Network International (LSE: NETW) provides payment services for digital commerce in the Middle East and Africa and the flotation is designed to increase the business’ international profile and enable shareholders to cash out.

There is a low penetration of digital transactions in the Middle East and Africa, but this is set to increase as more people have debit and other payment cards and there is greater use of other forms of payments, such as PayPal. Rising smartphone usage will also prompt growth.

On top of this, forecast economic growth is strong in the region and the population is growing.

Dubai-based Network is the only company that has coverage of the whole region with competitors predominantly focused on Middle East or on particular countries. The competitors are also much smaller. Banks are outsourcing these payment processing services, and this leaves Network in a strong position I its core region.

The initial issue price range was 395p to 465p and this was subsequently narrowed to 430p to 450p. The final placing price is 435p.

The shares sold came from the two existing shareholders, which raised around £1.3bn, and the company did not raise money, but the float has cost it $15m.

This is a growth business, but the rating appears high given the £2.2bn valuation. Profit would have to grow rapidly to justify this valuation, although it could be a valuable strategic target for a fintech business wanting to expand into the Middle East and Africa.

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Network International Holdings Ltd (LSE: NETW)

www.network.ae/en

Digital payments technology

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Premium listing

Flotation date: 15 April 2019 (Conditional dealings: 10 April)

Issue price: 435p

Amount raised: nil

Expenses: $15.9m

Market capitalisation: £2,1752m

Sponsor: Citigroup

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What does it do?

Dubai-based Network has been providing digital payments services to the Middle East and Africa for two decades – originally it was an in-house payments division of major shareholder Emirates NBD.

Network is the largest business focused on the region, which is at an earlier stage of online payments development than other parts of the world. Cash is still important in the Middle East, but that is changing.

Global digital transactions achieved a compound annual growth rate of 9.1% between 2012 and 2017, while Middle East and Africa grew by 14.2% a year over the same period. However, digital transactions accounted for 14% of total transactions in the region, the lowest percentage in the world.

Only one-third of people have a bank account in the region. There are 0.3 payment cards per person, compared with 5.3 cards per person in North America.

Digital payments in the region are forecast to grow from $6.5 trillion in 2017 to $8.9 trillion in 2020. Network receives fees for the processing, etc. The addressable market for Network is expected to be worth $6.2bn in 2019.

In 2018, Network processed $40bn of transactions for more than 65,000 merchants. Network has a 19% market share in the region.

There are two platforms: Network One and Network Lite. They are reliable and secure and cover all retail channels. They use Network’s own IP including the N-Genius payment technology. The services include payment acceptance and authorisation, through to processing and settlement.

Financials

Network generated revenues of $297.8m in 2018, while pre-tax profit was $57.7m, down from $86.3m in 2017. That is predominantly due to a $17.9m impairment write-off and a sharp jump in personnel expenses, although there was a disposal gain of $2.65m.

The Middle East accounts for three-quarters of revenues in 2018, with the rest coming from more than 40 countries in Africa – Egypt, Nigeria and South Africa are most important.

The December 2018 balance sheet includes cash of $60.3m and restricted cash of $71.9m. Total borrowings were $427m. NAV was $191.7m. Network paid $64.5m in dividends in 2017 and $89.9m last year.

Nearly $191m of capital investment has been made in the past three years.

Directors

Rohinton Kalifa is chairman and he is also a director of Worldpay, having been chief executive for more than a decade. He will step down from the Worldpay board in May, following the company’s acquisition by a rival of Network. He is also a director of trade body UK Finance and sits on the board of the England & Wales Cricket Board. RMK, which is controlled by Kalifa, receives a fee of $4m when he becomes chairman and this cash – after tax – is reinvested in shares.

Annual fee: £465,000 (including up to £15,000 for private health insurance)

Simon Haslam is chief executive and he has nearly four decades of experience in the banking and payments sector at organisations including US Bancorp, Citigroup International and HSBC. Network can terminate his employment if he significantly undershoots KPIs that have been agreed between him and the board for any specific year.

Annual salary: £419,000 equivalent

Darren Pope is senior independent non-executive and was finance director of TSB when it was separated from Lloyds and floated. He is also a non-executive of CYBG and Equiniti.

Annual fee: £105,000*

Victoria Hull is an independent non-executive and former executive director of Invensys and Telewest Communications. She is also a non-executive of Rosenblatt an Ultra Electronics.

Annual fee: £75,000*

Habib Al Mulla is an independent non-executive and is experienced in UAE law.

Annual fee: £75,000*

Shayne Nelson is a non-executive and is also chief executive of Emirates NBD, having previously been chief executive of Standard Chartered Private Bank.

Annual fee: £75,000*

Suryanarayan Subramanian is a non-executive and is also finance director of Emirates NBD. He has worked at Standard Chartered and Royal Bank of Canada.

Annual fee: £75,000*

Aaron Goldman is a non-executive and a managing director of fintech investor General Atlantic. Other fintech investments he has been involved with include Adyen, Ant Financial, BillDesk, Clip and Klarna.

Annual fee: £75,000*

Daniel Zilberman is a non-executive and he leads Warburg Pincus’s European investment activities.

Annual fee: £75,000*

*Additional fees for chairing or serving on board committees.

Shareholdings

The two pre-flotation shareholders Emirates NBD Bank and WP/GA (Warburg Pincus/ General Atlantic) are selling shares. This will reduce EBD’s shareholding from 51% to 24.2% and WP/GA’s stake from 49% to 23.3%.

Mastercard Asia/Pacific was the cornerstone investor in the flotation having acquired a 9.99% shareholding.

Rohinton Kalifa is the only director with a direct stake. He will have a 0.12% stake after reinvesting his $4m fee, excluding tax, at the time of the flotation.