Vostok Emerging Finance: 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.
 

Click here to view full report (https://www.dnb.no/seg-fundamental/fundamentalweb/GetReports.aspx?file=CMPSP_165635.pdf&Sid=1-367BEMU)
 

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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|
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