and March 27 we used a 30% look though PBT margin, rather than our 20% one the resulting PE’s would be 19x and 13x respectively

Another way to consider the company is through our ‘Put up more to make more’ model (PUMTMM) or Supernatural Compounder lens. The company just reported a Return on Equity of 42%. The year before it had an ROE of 22%, when its reported pre-tax margin was at 17%, i.e. closer to its longer-term underlying target. This suggests its likely earnings power in ROE terms, in the coming years could be somewhere between these two levels. As such the group might earn an ROE of 20-30% and compound at that rate.

Crucially the company has both the products, customer trust, geographic reach and management team to keep deploying more capital at equivalent rates. I.e. it has very very long runway of potential growth ahead. Indeed, when the company was recently asked about capital allocation and dividends by an analyst, they responded that they saw ample opportunity to reinvest all cashflows back into the business for a long time. We agree with both this course of action and welcome the mindset that drives it.

Valuation – Art not science

“Price is what you pay – value is what you get” Buffett

Our thinking following all this is as follows: Wise shares look to be trading somewhere between 15-25x the best guess we can make of the group’s look through earning power c.2years from now. That is the price we are being asked to pay.

Whilst no bargain we don’t think this price is outrageous vs the value we get in return. We will own a part share in a powerful disruptor business model that exhibits almost all the traits we seek. Multiple sustainable competitive advantages, aligned owner managers with a drive for growth and passion for innovation and powerful re-investment opportunities. All this with a starting ROE of 20-30%. As such c.20-25% pa growth in annual intrinsic value look very plausible, rather than rose-tinted.

We remind readers of the observations we made in our super-natural compounder piece. If look though multiples hold for ten years and a 20% grower can keep deploying capital at that rate, your investment is worth 6x what you paid for it today in 2034. At 30% its worth 14x today’s value.

For the chance to be part owner in such a compounding machine we are very happy to pay today’s starting prices. This is our first assessment of Wise plc having only looked at the company for a few weeks. We have much more to learn, we are sure. However, like Nubank we might decide to keep learning whilst being an owner, rather than just an observer…

With kind regards

Andrew Hollingworth

The Directors and employees of Holland Advisors may have a beneficial interest in some of the companies mentioned in this report via holdings in a fund that they also act as managers to.

Disclaimer

This document does not consist of investment research as it has not been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Therefore even if it contains a research recommendation it should be treated as a marketing communication and as such will be fair, clear and not misleading in line with Financial Conduct Authority rules. Holland Advisors is authorised and regulated by the Financial Conduct Authority. This presentation is intended for institutional investors and high net worth experienced investors who understand the risks involved with the investment being promoted within this document. This communication should not be distributed to anyone other than the intended recipients and should not be relied upon by retail clients (as defined by Financial Conduct Authority). This communication is being supplied to you solely for your information and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose. This communication is provided for information purposes only and should not be regarded as an offer or solicitation to buy or sell any security or other financial instrument. Any opinions cited in this communication are subject to change without notice. This communication is not a personal recommendation to you. Holland Advisors takes all reasonable care to ensure that the information is accurate and complete; however no warranty, representation, or undertaking is given that it is free from inaccuracies or omissions. This communication is based on and contains current public information, data, opinions, estimates and projections obtained from sources we believe to be reliable. Past performance is not necessarily a guide to future performance. The content of this communication may have been disclosed to the issuer(s) prior to dissemination in order to verify its factual accuracy. Investments in general involve some degree of risk therefore Prospective Investors should be aware that the value of any investment may rise and fall and you may get back less than you invested. Value and income may be adversely affected by exchange rates, interest rates and other factors. The investment discussed in this communication may not be eligible for sale in some states or countries and may not be suitable for all investors. If you are unsure about the suitability of this investment given your financial objectives, resources and risk appetite, please contact your financial advisor before taking any further action. This document is for informational purposes only and should not be regarded as an offer or solicitation to buy the securities or other instruments mentioned in it. Holland Advisors and/or its officers, directors and employees may have or take positions in securities or derivatives mentioned in this document (or in any related investment) and may from time to time dispose of any such securities (or instrument). Holland Advisors manage conflicts of interest in regard to this communication internally via their compliance procedures.