Heliad Equity Partners — Plans to merge with FinLab

HEP’s NAV per share declined by 50% in FY22 to €7.17, primarily due to a 54% fall in the share price of its stake in the listed flatexDEGIRO, which, together with other minor listed holdings, represented c 71% of HEP’s financial assets at end-2021. Most of these investment losses are unrealised, though the company also booked c €3.4m of realised loss in FY22 from the sale of its listed holdings Elumeo and Magforce and part of its flatexDEGIRO stake (578,880 shares, ie a c 0.5% stake); the flatexDEGIRO sale was through exercising the put option it had entered into as part of a collar transaction (HEP currently holds a c 5% stake in flatexDEGIRO). The silver lining is that the share of the flatexDEGIRO stake in HEP’s portfolio value declined to c 38% at end-March 2023, which is less than the aggregate value of all its major private holdings (57% of portfolio value), making HEP, to a greater extent, a growth equity play (in line with its strategy).

The company also booked c €2.8m of net unrealised revaluation gains from its private holdings, which we believe was largely driven by Enpal (a c €7.7m uplift for HEP, according to our calculations) and FINN, partly offset by the write-down of, among others, Klarna and Celsius. We discussed major developments across HEP’s portfolio companies in FY22 in our initiation note, October update note and March update note. These included, among others, successful funding rounds for FINN (Q222), Enpal (Q422) and Razor Group (Q422). HEP’s major new investments in 2022 included: NewtonX (in Q122), a B2B AI-driven knowledge business connecting companies with professionals to provide support in critical business decision-making; FINN (Q122), a car subscription platform in the United States and Europe; and WorkMotion (Q222), an HR management platform.

HEP recently published its NAV update as at end-March 2023, posting an increase in total portfolio value by 2.8% between end-January 2023 (last previous reported figures) and end-March 2023. This was the result of a 3.6% increase in the fair value of the series A/B bucket and a 9.7% increase in the fair value of Burnhard (formerly Springlane), though we note that in both cases it reflects an increase in holdings from a follow-on investment rather than a valuation uplift. Moreover, HEP’s portfolio value was assisted by a 2.1% rise in the value of its stake in flatexDEGIRO. That said, HEP’s NAV per share fell by 5.7% versus end-January 2023 (up c 3% vs end-2022) as a result of the new share issue completed at a discount to NAV (as discussed in our previous note).

Major developments across HEP’s private holdings since our previous update note include Razor Group’s acquisition of Stryze Group, a competitor in the aggregator space. The deal involved Upper90 (an investor in e-commerce aggregation) taking an additional equity investment in Razor Group, bringing the company’s series C round to a close at €80m.

FlatexDEGIRO recently announced its Q123 results, which on a year-on-year comparison reflect the normalisation from an environment with exceptionally high retail investor activity following the pandemic outbreak but before the war in Ukraine. That said, the company experienced a sequential pick-up in activity, which was at least partly attributable to the usual seasonal pattern (Q1 being normally a particularly strong quarter).

The company saw gross client additions of 112k in Q123 (vs 185k in Q122 and 86k in Q422). Net of 13k churn (representing a 2% annualised churn rate, which is below management’s standard assumption of 3–4%), the company added c 100,000 new customers. This translated into a 4.2% year-to-date net customer account growth versus an average 2.1% for its peers (Avanza, Nordnet and Fineco), according to flatexDEGIRO’s management. This is line with management’s target of growing at a rate 1.5–2.0x its peers. Q123 gross cash inflows from clients stood at €3.2bn (and net cash flows amounted to €1.7bn), with flatexDEGIRO’s assets under custody reaching a record-high level of €45.1m in Q123 (vs €43.1m in Q122). This was despite the turmoil in the US banking sector. The number of settled transactions came in at 16.3m in Q123, down 25% y-o-y but up 19% qoq. As a result, flatexDEGIRO’s adjusted revenue (including commission and interest income) was down 17% yoy to €98m but up 12% q-o-q, with a commission per transaction of €4.17 in Q123 versus €4.26 in Q122 and €3.90 in Q422 (with FY23 guidance at €4.25).

The company raised its margin loan rates at DEGIRO and flatex by 100bp from January 2023, with further increases planned for July 2023. Furthermore, it raised the commissions at DEGIRO for US and local trades in Spain, Portugal, Italy and France to €1 (on top of a €1 handling fee, raised from €0.50 in September 2022), effective mid-May 2023. flatexDEGIRO’s EBITDA, adjusted for share-based payments, reached €30m in Q123 (vs €55m in Q122 and €39m in Q422) and reflected, among others: (1) higher marketing expenses in Q123 of €17.2m (in line with expectations of spending 40–50% of the annual budget in the quarter), (2) a one-off tax-incentivised inflation compensation payment to its employees at €3.3m and (3) a fine from the local watchdog (BaFin) of €1.1m. The company’s CET-1 ratio stood at 19.9% (vs a regulatory requirement of 15.6%), with potential to increase upon resolving the relevant BaFin findings to 28%.

Management remains confident that the company can deliver the guidance for the year for adjusted revenue of c €380m (vs €369m in FY22), a moderate increase in adjusted EBITDA and adjusted EBT margin to more than 40% and more than 30%, respectively (vs 39.3% and 29.6% in FY22, respectively). Management also highlighted that the company is on track with the processing of findings of the local watchdog (BaFin, see our previous note for details). The company has made progress with respect to DEGIRO’s margin loan process and management expects all other BaFin findings to be resolved within the next 12–18 months (in line with previously targeted timelines). Management proposed to appoint another supervisory board member (bringing the total number to five members), which was approved during the latest AGM, as well as another management board member (a chief human resources officer).

HEP’s total available resources of c €14.7m at end-2022 consisted of cash and equivalents (€4.6m), the undrawn part of its €23m credit line with UniCredit Bank (€14.2m) and the undrawn part of the €7.5m loan provided in February 2022 by FinLab, HEP’s major shareholder (c €1.3m). Both the FinLab loan and the UniCredit Bank credit line were classified as current liabilities, therefore due before end-2023. To avoid a further increase of net gearing (which at end-2022 stood at 16% of total assets), HEP issued 1.6m shares at €4.40 in March 2023 (out of 1.8m on offer, translating into an 88% subscription rate), which translated into capital proceeds of €7.0m (out of up to €8m planned). We understand that HEP used at least part of the proceeds for follow-on investments in Burnhard (formerly Springlane) and Modifi.

Based on our discussion with management, we understand that the portfolio is overall well-funded at this stage. That said, management has not provided any details on the cash runway across its private portfolio or the extent of cash support it expects HEP will have to provide to any of its portfolio holdings, which we think could provide further reassurance to investors. However, we note that most of its holdings (by count) raised capital in Q222 or later.

HEP’s NAV performance is below the peer average over the last one-, three- and five-year periods due to the recent significant decrease in flatexDEGIRO’s share price, which also affects the long-term results. HEP’s ongoing charges ratio is higher than peers and it does not intend to pay dividends for now, contrary to venture capital trusts (VCTs), which normally distribute dividends on a regular basis.

HEP currently trades at a 41% discount to NAV, wider than the peer group average of 22%. However, we note that VCTs tend to trade at a much narrower discount than some of the other peers (with HEP having the narrowest discount among them, see Exhibit 4). For illustrative purposes, if we applied the current average peer discount to HEP’s NAV at end-March 2023 (adjusted for the subsequent movement in flatexDEGIRO’s share price), we would arrive at a fair value per share of €5.90. Based on a peer group excluding VCTs, we arrive at €4.00 per share.

We believe that forecasting the results of an investment company like HEP is very difficult (if not impossible), as these depend on a number of parameters relating to its existing investments, such as holding period, realised multiple of invested capital (MOIC) and prospective new investment activity. Moreover, HEP’s future earnings will also depend on flatexDEGIRO’s share price performance and realisation path. Having said that, we have updated our scenario analysis, which we included in our latest update note (our detailed assumptions are discussed in the initiation note published in July 2022); see Exhibit 5. The analysis below does not reflect the effects of a merger with FinLab. We note that the year-on-year EPS decline assumed in FY24 is largely due to a high base effect from FY23 related to the recent share price appreciation of flatexDEGIRO (leading to a significant revaluation gain for HEP).