Growing exposure to the fintech space

Finlab 24 April 2019 Update
Download PDF German PDF Download

FinLab

Growing exposure to the fintech space

Financials

Scale research report - Update

24 April 2019

Price

€15.6

Market cap

€82m

Share price graph

Share details

Code

A7A

Listing

Deutsche Börse Scale

Shares in issue

5.2m

Last reported net cash at 31 December 2018

€13.4m

Business description

FinLab is an incubator and builder of fintech companies based in Germany. It also has holdings in two relatively mature asset management businesses, Heliad and Patriarch, which gives it stable cash flows and a strong balance sheet. It currently has 10 fintech investments.

Bull

Good cash position may translate into NAV and earnings-enhancing acquisitions.

Strong balance sheet and stable cash flows.

Listed exposure to a growing portfolio of fintech companies in Germany.

Bear

Small free float and low liquidity.

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

Weak performance and management changes at Heliad.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

FinLab’s recent developments are characterised by successful new funding rounds completed by several of its private portfolio companies and their ability to attract new high-profile investors. This was coupled with good operational progress, including important client wins (eg Authada) and the introduction of new products (eg nextmarkets). On the other hand, FinLab’s NAV and overall result in FY18 was negatively affected by the strong share price decline (c 50% in 2018) posted by Heliad Equity Partners. FinLab continues to expand its fintech portfolio and has some firepower left for a few additional investments.

Slight decline in NAV due to Heliad’s revaluation

FinLab posted an increase in diluted EPS in FY18 of c 10% to €3.14, driven by a gain on the partial exit from Deposit Solutions (with the company retaining a 7.7% stake), as well as the revaluation of non-listed fintech holdings following new funding rounds (Deposit Solutions, nextmarkets, Kapilendo and Authada). It also booked €0.9m in dividend income from Heliad Equity Partners. However, its overall result stood at a negative €3.7m (vs a positive €30.8m in FY17) on the back of the significant share price decline of Heliad Equity Partners. Nevertheless, FinLab’s NAV fell only slightly to €20.44 per share vs €20.83 at end-2017.

Fintech portfolio approaching targeted composition

The company has concluded three new investments since our last update note, including awamo, Cashlink and ONPEX, which we discuss in detail later in this note. As a result, FinLab now holds a stake in 10 fintech companies, which compares with the maximum targeted size of its portfolio (determined by FinLab’s active management approach) of around 12–14 companies. The company has enough dry powder to conduct a few additional investments this year, with a cash position of €13.4m at end-2018 (even if part of it has already been spent on ONPEX and the new funding round of Iconiq Lab).

Valuation: Discount to NAV returned

FinLab’s last reported NAV at end-December 2018 stands at €20.44 and the company is trading at a discount to NAV of 24%. Heliad Equity Partners, one of FinLab’s largest portfolio holdings, is also trading at a discount to its NAV (which at end-December 2018 stood at c 23%). While it is typical for investment companies to trade at a discount, valuing Heliad at par with its NAV would translate into FinLab’s discount at c 28%.

Historical financials

Year
end

Total Income
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

6.5

7.1

1.44

0.00

10.8

N/A

12/16

4.9

14.0

2.98

0.00

5.2

N/A

12/17

4.4

14.5

2.85

0.00

5.5

N/A

12/18

4.7

17.1

3.14

0.00

5.0

N/A

Source: FinLab accounts, Edison Investment Research

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.

Financials: Heliad weak, non-listed holdings strong

FinLab reported diluted EPS at €3.14 in FY18 compared with €2.85 in FY17. Revenues related to services provided to subsidiaries and equity interests rose to €1.9m in FY18 from €1.5m in FY17, which was driven by the €0.5m performance fee received from Heliad Management in the first half of the year. The company’s income from investments went down by 8.8% y-o-y to €2.3m despite the higher dividend from Heliad Equity Partners (€0.20 per share vs €0.15 in FY17) and its first management fee from the EOS fund (in the form of a priority profit share). EBIT decreased to €0.8m from €1.5m in FY17, largely due to higher personnel expenses and advisory costs (with the increase in the latter related to the new EOS fund).

FinLab’s bottom line was supported by the €3.8m net disposal gains (vs c €0.2m in FY17), largely related to the successful partial exit from Deposit Solutions back in August 2018, which was accompanied by a new funding round, putting the company’s overall valuation at US$500m. Following the transaction, FinLab retained a 7.7% stake valued in excess of €30m. The company’s net write-ups of securities and financial assets amounted to €12.5m, marginally below the previous year’s number (€12.8m). This was the result of revaluations in conjunction with several founding rounds conducted by portfolio holdings, most notably the above-mentioned capital measure of Deposit Solutions, as well as nextmarkets, Kapilendo and Authada.

Consequently, FinLab’s net income went up to €16.9m from €14.2m in FY17. However, this does not take into account the change in revaluation reserve, which was down by €20.6m (vs a rise of €16.5m in FY17), mainly on the back of the c 50% decline in the share price of Heliad Equity Partners, which remained close to the end-2018 levels year to date. As a result, we estimate that Heliad is no longer FinLab’s largest portfolio holding and has been overtaken by Deposit Solutions, as the current stake in Heliad is valued at around €20m compared to more than €30m in the case of Deposit Solutions. FinLab’s overall result (including changes in revaluation reserve) stood at a negative €3.7m vs a positive €30.8m in FY17.

Heliad’s price decline was accompanied by weaker results in FY18 vs the prior year, driven by the reduced valuation of listed companies, as well as some write-downs on non-listed holdings. Heliad reported a net loss for FY18 of €56.6m, which was particularly affected by an €8.1m write-down on Sleepz. Meanwhile, Heliad’s managing director Thomas Hanke was replaced by FinLab’s management board members, Stefan Schütze and Juan Rodriguez. We believe these changes may be associated with Heliad’s subdued performance recently. Given the above-mentioned high FY18 loss, FinLab is unlikely to receive a dividend payment from Heliad this year.

Exhibit 1: Financial highlights FY18

in €000s, unless otherwise stated

FY18

FY17

change y-o-y

Revenue

1,945

1,515

28.4%

Income from investments

2,250

2,467

(8.8%)

Other operating income

495

374

32.4%

Total income

4,690

4,357

7.6%

Personnel expenses

(2,439)

(1,760)

38.6%

Non-personnel expenses

(1,462)

(1,140)

28.2%

EBIT

789

1,457

(45.8%)

Financial result, of which:

16,294

13,002

25.3%

Income from the sale of securities and financial assets

10,144

879

N/M

Retirement of securities and financial assets

(6,340)

(676)

N/M

Write-ups and write-downs of securities and financial assets

12,462

12,763

(2.4%)

Interest and similar income

35

36

(2.8%)

Interest and similar expenses

(6)

0

N/M

EBT

17,083

14,459

18.1%

Taxes on income

(167)

(245)

(31.8%)

Net result for the period

16,916

14,214

19.0%

EPS (€)

3.14

2.85

10.2%

Overall result (including change in revaluation reserve)

(3,669)

30,759

N/M

Source: FinLab accounts, Edison Investment Research

FinLab’s NAV per share declined to €20.44 at end-2018 from €22.59 at end-September 2018 and €20.83 at end-2017. This was largely attributable to the above-mentioned drop in Heliad’s share price, which more than offset the write-ups on non-listed holdings and disposal gain on Deposit Solutions. However, it must be noted that the NAV reduction in FY18 was rather limited at just 2%, compared with the DAX negative total return performance at c 18% in 2018. In terms of capital measures, FinLab conducted a capital increase in April at an issue price of €20.75 per share (vs the current level of €15.60), raising gross proceeds of around €5.2m.

Recent portfolio developments

FinLab has conducted a number of new investments in H218 and post balance sheet date. This includes the seven-figure investment in awamo, a provider of cloud-based core banking systems for small to medium-sized microfinance institutions in Uganda in September 2018. In November 2018, FinLab closed a seven-digit investment in stokera, which was acquired as part of a seed-financing round from Cashlink (stokera’s majority stakeholder). Cashlink intends to use the new capital to grow its team, as well as build and launch stokera, which is a blockchain-based platform for tradable, virtual start-up shares. FinLab acquired a 20% stake in Cashlink. Moreover, in February 2019, the company invested (together with several business angels) a high seven-digit figure in ONPEX, a provider of modular, white-label Payment-, Banking- and Compliance-as-a-Service solutions. The company offers API-based, multi-currency IBAN accounts, and aims at creating simple, compliant and cost-efficient payment and banking solutions. We note that the B2B profile of FinLab’s recent investments is in line with the company’s strategy to explore new opportunities in this segment rather than the more saturated B2C space. Following these acquisitions, FinLab’s fintech portfolio has now grown to 10 holdings. This compares with the management’s target of around 12–14 fintech portfolio investments, which is the maximum number of companies FinLab can actively manage at a time. Consequently, even though there is still scope for further transactions (the company had €13.4m in cash on its balance sheet at end-2018), the emphasis may gradually shift to value creation in existing holdings rather than portfolio expansion.

On top of the above, Iconiq Lab (one of FinLab’s existing holdings) closed a seven-digit financing round in January this year in order to further develop and launch its Asset-Management-as-a-Service (AMaaS) platform. The project is aimed at providing a comprehensive solution for asset managers to optimise the execution of their own crypto investment strategies. AMaaS is also the infrastructure behind Iconiq Funds’ crypto asset index funds. Moreover, with the use of new funds, the company hopes to scale up its existing business units, Iconiq Lab (a decentralised venture capital group and accelerator programme) and Iconiq Funds (an issuer of passively managed crypto asset index funds tracking the top digital assets by market capitalisation). We appreciate the fact that as part of the new financing round, the company was also able to obtain a new prominent investor, High-Tech Gründerfonds, a large reputable German VC investor in the high-tech space with a current total investment volume of around €0.9bn.

The new funding round represents a continuation of Iconiq Lab’s fund-raising efforts from last year. As at September 2018, Iconiq Lab raised €2.5m of proceeds from the pre-sale of 4.1m tokens throughout 2018. Part of the proceeds (€1.0m) was used to fund the first batch of its Initial Coin Offering ICO accelerator programme. The Iconiq Holding team purchased an additional 3m tokens. In total, the company planned to sell 20m tokens, but has already burned (ie cancelled) 10m of unsold tokens.

Apart from funding/investment activities, we would like to highlight Authada’s important client win as it was able to attract comdirect bank as its customer to use its identity solutions. This comes after the co-operation with Paysafe announced in July last year.

Valuation

FinLab’s development is driven by its ability to grow NAV over time. Earnings in any given year can be less informative as the timing of revaluations and exits, which are reflected in the income statement on recognition, can be volatile.

The company’s NAV per share declined by 2% to €20.44 in FY18, with its share price posting a c 41% decrease over that period. Currently, FinLab’s shares are trading at a 24% discount to last reported NAV. At end-December 2018, c 20% of the company’s NAV represented its holding in Heliad Equity Partners, valued at a 23% discount to its own NAV, which stood at €6.20 at end-2018. The latter already reflects the write-down on Sleepz discussed earlier. While it is typical for investment companies to trade at a discount, it is instructive to consider the impact on FinLab’s NAV if Heliad’s assets were reflected at NAV, given that Heliad’s discount has been gradually falling in recent years. If the discount were removed, FinLab’s NAV (at end-December 2018) would rise to €21.64 per share, suggesting that the shares would now trade at a discount to last reported NAV of c 28%.

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


General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

This paragraph mark is needed to maintain formatting, please leave this text for the editors.

Share this with friends and colleagues