Continued focus on its existing portfolio

FinLab 14 October 2021 Update
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FinLab

Continued focus on its existing portfolio

Financials

Scale research report - Update

14 October 2021

Price

€23

Market cap

€127m

Share price graph

Share details

Code

A7A

Listing

Deutsche Börse Scale

Shares in issue

5.5m

Last reported net cash at end-H121

€8.9m

Business description

FinLab is an incubator and builder of fintech companies based in Germany. It has holdings in two relatively mature asset management businesses, Heliad and Patriarch, which gives it stable cash flows and a strong balance sheet. It also receives 50% of the fees charged by the FinLab EOS VC Fund.

Bull

FinLab’s portfolio companies announced major business developments post period end.

Exposure to various fintech themes.

HEP resumed its investment activity recently.

Bear

Small free float and low liquidity.

Fintech investments are inherently high risk and the portfolio is relatively concentrated.

Limited visibility on its strategy post management change.

Analysts

Milosz Papst

+44 (0)203 077 5700

Anna Dziadkowiec

+44 (0)203 077 5700

FinLab reported an NAV total return of 18% in H121, backed by the strong share price performance of its only listed holding Heliad Equity Partners (HEP) and developments at its unlisted fintech investments. The changes to its shareholder structure (with Bernd Förtsch becoming the majority owner) in January 2021 resulted in the appointment of new management in April 2021. Meanwhile, FinLab has remained focused on its existing portfolio companies and investing through the FinLab EOS VC fund.

Performance fee from HEP drives H121 results

FinLab reported net profit in accordance with the German Commercial Code (HGB) of €2.4m in H121 versus €0.4m in H120, driven by the performance fee of €3.2m (vs nil in H120), which it charged HEP after HEP reported a strong realised profit in FY20. This was only partly offset by higher personnel costs of €2.1m in H121 (vs €0.7m in H121), which included a €1.4m special payment to the former members of the management board, Juan Rodriguez and Stefan Schütze, who resigned from their positions in April 2021.

M&A activity at portfolio holdings

FinLab’s portfolio holdings have announced a number of major developments since our previous note. In H121, Deposit Solutions completed a merger with its German competitor Raisin (operating the WeltSparen platform), while after the period end Kapilendo merged with Invesdor (operating a crowdfunding platform in the Nordics and DACH region). Moreover, Kapilendo Custodian was acquired by the private bank Hauck & Aufhäuser. Finally, HEP recently resumed its new investment activity and invested a mid-double-digit million-euro amount, according to HEP’s management.

Valuation: Trading at a discount to NAV

After a c 4% drop in FinLab’s share price between end-H121 and 13 October 2021, the company’s discount to last reported NAV at end-H121 has slightly widened to c 39% from c 35% at end-H121. This was coupled with an increasing discount to last reported NAV at end-H121 of its major portfolio holding HEP (c 29% of FinLab’s NAV at end-H121, according to our estimates), which was c 49% on 13 October 2021 versus c 37% at end-H121. We believe this was partly linked to a c 37% share price drop in flatexDEGIRO (c 81% of HEP’s NAV at end-H121) between the end of H121 and 13 October 2021, following a moderation in its results in Q221 after an extraordinarily strong Q121 (as expected by the company).

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

4.4

14.5

2.85

0.00

8.2

N/A

12/18

4.7

17.1

3.14

0.00

7.4

N/A

12/19

4.6

4.3

7.33

0.00

3.2

N/A

12/20

4.1

6.3

1.11

0.00

20.9

N/A

Source: FinLab accounts

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Posting a c 18% growth in NAV in H121

FinLab’s NAV per share increased c 18% to €37.73 in H121, which translated into a €35m rise of its NAV to €206m at end-H121, according to our calculations. We estimate this was backed by a c €21m rise of the market value of FinLab’s stake in its only listed holding HEP to c €60m at end-H121 after its share price increased c 55% in the period. This was primarily driven by flatexDEGIRO (c 81% of HEP’s NAV at end-H121, according to our estimates, based on HEP’s 5.2% stake in the company at end-H121), whose price surged 86% between end-2020 and end-June 2021 to its all-time high. Given HEP’s share in FinLab’s NAV is large (c 29% of FinLab’s NAV at end-H121, according to our estimates), we note its share price slipped c 22% between end-H121 and 13 October 2021, which was coupled with a c 37% share price drop in flatexDEGIRO over the same period. This drop may be due to some moderation in results in Q221 after an extraordinarily strong Q121 (as expected by the company). We discuss recent developments at flatexDEGIRO and HEP’s new investments in our latest update note.

Based on our conversation with management, we understand that FinLab’s NAV growth in H121 was also assisted by the revaluation of nextmarkets post completion of the Series B funding round in March 2021, which we described in our previous update note. FinLab’s annualised NAV total return was c 25% since its inception in 2014.

FinLab’s net profit in accordance with the German Commercial Code (HGB) was €2.4m in H121 versus €0.4m in H120, driven by an increase in revenue to c €3.9m from c €0.8m a year earlier. This included a c €3.2m performance fee from HEP (vs nil in H120), attributable to its realised profits in FY20, backed by the partial exit from flatexDEGIRO (see details in our September 2020 update note). Moreover, FinLab booked a €0.6m increase in operating income to €1.1m in H121, which included a €0.9m gain on the disposal of non-current securities in the period (vs no meaningful gains of this kind in H120). Based on our discussion with management, we understand that it was related to the sale of its stake in Coinbase, which completed its IPO in H121. All these were partly offset by a notable increase in personnel expenses by €1.4m to €2.1m in H120, affected by special payments to former members of the management board Juan Rodriguez and Stefan Schütze (€1.4m in H121 vs nil in H120), linked to their resignation from the management board in April 2021 (see below). FinLab had cash and bank balances of €8.9m at end-H121 versus €6.1m at end-H120.

We note that FinLab presented its H121 results in accordance with HGB as it has discontinued its voluntary IFRS reporting starting from FY21 (see below). Therefore, the revaluation of its stake in the listed HEP was not reflected in its financial statements in H121.

Exhibit 1: H121 results highlights

€000s (HGB)

H121

H120

y-o-y change

Revenue

3,886

725

N/M

Other operating income

1,125

459

145.0%

Expenses for services used

(192)

(192)

0.3%

Personnel expenses

(2,067)

(715)

189.2%

Amortisation and depreciation of intangible assets and property, plant and equipment

(13)

(11)

12.0%

Other operating expenses

(704)

(708)

(0.5%)

Income from investments

973

982

(0.9%)

Income from other securities and loans held as financial asset

0

0

N/M

Other interest and similar income

25

91

(72.9%)

Write-downs of financial assets and securities classified as current assets

(6)

(2)

194.6%

Interest and similar expenses

0

0

N/M

Income from profits and loss transfer agreement

0

0

N/M

EBT

3,027

630

N/M

Taxes on income

(616)

(202)

N/M

Other taxes

(1)

(1)

0.0%

Net profit

2,410

427

N/M

Source: FinLab

Reorganisation after shareholder change

In January 2021, Bernd Förtsch increased his share in FinLab to more than 50% (see our previous update note); he is also the controlling shareholder at HEP. This was followed by the resignation of Juan Rodriguez and Stefan Schütze from FinLab’s and HEP’s management board, effective 30 April 2021. Rodriguez and Schütze were replaced by Falk Schäfers and Matthias Kröner in April 2021. That said, Matthias Kröner resigned from this position in September 2021, which we understand (based on our discussion with Falk Schäfers) was always part of the corporate development plan.

Major organisational changes at FinLab in recent months also included the transfer of its asset management mandate in the FinLab EOS VC Fund to C3 Management, a company fully owned by Juan Rodriguez and Stefan Schütze, in July 2021. FinLab remains a limited partner in the fund and will participate in its development and receive management and performance fees. While the reorganisation reduces FinLab’s fee income from the fund by c 50%, the company expects it to be neutral for FinLab’s results due to the removal of costs associated with managing the fund.

Finally, FinLab announced in September 2021 that it will move its listing from Deutsche Börse's Scale Segment to the Basic Board and discontinue its voluntary reporting under the IFRS standards, which will significantly reduce its listing and reporting costs, according to management. The former will not restrict tradability of its shares.

Major fintech holdings complete mergers

Although FinLab has not made any new or follow-up investments so far in 2021, its portfolio companies have announced major business developments, including the merger activity at Deposit Solutions and Kapilendo (see details below). Meanwhile, the FinLab EOS VC Fund has continued its investment activity, which included a €2m seed round that it led in a Portuguese blockchain-based open innovation platform TAIKAI in September 2021.

In June 2021, Deposit Solutions completed its merger with Raisin, one of its major German competitors operating a B2C platform for savings and investments. The deal rationale was to create a European champion with global ambitions. The merged companies will operate as Raisin DS, which currently collaborates with c 400 banks and financial services providers from over 30 countries and services c 550k direct customers. It is active in Europe and the United States and backed by renowned international investors. FinLab will hold a low-single digit percentage stake in the merged company, according to management. According to our estimates, Deposit Solutions represented c 50% of FinLab’s NAV at end-March 2020 (see more details in our review note).

In July 2021, Kapilendo announced a merger with Invesdor, a Finland-based company operating a crowdfunding platform in the Nordics and DACH region. This follows a merger of Invesdor and Finnest in 2019, an Austrian crowdinvesting platform, offering debt-based crowdfunding for medium-sized companies. The three companies will operate as Invesdor, which has so far provided financing of more than €300m in over 500 funding rounds to more than 110k customers. Moreover, Kapilendo Custodian (a crypto custody provider) launched by Kapilendo in 2019, received the German Federal Financial Authority (BaFin) authorisation to provide crypto custody services in Germany in mid-September 2021. After this decision, the private bank Hauck & Aufhäuser announced the acquisition of Kapilendo Custodian. FinLab did not disclose any details on the M&A activity at Kapilendo. According to our estimates, Kapilendo represented c 5% of FinLab’s NAV at end-March 2020 (see more detail in our review note).

In May 2021, Authada (a provider of digital identity solutions) together with Infocert (a European digital trust service provider) launched a Qualified Electronic Signature (QES) on the market. Authada highlights the QES meets the requirements of the European Union regulation on electronic identification and trust services for transactions in the internal market (eIDAS Regulation), which means it can replace a handwritten signature in many cases. These include, among others, consumer loan agreements, mobile phone contracts or terminations of lease agreements. As part of the partnership, Authada provides its app-based eID identification and Infocert generates the valid qualified certificates.

Valuation

FinLab’s NAV per share increased c 18% in H121, which we estimate was largely driven by the revaluation of its stake in the listed HEP and revaluation of unlisted holdings, as discussed above. This was coupled with a 15% rise in FinLab’s share price in the period. FinLab’s share price declined c 4% between end-H121 to 13 October 2021 and its discount to NAV at end-H121 slightly widened to c 39%. We believe this is at least partially associated with the c 22% share price drop in its large portfolio holding, HEP (c 29% of FinLab’s NAV at end-H121, according to our estimates), triggered by a c 37% share price fall in flatexDEGIRO (HEP’s main portfolio holding) over the same period. When we adjust FinLab’s NAV at end-H121 for the change in market value of its stake in HEP between end-H121 and 13 October 2021 and ignore any other factors affecting FinLab’s NAV versus end-June 2021, we arrive at an NAV PS of c €35.34, implying a c 34% discount.

That said, we note that HEP is also trading at a discount of c 28% when adjusted for the share price drop of flatexDEGIRO since end-H121 (see our estimates in our update note on HEP). While it is typical for investment companies to trade at a discount, we note that if HEP’s discount of c 28% was removed, FinLab’s NAV (at end-June 2021) would be c €45.22 per share, implying a c 49% discount to its NAV on a look-through basis.

Exhibit 2: FinLab’s share price and NAV performance

Exhibit 3: FinLab’s discount/premium to NAV

Source: FinLab, Edison Investment Research

Source: FinLab, Edison Investment Research

Exhibit 2: FinLab’s share price and NAV performance

Source: FinLab, Edison Investment Research

Exhibit 3: FinLab’s discount/premium to NAV

Source: FinLab, Edison Investment Research

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