Markets are efficient only in the eyes of theorists. But they are still better at pricing shares than chief executives, bankers or financial scribblers. Payments business Wise lives up to its name with plans for a direct listing, which avoids a share offering. Price formation will result from many small transactions, not fevered spreadsheet jockeying.
The market is still likely to overvalue Wise by metrics relevant to mature businesses. But shares in start-ups are a bet on their potential to disrupt established industries. They do not offer a yield play for income funds. Investors really care whether the proposition is compelling.
Wise certainly appeals more than Deliveroo, whose shares trade 34 per cent below its mispriced April float. It has a stronger business model than the lossmaking meal delivery group. Wise makes profits thanks to low overheads on every new customer using its TransferWise app to move money across borders.
The group, a fruit of London’s fintech start-up scene, has growth potential. It handles just $75bn of global payments worth $2tn yearly. It aims to undercut banks that pad returns on money transfers via skewed exchange rates. The group claims to be up to 12 times cheaper.
Investors must take much on trust in the complex payments industry, as the scandalous collapse of German group Wirecard showed. Wise’s large consumer business should give it greater transparency, however.
A quotation in London, which plans to permit dual-class shares for premium-listed groups, should help too. Most current Wise shareholders will hold half of their stakes in single-vote A shares. The other half will be in B shares bearing nine votes each, subject to a five-year sunset clause. The exception is chief executive Kristo Kaarmann, whose entire 20 per cent holding will be in B shares.
Larger peers such as Adyen and PayPal trade at about 15 times trailing sales. That would value Wise at more than £6bn, or 55 times trailing adjusted ebitda. Wise targets annual sales growth and margins of 20 per cent. This would put the group on a more palatable 30 times ebitda multiple on a five-year view.
The high valuation of payments groups makes their shares vulnerable to rate rises, according to Redburn analysis. Even so, investors should not sit out the disruptive land grab in payments. Wise will be a stock they should consider — once the market has worked out its worth.
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