DNB Markets - VEF: Starting to lean forward again

VEF continues to trade below pre-covid levels at a 40% discount to reported NAV (58% to our estimated NAV). We believe the ice-cold winds blowing in the fintech VC industry appear relatively warmer at VEF’s holdings’ southern latitudes with still-strong operational performance (120%+ portfolio-weighted revenue growth YOY) with 65% of its NAV capitalised to break-even. Hence, we have raised our fair value to SEK3.7–5.4 (3.4–4.8).

Q3 key highlights: 1) VEF's NAV was flat (+1%) QOQ (-42% YTD) in USD adjusted for net invested capital (in line with our forecast), which we believe reflects conservatism from VEF benchmarked against how Swedish investment companies has written down their unlisted NAVs YTD: VNV Global (-40% in USD), Creades (-24% in SEK), Kinnevik (-16% in SEK), and Flat Capital (-14% in SEK) with ~75% of its NAV valued using marked-to-model and calibration approaches; 2) VEF invested USD1m in Pakistan-based digital wealth manager Mahaana and completed a USD2m follow-on investment in Ruppek; 3) operational momentum remained strong in its portfolio and it expects ~120% YOY portfolio-weighted revenue growth in 2022 (Creditas reported 248% revenue growth in H1 2022); and 4) with USD56m of cash available (13% 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. According to VEF, 65% of its NAV is capitalised to reach break-even (or already profitable) while the remaining 35% has a weighted cash runway of 17 months.

VEF's values its portfolio at a weighted 2022–2023e EV/sales of ~8–5x versus fintech peers at ~8–6x on our calculations). VC marketplace Forge Global said in October 2022 that the average share price of companies trading was -41% versus its last funding round. Although we still like VEF's portfolio, we do not rule out down rounds to come, as only 6% of completed global funding rounds YTD have been made at lower valuations, according to Pitchbook. That said, we believe this is already largely reflected in its reported NAV.

Good timing of VEF's buyback programme, which was approved by the board on 22 August. On our calculations, VEF has since bought back 9.0m shares (0.8% of total shares) for a value of USD2m (or 3% of its end-Q3 cash). The transactions have been made at a volume-weighted average price of SEK2.33 or a 45%+ discount to NAV (~15% below its current share price). Given the current dislocation between VEF's reported NAV and its share price, we expect it to continue to buy back shares, which it only does if it sees a 30%+ IRR opportunity (EGM mandate allows for USD10m or 10% of shares outstanding, although we do not expect it to utilise its full mandate).

Fair value raised to SEK3.7–5.4 (3.4–4.8). The share price is down 55% YTD (in SEK) versus Global X Fintech index and ARK Fintech Innovation down 50–60% in USD. The market appears to be pricing in a further ~20% write-down of VEF's assets to trade in line with its historical average 20% discount to NAV (currently at 40%). 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 17%).

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