Business model

There are many risks surrounding the innovative business model of Cian Stock (NYSE:CIAN)

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Cian (NYSE: CIAN) runs a pretty innovative business model and even achieves triple-digit sales growth in some regions. With that, in my opinion, market players don’t like the stock due to the recent write-down of intangible assets acquired from the N1 group. I celebrate the new acquisitions announced in 2022, and look forward to more. However, I see many risks, which could push the stock price even lower. I am considering not only possible sanctions from Europe or the United States, but also possible cyberattacks against Cian’s online platform. All in all, I appreciate Cian’s business, but I see too many risks in the current context.

Cian Announces Triple-Digit Listing Revenue Growth in Select Regions

Cian is an online real estate classifieds platform on the Russian real estate classifieds market.

The company targets a massive market of over $6 billion and is an innovative group, which could bring significant revenue generation in the future:

Prospectus

Prospectus

The most recent figures have been very beneficial. The company appears to be delivering 41% sales growth and almost 48% revenue growth. Cian’s mortgage market would also be close to 177%. In my opinion, if the company continues to generate such revenue growth, the valuation should reach an incredibly high level:

Quarterly report

Quarterly report

In the latest quarterly report, Cian reported 137% growth in listing revenue in select Russian regions and an average daily revenue per listing of 86%. The numbers are quite impressive:

Quarterly report

Quarterly report

Analysts expected 32% sales growth in 2023, but current valuation fails to recognize good market expectations

I believe the invasion of Ukraine may change future market estimates. However, with the previous figures delivered a few months ago, analysts seemed rather optimistic about Cian.

Net sales growth in 2023 should be equal to 32% and the 2023 EBITDA margin should be close to 18.2%. Finally, analysts also expect free cash flow to increase from 453 million rubles in 2022 to 1.5 billion rubles in 2023. We would be talking about an ROE of 20%, which is quite impressive:

Analysts

Analysts

With that on market expectations, the company’s EV to Sales ratio and stock price are a bit less optimistic. EV/Sales went from nearly 20x in 2021 to less than 4x in 2022. I don’t believe market players were expecting Ukraine to invade in 2021. For some reason, traders did not believe analysts’ expectations. A closer look at the financial accounts shows that there are more risks than just EU and US sanctions against Russia:

Y-Charts

Y-Charts

Balance sheet shows significant increase in intangible assets due to recent acquisition

Total assets increased significantly in 2021 from 1.37 billion rubles to over 3.7 billion rubles. This increase is explained by the acquisition of the N1 Group, which contributed a significant amount of goodwill and intangible assets:

Quarterly report

Quarterly report

I don’t believe that financial bonds have lowered the share price because Cian reported a significant decrease in borrowings in 2021. In the last report, long-term borrowings were equal to 450 million rubles:

Quarterly report

Quarterly report

In my opinion, the market did not like the acquisition of N1 Group and there is a risk of depreciation

Cian PLC issued shares to pay N1. Cian paid a total of 1.785 billion rubles. I don’t know if the price paid was competitive enough:

On February 5, 2021, Cian Group acquired 100% of the voting shares of N1 Group, one of Russia’s leading regional online real estate classifieds, for a total cash consideration of 1,785 million rubles. Cian Group financed the acquisition through the issuance of 281 ordinary shares (5,566,900 after the stock split) for 2,265 million rubles in cash in accordance with the investment agreement. Source: Prospectus

N1’s historical revenue is supposed to be 563 million rubles, which means that Cian paid almost 3.3 times the sales, which in my opinion is not cheap considering that the target is not was not a big business. I wonder if more negotiation would have led to a better price. Target’s net income was equal to 58 million rubles, so Cian bought Target at 30 times N1’s profit for the year.

Prospectus

Prospectus

There is another alarming detail that represents a clear risk for the future. Immediately after Cian announced the acquisition, management included the amortization of many intangible assets. This means that it failed to calculate the valuation of N1. In my view, if management continues to report writedowns, the stock price could decline further:

Our depreciation expense increased by 35.4% to 134 million rubles during the six months ended June 30, 2021, compared to 99 million rubles during the six months ended June 30, 2020. This increase is mainly explained by the amortization of identifiable intangible assets acquired by the L1 Acquisition, such as goodwill, brands and software. Source: Prospectus

Cian warned of potential US, EU and UK sanctions

Cian PLC could suffer significantly if the company cannot raise funds in international markets due to new sanctions. Less funding should lead to less revenue because management may have less cash to invest in marketing:

To the extent possible, existing and new or future extended sanctions may adversely impact our revenues and profitability, and could impede our ability to effectively manage our legal entities and operations or raise funds from financial institutions. international or international capital markets. Source: Prospectus

With that, I’m not really worried about the European Union or the United States freezing Cian’s real estate assets. The company mainly rents out its offices and does not own a lot of properties. Also, I wouldn’t expect Cian to have a lot of bank accounts outside of Russia that foreign countries could block.

The main executive office is located at Elektrozavodskaya Ulitsa, 27, Building 8 Moscow, 107023, Russia. We have leased certain premises in this building for a period of two years, which we have further extended until June 30, 2024. Source: Prospectus

Cian PLC could receive attempts to overload its servers

Some Russian websites are currently being targeted by anonymous and other actors in the cybersecurity industry. If Cian PLC cannot present its products for a significant period of time, revenue growth should decline significantly. As a result, we may see a decline in the implied stock price. The stock price could also go down.

Like other website and mobile application providers, our websites and mobile applications and other computer systems are vulnerable to computer viruses, break-ins, phishing attacks, attempts to overload our servers with denial attacks of service or other cybersecurity attacks or threats. and similar disruptions, each of which could result in the loss of critical data, the availability or unauthorized disclosure or use of personal information or other confidential information. Source: Prospectus

Two case scenarios

Under normal conditions, if Cian continues to acquire other targets like Smartdeal, revenue growth will likely head north. In my best-case scenario, I assumed a sales growth of 20%, which would imply net sales of 14.75 billion rubles in 2025. In this case, with an EBITDA margin of around 16.5% and 18.5% from 2023 to 2025, the FCF would reach almost 1.5 billion rubles. Note that the company does not have many properties. Thus, most D&As are impairments of intangible assets. Some investors may have concerns about this and may also view impairment of intangible assets as a one-time event:

My DCF model

My DCF model

Adding up all future free cash flows with a 10% discount, the net present value should remain close to 3.6 billion rubles. I also got a terminal value close to 37.5 billion rubles with an exit multiple of 15x. Note that I am quite conservative as the company is currently trading at over 20x EBITDA. Finally, the implied price will likely equal $5.

My DCF model

My DCF model

Y-Charts

Y-Charts

Y-Charts

Y-Charts

I ran another case scenario, which includes EU and US sanctions. As a result, I think the company may have to pay more for the cost of debt and the cost of equity, so the WACC can go up to 22%. In this scenario, the free cash flow would decrease from 434 million rubles in 2022 to 1,361 million rubles in 2025:

My DCF model

My DCF model

If we add it all up with a WACC of 22%, the net present value should remain close to 2.7 billion rubles. Assuming the previous detrimental financial numbers, I decided to use an exit multiple of 4.7x EBITDA, which should mean a terminal value of almost 11 billion rubles. With the previous numbers, the implied stock price should be close to $1:

My DCF model

My DCF model

Conclusion

Cian is quite an innovative business model that even shows triple-digit revenue growth in some specific regions. A few months ago, analysts were expecting significant growth in free cash flow for 2022 and 2023. Today, the situation has changed quite a bit. I believe that with the new economic sanctions, Cian could experience a significant increase in the cost of equity and debt. With no properties or business outside of Russia, I shouldn’t expect the Europeans to freeze Cian’s assets. However, Cian may also be subject to cyberattacks. In sum, I believe that the risks outweigh the potential rewards.