DNB Markets - VEF: This too shall pass
VEF’s Q2 NAV fell 40% QOQ, which we believe reflects conservatism from VEF, as its largest asset, Creditas, recently received funding from new investors at a 100%+ higher valuation than VEF’s NAV. The market is unlikely to dismiss private fintech-related events such as Klarna’s ~85% down round as an anomaly. However, as VEF is trading at a 44% discount to its Q2 NAV, the market appears to be implicitly pricing in an IRR of -5% on its invested capital over the next three years (versus its 18% 7-year NAVPS IRR and exits at ~27%). We have cut our fair value to SEK3.4–4.8 (6.3–7.4).
Q2 takeaways. 1) VEF's NAV declined 40% QOQ in USD (versus our -39% estimate), which we believe reflects conservatism owing to fintech peers' multiples contracting 49%, while VEF did not take its liquidation preferences into account. 2) VEF used USD6.6m on follow-on investments. 3) Operational momentum remained strong in its portfolio and it expects ~100% YOY revenue growth in 2022 from its largest holdings (Creditas, Konfío, and Juspay). 4) With USD64m in cash available (15% of NAV) after proactive balance-sheet management, we believe VEF has the financial headroom to take its proportional ownership in funding rounds across its portfolio over the next 12 months. It expects to use ~1/4 of its cash by end-2022 for its existing holdings, and sees a strong new pipeline emerging.
40% NAV write-down reflects current market reality, but not long-term potential. We believe VEF's Q2 NAV write-down was justified, as it showed that its short-term valuation is not immune to the de-rating across listed fintech peers. At end-Q2, 63% of its portfolio value was based on a more conservative calibration methodology, and 29% of its NAV was based on the latest transactions, half of which were completed in Q2, while 8% used mark-to-model valuations. In July, Credits attracted a USD50m extension financing, as it acquired Banco Andbank's banking license at the same valuation as its January 2022 Series-F round (100%+ above VEF's reported value in Q2), illustrating VEF's prudent approach. Assuming Creditas reaches 100–75% revenue growth YOY in 2022–2023e, it would correspond to an EV/sales of 6.8–3.8x.
VEF appears adequately capitalised, with USD64m in cash available (15% of NAV), or a net cash position of USD15m (3% of NAV). In H2 2021, its top-five holdings completed significant recapitalisations. In Q2 2022, VEF made follow-on investments in four additional holdings. Of its larger assets, we expect Konfio to raise additional funding in 2022. That said, we believe VEF's flexibility for larger new investments could be constrained by its ability to raise equity without risking large dilution effects, as it is trading at a 44% discount to reported NAV.
Fair value lowered to SEK3.4–4.8. The market's faith seems shaken, as it appears to be pricing in a further ~23% write-down of VEF's assets to trade in line with its historical average 20% discount to NAV (currently at 44%). While there are inherent risks to emerging-market private investments should the VC cycle deteriorate further, we believe this is not new to VEF, which has generated attractive returns through periods of market volatility since 2016 (NAVPS IRR of 18%).
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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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