DNB Markets - Vostok Emerging Finance: Scarcity value with upside potential
VEF offers rare access to: 1) leading VC fintech companies in emerging markets; and 2) a strong NAV value creation track record. We see several potential NAV catalysts by 2021e that could make investors more confident in the medium-term NAV growth prospects. Although it is not a low-risk investment, we like the investment opportunity evolving in VEF and initiate coverage with a fair value of SEK2.6–4.2/share.
Rare VC access to one of the most attractive emerging fintech markets. Vostok Emerging Finance (VEF) is an investment company that lends access to scarce VC fintech in scale emerging markets. In our view, Latin America (~75% of its portfolio) is one of the world’s most interesting structural fintech opportunities, where VEF owns the leading equivalents to proven business models such as Klarna, Tink, Lendo, Betterment, Fortnox, etc., and taps into a addressable market opportunity of USD22bn (~SEK190bn). We believe emerging markets can benefit disproportionally from fintech innovation by leapfrogging traditional high-margin banking services – the oligopolistic Latin American banking market is particularly vulnerable to new fintech entrants.
Delivering on key aspects of the equity story. VEF has a track record of generating substantial shareholder value (NAV IRR of 23% since 2015), and is building traction in the investment community from recent successful portfolio exits (Tinkoff Bank at 65% IRR, iyzico at 57% IRR). We believe VEF is well positioned to crystallise further value, where consumer-lending holdings Creditas and Konfio are potential high-value companies in the making and hold the largest short-term potential (49% of NAV), which could boost VEF’s NAV by 45%+ by 2022e. Also, with a solid net cash position of USD20m (9% of NAV), we believe it has ample resources to support its portfolio in further funding rounds, as well as carry out share buybacks.
Investors still struggling to tap into emerging market (EM) fintech. Institutional capital has been pouring into private, illiquid investments in search of alternative sources of return. The few listed EM fintechs are trading at all-time highs and we believe VEF’s portfolio of 12 leading EM fintechs, diversified by geography, business model and stage of development, lends scarcity value. Also, we highlight an ESG angle as VEF offers exposure to the wealth catch-up from financial inclusion in EMs (increasing accessibility to and affordability of financial services for under-served, low-income and SME segments) where its portfolio is an indirect facilitator for most of the UN’s SDGs.
Covid-19 stress-testing VEF’s crisis-ready holdings. We are encouraged that its portfolio fared well during the Covid-19 stress-test, focusing on sustainable revenue growth, extending cash runways, asset quality, etc., and believe the portfolio is well positioned to take market shares post-Covid-19 as structural fintech trends accelerate.
Initiating coverage with a SEK2.6–4.2/share fair value, based on: 1) a 10% discount to reported NAV; 2) an IRR of 15% by end-2022e for VEF’s holdings (versus its 30% IRR target); 3) a multiple of 4x on invested capital, and a 20% cost of capital using an exit period six years from its initial investment; and 4) our 2022e NAV, based on peer multiples. We apply a 10% discount to our NAV in all valuation scenarios (currently 6%) to reflect a higher risk profile due to VEF’s VC-stage portfolio, somewhat offset by recent investment successes demonstrating its shareholder value-creation potential.
Best regards
__________________________________________________
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
__________________________________________________