DNB Markets - VEF: Market volatility not new to VEF
VEF’s NAV declined only ~3% QOQ in Q1 despite turbulent markets. With a portfolio of leading fintech holdings across some of the world’s fastest-growing markets, the investment community now expects VEF to report only a ~7% IRR on invested capital (versus its 30% track record), as the stock is trading 47% below NAV. We have cut our fair value to SEK6.3–7.4 (6.8–8.1) on our updated NAV forecasts, to which we apply a 10% discount to NAV.
Q1 takeaways: 1) VEF's NAV declined 3% QOQ in USD in Q1, as it marked down its Russian exposure to zero (all Russia-related potential downside now reflected), while FinanZero was written down by 9% and Nibo by 17%, based on marked-to-model valuations; 2) ~98% of NAV valuations are based on the last completed funding round in the past 12 months (most of which in H2 2021); and 3) VEF's investment pipeline appears healthy as it invested USD12m in Brazilian driver app Gringo and USD20m in solar-energy financing platform Solfácil in Q1 and expects to close one more deal in Q2.
Why we believe a Q1 NAV decline of only ~3% QOQ makes sense. We calculate that, since end-2021, emerging-market fintech valuation multiples have contracted by ~25–30% and note that global start-up funding dropped 19% QOQ in Q1, from record-high levels in Q4. That said, many of VEF's holdings showed 60–100%+ revenue growth YOY in Q1 (~15–20% QOQ), while VEF benefited from FX tailwinds (BRL/USD was up ~20% in Q1), which would everything else being equal correspond to relatively neutral NAV revisions (or equate to valuations assessed in its recent funding rounds). That said, we still see a risk of continued multiples contraction of public tech/growth assets affecting private valuations, stage-wise. Based on the latest transaction, VEF is valuing Creditas, which makes up 53% of NAV, at 8x 12-month forward EV/sales (broadly in line with peer Nubank at 9x, despite showing 100%+ revenue growth YOY). Moreover, Juspay (~6% of NAV) is valued at ⟨15x 12-month forward EV/sales versus peers D-Local and Adyen at 15–30x, which seems justified to us.
Improved financial flexibility as VEF issued a SEK500m sustainability bond (floating coupon of 3M Stibor+725bp). We believe this should help to accelerate VEF's ESG profile (~75% of its portfolio has a direct impact on financial inclusion, mainly in Latin America) but also allow for strategic flexibility, with USD73m cash at hand to facilitate potential new and follow-on investments in 2022. As VEF's top-5 holdings (representing ~85% of NAV) completed significant recapitalisations in H2 2021, they appear well funded and will likely not have to raise equity again in 2022, although we could see some extension rounds, we believe.
Fair value lowered to SEK6.3–7.4 (6.8–8.1). VEF offers scarce exposure to leading emerging-market fintech investments (~90% in Latin America and India), with a strong track record, having reported a ~30% NAVPS IRR since 2016 despite volatility in emerging markets. As VEF's stock appears to have decoupled from its NAV, now trading 47% below, it seems the market is implicitly assuming VEF can generate an IRR of ~7% on invested capital over the next five years (versus its ~30% track record).
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Best regards
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Joachim Gunell | DNB Markets | Equity Research
DNB Bank ASA, Filial Sverige
Visiting address: Regeringsgatan 59, Stockholm
Postal address: 105 88 Stockholm
E-mail: joachim.gunell@dnb.se | www.dnb.no
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