Recently-listed microfinance firm Zaim Credit Systems (LSE:ZAIM), which provides credit for underserved retail consumers in Russia, produced mixed results in its trading update yesterday. The stock did rise 13pc to 3p on the mid, but it feels like the company is at something of a crossroads.
Zaim provides short-dated microloans of up to 30,000 roubles (£366) in cash and on branded bankcards through its Russian subsidiary Zaim Express, with 95 sites in Moscow. These loans have an average maturity date of just 20 days.
Zaim reported that trading throughout the year “was hampered by the lack of available liquidity”, because the group went public a year later than planned, and because it restructured historic bonds, suggesting the company undertook significant borrowing to get them to this stage.
That said, Zaim added that it had renewed until 31 December 2020 a May 2019 loan facility worth £365,000 agreed with Noah’s Ark 500 (a brief search conducted on Monday 27 January did not turn up any information on this company, by the way), to provide additional liquidity should Zaim need it.
The relatively small size of its loan book, at just £630,000, has not aided the firm in this cause and, while there are plans to add £1.2m to this total over the next six to 12 months, Zaim is a tricky one for investors to value accurately, in my opinion.
There has not been a significant amount of retail interest in the shares, as evidenced by the wide spread, with a bid price of 2.3p and ask of 2.98p at Friday’s close. Trading volume has also been fairly light.
The board argues that the company is “performing well, in line with management and market expectations” while admitting that its credit scoring system needs work. However default rates on its small short-term loans apparently have seen “a steady improvement since the beginning of 2019”.
Zaim founder and CFO Simon Retter is an experienced Plc director. He has held or holds positions at 22 limited companies, including finance director at NEX-listed SulNOx Group (LSE:SNOX), Malaysian closed-ended fund Vertu Capital (LSE:VCBC) and, perhaps most famously, CFO and Secretary of Brazilian nickel developer Horizonte Minerals (LSE:HXN).
Zaim raised £2.6m through its 4 November 2019 IPO. The shares initially spiked 50% to an all time high of 3.75p, but have since sunk back towards the initial price. While at last count the shares are still trading at 3p (fairly comfortably above the 2.5p IPO price), the fact that Zaim is loss making is a concern.
Zaim says its largest area of growth potential remains in a moving away from physical stores to approving lending online, which removes the requirement to undertake anti money laundering checks in person. The company says it saw a significant 427% uptick in total loans granted from £18,000 in October 2019 to £77,000 in December. However, this growth rate will likely need to continue for a number of quarters if it is to have a material effect on the share price.
All of this adds up to this conclusion: I would be wary of making a significant investment in Zaim as it stands, until the company can prove it is profitable, it starts to attract better liquidity so investors can more easily move in and out of positions and its expansion is not affecting the quality of the customers it takes on.
If the company can put its IPO funds to good use then there could be plenty of upside on the table, but Zaim will need to demonstrate improved performance on all three fronts.