Multitude initiation of coverage: Profitable growth by serving overlooked customers

We initiate our coverage of Multitude with an Accumulate recommendation and a target price of EUR 5.7 per share. Multitude has returned to profitable growth after a few difficult years, and we expect the company to continue on this path in the coming years. In view of this, we consider the valuation to be low and the risk/reward of the stock to be attractive.

Digital bank serving overlooked consumers, SMEs and other fintechs

Multitude (originally Ferratum), a Frankfurt-listed digital bank established in Finland, offers lending and online banking services to consumers, SMEs and other fintechs that are overlooked by traditional banks. Multitude operates in 17 countries and through three business units: Consumer Banking (Ferratum), SME Banking (CapitalBox) and Wholesale Banking (Multitude Bank). Consumer Banking is clearly the largest segment in terms of net interest income and loan portfolio. Due to its more mature phase, its growth prospects are also more modest than those of the other segments, but it is responsible for virtually all of the Group's profits. SME Banking remains loss-making, and improving its profitability through increased scale is a key focus. Wholesale Banking, the newest business area, has demonstrated promising growth and is already profitable.

Loan portfolio is riskier compared to other digital and traditional banks

Multitude is profiled as a high-risk, profitably growing digital bank. Its loan portfolio carries significantly more risk than other Nordic digital banks due to its focus on unsecured loans and its target customers. This is reflected in high net interest income and high impairment loss percentages, although both have been trending down as the company has gradually shifted to lower-risk, lower-yield customers.

Guidance expects strong earnings growth to continue in the coming years

Multitude had a good track record of earnings growth prior to 2019 (also with high ROE-%), but the COVID-19 pandemic proved challenging for the company (decreased demand for credit and tighter credit policies by Multitude). While earnings have recovered significantly, they haven't yet reached previous peaks. Multitude's guidance targets a net profit of 23 MEUR in 2025 and 30 MEUR in 2026, implying very strong growth from the current estimated level of 17.5 MEUR for 2024. Our estimates currently assume that the company will meet the 2025 guidance, but miss the 2026 guidance. The key drivers of earnings growth in the coming years are improved economies of scale (lower cost/income ratio), slightly lower impairment loss-% and easing headwinds from higher funding costs.

Risk/reward ratio tilted to the positive side

As Multitude's business is similar to that of a bank, the valuation must also be viewed from this perspective. In our view, the acceptable P/B for Multitude is currently in the range of 0.7-1.0x, derived from assumptions about sustainable return on equity and cost of equity. Treating the perpetual bonds on the balance sheet as debt, Multitude's current P/B is 0.7x, which is at the lower end of the range, suggesting a modest valuation. Our dividend discount model also suggests upside potential. Compared to its peer group, the valuation is relatively neutral, but the peer group itself trades at relatively low multiples. In return for the rather high risk profile, the expected return is good at the current valuation and we see the risk/reward ratio tilted to the positive side.