DNB Markets - VEF: Green shoots

VEF's share price is down 12% in SEK YTD despite: 1) a 25% recovery in its NAV YTD (in USD), which lags green shoots from its portfolio peers (up 30–70% in USD); 2) a portfolio-weighted FX tailwind of 14% YTD; and 3) a 54% discount to a fairly conservative NAV. We believe balance sheet concerns are receiving too much focus, with USD45m cash available (9% of NAV) and its bond not maturing until Q2 2025e, but sense a more accentuated priority to strengthen its balance sheet in the next 12–24 months. We note VEF’s high-beta characteristics and expect a continued recovery in long-duration growth valuation multiples, should interest rates peak. We have updated our fair value to SEK3.8–5.6 (3.3–5.7).

Q2 takeaways. 1) VEF marked up its portfolio by 17% QOQ in Q2, split 15% from peers' multiples expansion, 4% from positive FX, offset by 2% new investments and other. This corresponds to a 25% YTD NAV uplift in USD, which means that VEF has still marked down its NAV by 30% from end-2021 highs (adjusted for net investments), which bakes in conservatism, in our view; 2) value changes in Q2 were (on the positive side) Konfio (+75%) and TransferGo (+35%) and (on the negative side) Rupeek (-10%) and Gringo (-8%); and 3) underlying portfolio performance remains strong and VEF broadly reiterated its portfolio-weighted 2023 revenue growth expectations of ~50% YOY.

Creditas' (44% of NAV) net profit break-even as a catalyst. We expect initiatives such as loan portfolio repricing (accelerated by a normalised SELIC rate), reduced overhead and optimised customer acquisition costs to help Creditas reach net profit break-even by Q4e while maintaining ~40% revenue growth YOY in 2023e. As it successfully executes on its profitable strategy, we expect it to plan for an IPO by H2 2024e (should market conditions improve) to gain access to capital markets and improved funding conditions. In its current structure, Creditas targets a 7% net profit margin on its portfolio, which should allow for a long-term return on equity of 70% (50% post-tax) excluding growth investments. VEF currently values Creditas at USD2.5bn (~4.3x 2023e EV/sales versus listed peer Nubank at 5.1x).

VEF values its portfolio at a weighted 2023 EV/sales of ~6x versus fintech peers at ~8x on our calculations, despite offering a 2–3x higher revenue growth profile on a path to profitability. VEF remains consistent in its valuation processes, with 90%+ of its NAV based on marked-to-model valuations (tied to public markets).

Fair value raised to SEK3.8–5.6. VEF expects an end-2023 cash position of USD32m, as it expects to use ~USD13m of its USD45m cash available in H2, as ~94% of its NAV is funded for break-even with existing capital positions and the remaining ~6% of NAV with a weighted cash runway of 14 months. We calculate that VEF is not near its covenant levels (net debt to NAV of 0% (20% ceiling) and an equity ratio of 91% (80% ceiling)), suggesting ample headroom versus conservative NAV.

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Best regards

Joachim Gunell | DNB Markets | Equity Research Sweden

Email: [email protected]

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