April 27, 2022 (MLN): It took some time to get the Pakistan Stock Exchange’s much-touted Growth and Enterprise Market board off the ground but the listings are finally picking up pace. First it was the Pak Agro Packaging and soon after the Universal Network Systems Ltd (BlueEx) that raised PKR 198 million and PKR 446m, respectively. Now, it’s Coeus Solutions looking to secure PKR 1.05-1.47 billion with floor and ceiling prices of PKR 210 and PKR 294, diluting 16.67% of the post-issue equity.
So let’s jump straight into the business. An Information Technology company founded in 2008 and incorporated in 2013 by two LUMS alumni, Ali Naqi Shaheen and Muhammad Ahsan Naseem, and based out of Lahore and Berlin, Coeus’ unique selling point throughout the information memorandum is that it caters to Germany, which has remained largely untapped by the regional players as an export destination. As per the IM prepared by KTrade Securities Ltd, the adviser to the issue, 2% of Pakistan’s total IT exports over the years have been to Germany, clocking in at a dollar value of $40m in FY21.
But by choosing a niche, Coeus has limited itself to a minor fraction of what the overall opportunity represents. Why do that? “If you look at Germany, or the European market at large, it’s relatively easier as you can enjoy better margins here which has other effects, including more cash to be spent on research and development or carry out consolidation. On the other hand, the US market has too many players that adds to the price pressures,” reasons Mr Shaheen.
Over the past two years, Coeus has shown impressive growth as its topline CAGR for 2019-2021 stood at 35% while gross margins were north of 60%. A significant driver of this growth has been its partnership with two German companies for which it acts as the product operator and not just a solutions provider. First of these is eKomi Technologies, a rating and review platform based out of Berlin that’s a leader across a number of European markets. Through their arrangement, Coeus claims access to eKomi’s customer base. The second is 4Art Technologies which is working to introduce blockchain in the world of art.
However, now Coeus wants to get into the world of products itself because of their potential to exponentially scale without the need to add more human resources. “In the services business, if you want to grow 2x, you’d have to hire accordingly. In the current market, that’s a challenge for tech companies globally, only exacerbated by the Ukraine-Russia situation as the two countries have been major sources of developers,” Mr Shaheen says.
The company has started out with two products; Workhub, a remote work management tool that brings connectivity, engagement and compliance together; and Vidmonials, a video reviews platform. These together are expected to bring in most of the growth over the next few years: the former has been projected to hit an annual recurring revenue (ARR) of PKR 2.1bn by 2024 and the latter PKR 219m.
That’s one motivation behind their listing. The second is consolidation for which Coeus is looking for M&A targets, primarily SaaS companies with revenues and profits within the range of 3-30 million euros and 1-10m euros, respectively. But where will these targets come from as the M&A activity in Pakistan, both in the broader corporate sector and specifically the technology industry, has largely remained abysmal? There are many reasons for that, including how many IT, and other smaller, companies prefer to keep control of themselves even at the expense of potential growth.
“It’s definitely true but you have to look for partners with different sets of strengths. Our focus is towards players who are offering technologies that we don’t offer, such as Microsoft or Oracle solutions and opening up an untapped market for them which makes it a win-win,” explains Mr Shaheen. They are looking at cash plus stock deals that would open up the potential upside for everyone via the listing.
Finally, given plans to raise up to almost PKR 1.5bn, one wonders why go for GEM, as the amount is higher than what some of the companies, such as TPL Trakker, have raised through listing on the mainboard? “Firstly, the process is much faster and easier as there are less paperwork requirements. Secondly, this would eliminate the fluctuations and volatility that come with the mainboard since only accredited investors can subscribe to our issue. Once we deliver on our promise, it will help build trust in the market and then we can migrate to the mainboard,” according to Mr Shaheen.
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