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Edited Transcript of VEMFsdb.ST earnings conference call or presentation 14-Aug-19 1:00pm GMT

Q2 2019 Vostok Emerging Finance Ltd Earnings Call

HAMILTON Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Vostok Emerging Finance Ltd earnings conference call or presentation Wednesday, August 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David Francis Nangle

Vostok Emerging Finance Ltd. - CEO, MD & Director

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Conference Call Participants

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* Gustav Österberg

Pareto Securities, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome to the Vostok Emerging Finance Q2 2019 Report for the First Half Fiscal. (Operator Instructions)

I'll now hand the floor to David Nangle, Managing Director. Please begin.

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [2]

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Yes. Thank you very much, and good morning, good afternoon, everybody, and welcome to our Q2 First Half 2019 Results Conference Call and Presentation. And the slides are available online and on our website and via our media booth. I'll start off with a brief presentation of kind of the key highlights of the first half, get into some of the numbers and obviously, then look at some of the major outlooks before we open up for Q&A.

Looking at Slide #2, 2019 highlights. This is what's happened to us, our company over the first half and of this year, year-to-date. And effectively, it's been our most successful period to date since inception in 2015. And a lot of the efforts that we put in over that period really came to fruition in this period, and its being kind of highlighted with headlines around exits, big investment rounds for some of our main portfolio companies, a big piece of what is the most exciting fintech markets in the world, in our opinion, Brazil. And clearly, SDB share price reacting to all these positive headlines.

To get in some of the detail there, we're talking about exits and of our -- what was at the start of the year a 12-company portfolio, we've had 2 exits in the first half of this year. We followed up the Tinkoff Bank exit in Q1, Russia's leading digital bank, with the exit from iyzico from Turkey, Turkey's leading online payments player. Both exits yielded IRRs of over 60% and a great benchmark return to show our investors that we are investing in fintech winners across EM, that actually do yield real results as opposed to just mark-to-market NAV along the journey.

And also we had a significant investment in one of the largest portfolio company today post recent exit of Creditas, a secured consumer lender in Brazil, leading secured lender in Brazil. Softbank led a $230 million-plus raising -- Series D raising into Creditas, which we took part. We took up our rights, approximately $23.5 million into that but at a significant raise, at a significant uplift in valuation. And once again, highlights the quality of our portfolio, but also allows a name like Creditas to position itself to win in what is a phenomenally big, opportunistic and high unit economic space in Brazil.

Brazil fintech. We always like to talk about Brazil fintech and because we feel -- and I think a lot of research is now coming out to back that up. But Brazil is, if not the, it's one of the most exciting fintech markets globally. We were early on this one. We've got now 5 investments and growing in Brazil, started maybe 3 years ago. And it's really benefiting also the company, our NAV and on the opportunity that we see going forward. So we're very happy, and with our positioning in Brazil well ahead of Brazil being noticed by the world, plus obviously, the macro and politics turning in favor there at the same time.

Another phase, the bottom of Slide #2. And all of this, as it should be, has been reflected in both our NAV per share on the rise of 18.5% year-to-date. And more importantly, I guess, is our share price, which has lagged the NAV uplift to date. But is up maybe 50% year-to-date, something that we obviously want to see.

And moving on to Slide #3. Just some of the numbers. It's all about NAV when it comes to an investment company like Vostok Emerging Finance. Our NAV is now touching $240 million, that's up 17% over the quarter. On a SEK per share basis, up at SEK 3.41 per share. So we keep on driving that NAV through the investment portfolio to the marks and valuations of our company, both on a mark-to-model basis and also from an exit point of view on the exit of Tinkoff and iyzico. Our cash position at the end of the quarter was $25 million and at pre the sale money fund flows from iyzico, which is an additional approximately $34 million.

Skipping a few slides and moving on to Slide #8 or Slide #9, excuse me. And this is a bit more portfolio commentary and looking at our portfolio from a pie, from an NAV, and where the weights are today. What you'll see, we started the year with 12 holdings. We're now at 11 holdings, and it is soon to be 10, given the exit of iyzico. That's not to say we're anywhere near wind-down mode, given the opportunity that we see across fintech and emerging markets. But the opportunistic nature of taking real exits at real valuations is just too obvious for us, and I'll talk about that in a second.

From a portfolio point of view, with an investment company, it's always what's going to drive our NAV and generally speaking, it's the larger names in the portfolio drive it most because its the easiest mathematical way to do that. And portfolio champion, now that Tinkoff has been exited and iyzico soon, had to be no longer part of our NAV in pie. And Creditas starts to stand out at about 30% of our NAV post the recent mega funding round from Softbank, including ourselves and also Konfio in Mexico, the SME lender.

So we're starting to get a couple of new portfolio champions which, I guess, will take the baton from the likes of iyzico and Tinkoff to drive our NAV. Nor are the suspected other names in our portfolio, but they'll drive it more in the near future, given their size and shape of the percentage of our NAV.

And I've already talked about our cash and capital position. Remains quite healthy, both from the cash capital at bank of $25 million today, plus the flows coming towards us with the iyzico exit. And our pipeline does remain very healthy and plenty of options to deploy capital and portfolio outside portfolio and, obviously, in buybacks. It actually -- it's a very interesting, exciting time for us as best and where the portfolio is positioned and our cash and capital position also.

I'll move forward to Slides 11 and 12. I'm just moving -- 12 and 13, sorry. Just looking at the exits because it has been a very big exit period. And a lot of investment companies -- the entering of quality companies is hard enough, building the business, building the pipeline. But the exiting is, obviously, clearly much more important as you execute and you bring in the value. You execute on the value that's on paper. So it's important to do. It's important to show investors that we do that. We have the ability to do that. We're disciplined to do that and take money in at good returns as well as putting money out into quality companies at good valuations.

The first one, obviously, was Tinkoff Bank, which has been an exit of a public holding that we had since inception in 2015. It was a great 4 years with the company, and obviously, longer before that, as a former Vostok companies. But our $19 million initial invested position yielded nearly $120 million over the period and a 65% IRR and 6x cash-on-cash return. So exceptional returns from an exceptional bank in what can be a tricky market.

Moving on to the next slide and the more recent exits, which is not yet finalized. But we're nearly there, just a couple of more regulatory hurdles to jump through. This is iyzico, which is the online payments champion of Turkey. It’s like the Stripe or Adyen of the Turkish market, processing online payments. We invested in that company, own slightly north of 20%, $11 million in total. And we'll be taking approximately $34 million off the table. And once again, a 60%-plus IRR.

This is more opportunistic where Naspers came at us, looking to acquire the asset at a very attractive price, combined with the founders' desire to sell and have made the right rational business decision to exit. Would have been a phenomenal company for us, an NAV driver and a portfolio champion to date. So we're sad to see it go, but obviously, happy to lock in returns like these, as we did with Tinkoff.

And it's the other important thing with iyzico as a private holding, as the rest of our holdings are private, not their mandate, is just to look at the chart on the bottom left-hand side, on Slide 13. And it basically shows how our NAV and iyzico had evolved through the period of ownership. Because we always get asked about our NAV, how we calculate our NAV, our NAV mark, how conservative. What you'll see through the life of iyzico is logical markups in iyzico of the business performance, delivered mixed with mark-to-model and then moves on to mark to next round, until the eventual exit. That one was the $165 million total. We initially invested at a $45 million total investment, investment size for the company. So a very logical show of where -- how the NAV process works right through to exit for what has been one of our better holdings to date.

Moving forward from the exit slides on to the share price, that's Slide #15. As I say, a lot of what we do, we like to see reflected in our NAV. We calculate, we show that to the market, and then we let that then be reflected in the share price.

We currently trade at a discount to NAV. It's been like that for some time, albeit that discount has bobbed and weaved around the range of 10% to 30%. We do take this very seriously. We do look at it a lot. We work with the market, with international and local brokers. We're marketing now more than ever. And we think we have a very strong case, given the year-to-date performance. This shows that we have in exits the uplift in NAV from serious investments in our largest portfolio holding. It can all highlight the defensibility of both the NAV and then the upside in NAV, which is where we see this going. So while we do trade at a discount to NAV, it's something that we do take seriously and are working on correcting over time.

And finally, for the first part, moving on to slide number -- moving to the back end of the presentation and outlook for the company and our portfolio assets. This is Slide #34, and what I would say to conclude the call and outlook for 2019 and beyond. Over 4 years, we've built a very exciting, diversified portfolio of winning fintech assets as we promised investors at inception.

I think the recent exits and the recent investments from names like Softbank and then, some of our companies are basically showing that and highlighting these facts. The exits have been great. We welcome them. We welcome the returns. And we welcome names like Creditas getting the investments they have from serious and international investment upside.

We constantly talk about Brazil because approximately 1/2 our portfolio investments are in Brazil. And it is the market, from a fintech point of view, that we like most. That said, we've shown that we can exit and perform and deliver in markets like Russia and Turkey, which are not for the same target.

Elsewhere, geographically, Latin America has been a focus of choice. We're looking heavily at Mexico. We've got a couple of opportunities in India, and the frontiers are the future. We believe strongly in the frontiers. We have our toe in Africa and in Pakistan, with Finja and Jumo. We're looking hard at Bangladesh, Egypt, Nigeria as well as more, potentially in Pakistan.

NAV has been on the up gradually since inception. It’s been up 3x or over 3x since we started. We drive that by investing in quality companies that deliver and then, we work with the market to try and make sure our share price reflects the fairness of the NAV. We're still sitting on a strong cash and near cash position and more coming in from the iyzico exit. So it puts us in a very strong position cash-wise.

I think the final point is after 4 years in with a strong team, 4 years of experience, lots of battle scars, learnings, travel, investments, we are probably in as good a position as we have ever been from an experience, a capital, a portfolio, partnerships, et cetera, point of view. We are seeing, through our portfolio and just generally, that there is a lot of value to be created in fintech in emerging markets. And I think we're one of the best-positioned vehicles to play that trade, and it's obviously being played out through the highlights I focused on in the course of this call.

I will stop there and pass back to the operator, who can open up for any questions from the audience that we'll be happy to take.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Gustav Osterberg of Pareto Securities.

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Gustav Österberg, Pareto Securities, Research Division - Analyst [2]

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A quick question on the outlook in your frontier markets. You were mentioning that they will be a focus here going forward, especially given your cash position. I get it to all just slight below USD 60 million, if we had the proceeds from iyzico. If you first could confirm that number's roughly right?

And then just wondering at what stage you are, when you're looking at these new regions. Like how does the runway look to finding new investments? And how far have you proceeded in these regions? To give us a feel for kind of where you're looking more closely.

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [3]

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Gustav, look, we're running about a $250 million, or just shy of that, NAV at the moment. You're correct. We're on nearly $60 million of cash and near cash with the iyzico flows due to come in close to a couple of regulatory approvals.

So we're in a very strong cash position. But as always, what are you doing with the cash? What's the future of that cash and capital? So what I'd say, I'd say it's on a few front, just pipeline.

We are very late-stage in one deal across Latin America, which we're hoping to close in the near future. Nothing's done until it’s done. But once again, it's in a region that we know well and a space that we're very excited about. More to be disclosed, obviously, when we get it done. But we have one deal, which is in that later stage of the overall funnel. I'd also say within Latin America itself, we found ourselves in a very strong position within the broader LatAm ecosystem, local BCs, international BCs, reputation on the ground for working with companies. We're seen as a good partner of choice. And within the ecosystem, while it can be busy, it's generally busier at the earlier stage Series A and C. Just very busy at the very late-stage and Softbank pops in with their big checks. But somewhere in the middle, Series B, Series C, there is still a decent gap for people like us and that's where we like to play.

And I'd say, within the frontiers, just what you touched on specifically. We spent a lot of time working on and running around Nigeria, Pakistan, Egypt, and now looking at Bangladesh. They're totally different markets when you put this frontier category versus the emerging fintech category. A lot of the emerging stuff in Turkey, Russia, Brazil, it's copy-paste, replicate from what happens in the West, with a great team executing. And in many ways, it works quicker, better than what we've seen in the frontier markets, which are much earlier stage, lower income, arguably less regulation, depending on the market and less bankerized as a nation. So they can do yields, slightly different models or longer-term models, depending on what you're looking at.

And I think within that, we've already put our toe into Pakistan with Finja as a mobile wallet, which is a basic entry product for the mass market. That is working well. We put more money into that, and we're looking at a couple of other opportunities in Pakistan, one in the lending front, which is quite interesting. But everything in this market, it's very early stage. So you're talking Seed, Series A. It's hard, put it that way, to spend real money.

Nigeria and Egypt are a bit more developed. There are some opportunities there. But once again, I would say it's -- we have in Nigeria a name on our radar, but they don't need capital today. So it's a function of when they need capital, we could strike. In Egypt, the work is being done, nothing has jumped out at us yet, and we'll be on the ground there again in Q4 to see if anything is different there.

I guess it's all about positioning after when the right things come, and then we can move quickly because not many people have the capital or the appetite to play in markets like these for the long term. And I guess we've seen before -- and again and again with these companies continue through yields, winning new economy assets and it's a matter of time and patience to pick up the right one.

So to answer that question, with the $60 million of cash, we've got an internal deal, which is on the go. We have pipeline LatAm into frontiers. Frontiers, a bit more long dated. And we obviously have our current stock of companies which are, I would say, there's 2 or 3 there in that portfolio over the next 12 months that we could be giving more money to. And then, there's always the area of buybacks.

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Gustav Österberg, Pareto Securities, Research Division - Analyst [4]

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Great. So just to recap that. For the smaller or frontier markets, there will likely be a smaller portion of NAV in the coming quarters. But if you turn the focus to Brazil, we've obviously seen very strong momentum in the fintech space, not only via Softbank entering the area as well as some of your deals of backing some of your companies. Are you still finding good opportunities there in size? Or do you feel that the competition has increased, and do you need to look at smaller assets? Or how is the temperature in Brazil right now?

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [5]

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Yes. Look, it's -- I think the obvious spaces are busy and/or taken, whether it's payments online, offline, whether it's digital banks, consumer credit. Some of the more obvious areas of what would be fintech. I think you have to start looking beyond. And Internet works very well for us. There's obviously Nibo in in the accounting SaaS space. We're getting into HR, payroll, that kind of area. We're looking at our first insure tech options. We looked at a health tech and a P&C insurance company. So we're getting into that and some related fintech areas.

So still opportunities there, still around the B and C area, Series B, Series C area. But I think the less or the more obvious space has been taken or done. And the winners are starting to stand out, whether it’s a new bank, whether it’s a Creditas. And the big boys are starting to come in and properly back them to be scale winners.

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Gustav Österberg, Pareto Securities, Research Division - Analyst [6]

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Got it. And just a quick question on valuations in the unlisted space within emerging markets. Obviously, in Brazil, I imagine that the momentum is pretty strong, but what are you seeing elsewhere? Are you seeing any markdowns or markups for peers in your sectors? And what could be required for -- to see like a more general markdown or a feeling that the flows are still very, very different from what you're seeing in developed markets?

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [7]

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Yes. I still think the flows are very different than developed markets. We are seeing -- obviously, there's a lot of headlines coming out. But you can wrap those headlines in Latin America, around Softbank and 1 or 2 other investors, picking up a handful of names, what seem like big rounded valuation numbers. But obviously, people don't know the multiples or what's behind that.

I think in the broader earlier stage space, Seed and Series A is very busy. And there's a lot of people who think they can now invest and want to get their hands on the next NuBank or Creditas of Brazil. But I still think our area in the middle hasn't heated up. I don't know why capital isn't being deployed there enough. That will change, as any kind of opportunity set that has that brings more supply of capital to us, is logical. We haven't seen that yet, and we haven't seen that across a lot of markets where the early stage stuff is easier to get going, incubators, series A and -- Seed, Series A. And the big boys don't bother turning up until the party is late to write the big checks.

But it's that middle space where we've tended to play across markets and have found less competition, and then we just need to be disciplined in what we do, from a valuation point of view. We generally always have been work by numbers. And the only market that's always worked against us in terms of valuation or where we struggle to get our head around has been India. The valuations there always work off long term in scale as opposed to logic and numbers. And I guess that's why we haven't yet done an Indian valuation or an Indian investment.

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Gustav Österberg, Pareto Securities, Research Division - Analyst [8]

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Great. And just a final question on -- I've asked this before, but I just wanted to see now that the portfolio has changed a bit, like a breakeven update on your portfolio. How close do you feel that your companies are today from reaching breakeven? And maybe if you could comment a bit more on the larger names?

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [9]

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Yes. No, it's a fair question. I think with 2 easy names: iyzico is about to go and it's breakeven, REVO is positive on the bottom line. They're 2 that we have in that positive category. Everything else is negative J curve, looking to breakeven or not, based on what their capital position is.

Creditas and Konfio are the 2 big names, let's say, and then REVO is #3. Creditas, with the big funding rounds, clearly has been backed to go harder. It will be a 2-year runway toward breakeven. And Konfio is broadly in the same ballpark. Pre these funding rounds, it would have been a 12-month out. But the funding round came with runway and room to go harder, whether it's in related products, whether its geographic expansion. And that's what the Board's generally signed off on.

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Operator [10]

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(Operator Instructions) Okay, there seems to be no further questions coming through. So I'll hand back to David for the closing comments.

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David Francis Nangle, Vostok Emerging Finance Ltd. - CEO, MD & Director [11]

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Yes. Thank you, operator. Thank you, everybody, for dialing in and showing interest in our story. And as ever, if you have any questions or any interest as you go, please feel free to contact me directly or Henrik Stenlund in our Stockholm office. We're always happy to discuss and get feedback on our story. Thank you.

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Operator [12]

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This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.