Vostok Emerging Finance: DNB Markets - VEF: One `unicorn' down, two to go

The Covid-19 pandemic is accelerating fintech momentum in emerging markets, where VEF's tech-enabling leaders are gaining significant advantage over incumbent banks with high fees and unsophisticated products. We see VEF as a unique, multifaceted story, and forecast ~20% NAV growth in 2021, driven mainly by Konfio; with a lot of sector liquidity and industry deals, we do not rule out portfolio exits. We have raised our fair value to SEK3.9-5.1 (3.2-4.4).

Portfolio highlights in Q4. 1) VEF's NAV rose 16% QOQ in Q4 (6% in local currencies), driven mainly by a recent USD255m funding round in Creditas valuing VEF's portfolio gem at USD1.8bn (in line with our Q3 2020 value); 2) having raised SEK522m through a directed share issue, VEF's net cash is USD54m, which should allow it to commit ~USD20m to its existing portfolio while letting management leverage the VEF brand to secure future deal flow in frontier markets, where we expect smaller ticket investments in Pakistan, India, and Mexico will be prioritised; and 3) we expect its portfolio holdings to maintain 2-3x YOY revenue growth in 2021, where we see Konfio, Juspay, Nibo, and TransferGo as potential NAV catalysts.

Creditas has started to provide quarterly trading statements. We believe this increased transparency should expand the investment community's appetite for its growth prospects while taking another step towards readiness for an equity offering, in our view. For 2020, despite pandemic headwinds, Creditas grew: 1) its credit portfolio by ~85% YOY, to BRL1.3bn (~USD230m); 2) new loan origination by ~70% YOY, to BRL900m (USD166m); 3) revenues by ~88% YOY, to BRL336m (~USD62m); while 4) delivering a contribution margin of 52.8% (down 4.4%-points YOY), and lowering its net loss by 8% YOY, to BRL186m (~USD34m). We believe the stand-alone Q4 report was also encouraging with 55-85% YOY topline growth while lowering the net loss by 18%, proving the attractiveness of the business model as revenues scale up. We are still in the early stages of penetrating the huge untapped secured lending market in Brazil and Mexico, and we believe the recent USD255m funding should allow Creditas to emerge as an asset-light leader with a potential equity offering acting as a catalyst for VEF in 2022-2023e.

Fair value raised to SEK3.9-5.1 (3.2-4.4) based on four equally weighted valuation methodologies. In our own valuation assessment of VEF's portfolio by 2022e, we calculate potential NAV growth of 20%+. The stock is tradingin line with reported NAV but 16% below our estimated NAV (versus its five-year average of 18% below and sector peers at 8% above). We like that VEF offers unique venture capital (VC) exposure to the wealth catch-up from financial inclusion in emerging markets through VC, to which institutional capital is increasingly attracted in search of alternative sources of return (funding to Latin America-based fintechs has shown a 64% CAGR since 2016). On our conservative forecasts, we see a potential revenue pool of USD22bn for VEF's holdings, which lends unique growth prospects from fintech adoption and serving the underbanked.
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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
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