DNB Markets: VEF - High veta if market mood shifts

VEF took a defensive stance in 2022, focusing on strengthening its balance sheet and reprioritising growth strategies across its portfolio, while conservatively reflecting the reduction in public fintech valuation multiples in its NAV. For 2023e, we note its 40% discount to reported NAV and high-beta characteristics heading into a potential market recovery. To reflect this, we have updated our fair value to SEK3.0–5.7 (3.7–5.4).

Q4 highlights: 1) VEF marked down its portfolio by 14% QOQ in Q4 adjusted for net investments (-39% YOY in 2022, but -50% YOY on total NAV), mainly reflecting a calibration to listed fintech peers' multiples contraction; 2) ~70% of its NAV is tied to public market valuations, which in our view reflects conservatism as VEF's portfolio is only valued at 1.3x net invested capital (below what its preferred shares in Konfio would yield at an exit); 3) VEF invested USD5m in Creditas convertible notes in Q4 and initiated a buyback programme to address its discount to NAV. In August 2022, it bought back shares for USD3m at a VWAP of SEK2.5/share (or at a ~45% discount to NAV), which took its cash available to USD48m (13% of NAV); and 4) its underlying portfolio performance remains strong, with good asset quality and ~120% portfolio-weighted revenue growth YOY for 2022e, which is expected to decline to ~65% YOY for 2023e as growth strategies and cash runways have been revised.

VEF values its portfolio at a weighted 2023e EV/sales of ~5x versus fintech peers at ~6x on our calculations, despite offering a 2–3x higher revenue growth profile on a path to profitability. We note that VEF has taken a defensive stance in its NAV, which has not been rewarded by the market, although we believe it could still wait for private markets' valuations to settle before becoming more opportune on new investment ideas for emerging market fintech companies in the growth stage with a funding gap. We believe the main potential NAV catalysts for VEF could be tilted towards H2 2023e, with: 1) Creditas closing in on its breakeven ambitions (volume growth, widening margins, and lower CAC); 2) funding rounds in Juspay and Gringo resulting in NAV increases; and 3) a recovery in long-duration growth valuation multiples, should interest rates peak.

Capitalised to cover its funding needs for 2023e, with USD48m in cash available as VEF expects to use ~USD21m (split: ~USD6m for portfolio needs, ~USD3m for buybacks, ~USD5m for coupon payments, and ~USD8m for overhead costs), while ~69% of its NAV is funded for breakeven with existing capital positions and the remaining ~31% of NAV with a weighted cash runway of 15 months. We calculate that VEF is not close to its covenant levels with a net debt to NAV of -1% (20% ceiling) and equity ratio of 89% (80% ceiling), suggesting headroom of ~USD40m–80m versus a conservative NAV.

Fair value updated to SEK3.0–5.7 (3.7–5.4). From end-2021, VEF's share price is down 63% (in SEK) versus the Global X Fintech index and ARK Fintech Innovation ETF, which are down 50–60% in USD. Despite having marked down its NAV by 50% in 2022 owing to market declines, VEF's shares are still trading at a 40% discount to its reported NAV (versus its 20% historical average). We note VEF's high-beta characteristics should interest rates peak in 2023e.


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