DNB Markets - VEF: Already strong, but more to come

VEF’s holdings delivered another strong quarter with 20% NAV growth. Recent industry deals have shown that investors are increasingly rewarding emerging market fintech, and we highlight that VEF offers unique access to 12 leading VC fintechs (~75% in Latin America). We see several potential near-term NAV catalysts, such as a probable financing round in Creditas (38% of GAV), which could lead to significant growth in the coming year; thus, we have raised our fair value to SEK3.2–4.4 (2.6–4.2).

Portfolio highlights in Q3. 1) VEF’s NAV grew 20% QOQ in Q3 (16% in local currencies), driven mainly by valuation uplifts of consumer lending platforms Creditas (38% of GAV) and Konfio (15%), which has emerged strong from the pandemic with high asset quality and access to funding to resume its rapid origination growth trajectories, while also tapping into non-balance sheet revenues (payroll, tech services, etc.); 2) its payments holdings TransferGo and Juspay (~15% of the portfolio) remain beneficiaries of the global spike in online payments; 3) VEF made no new investments in the quarter, which makes sense to us at this stage to support the 12 existing holdings; and 4) on updated Q3 NAV, VEF has a NAV IRR track record of 24% since 2015, highlighting the value-creation potential from its unique investment strategy.

Potential catalysts in the coming year. EM fintech has seen a flurry of IPOs, and as Creditas, the leading digital lending platform for secured loans in Brazil, has fared well throughout the Covid-19 stress test (reached cash flow break-even in Q2) while we forecast 2x revenue CAGR until 2022e, we believe it could take the opportunity to recapitalise in H1 2021e with a potential IPO in 2022/2023e. Our estimated value of Creditas is 72% above VEF’s reported, valuing the company at (~USD2bn) highlighting that a new funding round could crystallise material value. Moreover, we have seen how Covid-19 has fuelled fintech M&A and we identify a clear rationale for consolidation where leaders acquire distressed challengers to expand their product suites and market presence or capitalise on richer valuation in sub-sectors such as payments, which is a scale game. Thus, we would not rule out that VEF could take the opportunity to make some portfolio divestments in 2021e.

Ample funding capacity with a USD20m cash position (7% of GAV) to support its holdings in future funding rounds. Should VEF be more opportune on either: 1) its new investment pipeline, which is building out nicely, or 2) taking its pro rata share in a potential Creditas funding round (likely requiring USD15m–20m), we do not rule out that VEF could use its new mandate to issue new shares or debt.

Fair value raised to SEK3.2–4.4 (2.6–4.2) based on four equally weighted valuation methodologies. In our own valuation assessment of VEF’s portfolio by 2022e, we calculate potential NAV growth of 35%+. The shares are trading 16% discount to NAV (versus its five-year average of 20% discount and sector peers at 10% premium). We observe that VEF has unique VC exposure to the wealth catch-up from financial inclusion in emerging markets through VC which institutional capital is increasingly pouring into in search of alternative sources of return.
 

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