More than a £1 billion was wiped off the stock market value of Wise last week. Why? Because it had failed to keep up with its own undeniably impressive track record. The money transfer business’s underlying income has grown over the past three years at a compound rate of 41 per cent. Now the 13-year-old business expects this to slow to somewhere from 15 per cent to 20 per cent.
Wise has grown at a phenomenal pace since it was launched in 2011, snatching market share from the big banks by offering a much cheaper money transfer service to individuals and small businesses. It operates in Europe, North America and the Asia Pacific region and has used its growing scale to continuously push down fees for its customers and to drive growth.
The company has always said that its long-term mission is to push cross-border payment fees to zero, but last week it surprised investors by saying that it would push down fees yet again in its present financial year, a move likely to hit earnings. It was the second shock for shareholders this year, after Wise warned in April that its business volume growth had been slower than expected.
And the stock market has been unforgiving. The shares have fallen by roughly 19 per cent in the year to date and are now worth less than 700p, compared with 800p when it arrived on the stock market via a direct listing in the summer of 2021.
Wise’s race to the bottom on fees could hurt its already rich valuation. However, its client base has held up well. Active customer numbers in the year rose by 29 per cent to 12.8 million. It also has built a strong industry reputation. Two thirds of its customers who joined in the past year did so because they had been recommended by another customer. Meanwhile, higher interest earned on its customer balances helped its underlying pre-tax profits to more than treble to £242 million in its financial year to the end of March. Wise also now generates about a third of its income from its non-core businesses, such as debit card interchange fees, account fees and its net interest income.
Investors should be aware that Wise has a two-tier share structure, which gives firm control to Kristo Kaarmann, its co-founder and chief executive, who owns 18.2 per cent of the stock. This structure also excludes it from the FTSE 100 share index and limits its liquidity on the market, which can exaggerate share price movements. There has been no recent update, either, on an investigation by the Financial Conduct Authority into whether Kaarmann is considered fit and proper to run a financial services business. In 2021 it emerged that Kaarmann had been fined £365,651 by the taxman for failing to pay a £720,495 tax bill for the 2017-18 year.
Wise does have form for conservative estimates followed by big beats. This time last year Wise said it expected total income growth somewhere between 28 per cent and 33 per cent, but it ended the year up 46 per cent after raising that initial guidance twice.
Even if Wise’s earnings take a hit, its lower fees should help it to cement its growing market position, especially as larger banks begin to push into the sector. This year HSBC launched Zing, a rival international payments app.
Wise could still represent a good long-term growth opportunity for investors with strong stomachs, but it will not come cheap. It is a fast-growing, profitable financial technology company and is priced as such. Even after the recent falls, Wise still trades at a multiple of forward enterprise value to earnings before interest and tax of 14. This is no bargain, but it is at a discount to its average of 19 over the past year, during which time the shares have risen by 16 per cent.
Advice Buy
Why Lower fees should help Wise to cement its market share and support its long-term growth
Fidelity European Trust
The French stock market lost hundreds of billions of dollars last week after news of a snap election triggered a sell-off. Investors are fleeing over fears that a more extreme political party may emerge victorious. In contrast, the Fidelity European Trust offers a steadier, more diverse approach to investing on the Continent.
French companies make up just over 30 per cent of the trust’s portfolio, followed by businesses in Switzerland and Germany. There are a few British companies in the mix, but they make up less than 5 per cent of the portfolio. The only British business in its top ten holdings is 3i Group, the private equity firm.
Its biggest holding is in Novo Nordisk, the Copenhagen-listed pharmaceuticals group whose shares have risen by more than 80 per cent in the past year thanks to the success of Wegovy, its weight-loss drug. This is followed by ASML, the Dutch chip maker, and Nestlé, the Swiss foods group.
The trust, which is a member of the FTSE 250, does not officially aim to provide investors with income. However, a key appeal is that the investment strategy naturally prioritises companies that pay growing and sustainable dividends as a marker of strong cash generation and capital discipline.
Its payouts therefore are slightly higher than some of its peers in the sector and the shares yield 2.1 per cent. It has increased the dividend for 13 consecutive years.
The trust trades at a modest discount of 5 per cent, compared with an average of about 6.8 per cent across the whole investment trust universe.
Fidelity European is not particularly cheap, with a tiered management fee of 0.85 per cent on the first £400 million of its net assets, falling to 0.65 per cent on assets over this point. This equates to an average management fee of about 0.7 per cent, according to an analysis by Kepler Partners, the research firm.
This seems decent value, given the trust’s outperformance against its benchmark index, the FTSE World Europe ex-UK, which it has beaten on one-year, three-year and five-year bases.
Advice Buy
Why High-quality European portfolio at a discount to NAV
