FinLab — Several holdings complete financing rounds

FinLab reported a more than threefold y-o-y improvement in EBIT in H118 (which amounted to €1.02m) on the back of a 58.9% y-o-y increase in total income. The revenue related to services provided to subsidiaries and equity interests rose from €0.76m in H117 to €1.22m in H118, assisted by the €0.5m performance fee received from Heliad Management. Income from investments reached €1.21m compared with €0.67m in H117 and included a higher dividend from Heliad Equity Partners compared to last year (€0.89m vs €0.67m in H117), as well as a dividend from Heliad Management (€0.32m). Meanwhile, personnel expenses increased by 24.3% y-o-y to €1.06m from €0.85m, but this was largely due to the valuation of options issued under the stock option programme, while non-operating expenses rose moderately by 18.0% y-o-y to €0.7m.

However, net income for the period dropped by 45.7% y-o-y to €1.6m. This is primarily because of the limited extent of write-ups in H118 (€0.92m vs €2.52m in H117), with the only major event triggering a revaluation of non-listed holdings being the new financing round of nextmarkets. However, it is worth noting that there were significant positive events post-balance sheet date, including the profitable partial sale and new financing round of Deposit Solutions (announced on 16 August), as well as new funding rounds in the case of kapilendo (announced on 11 July) and Authada (21 August), which will be reflected in the H218 results (we discuss these in more detail below). FinLab reported a negative overall result of €7.28m compared with a positive €7.56m in H117. It was driven by a €8.9m decline in the revaluation reserve, which is fully attributable to the c 21% share price decline of Heliad Equity Partners in H118.

As at end-June 2018, NAV per share stood at €19.51, representing a 6.3% decline compared to end-2017, which resulted mainly from the lower market value of Heliad Equity Partners. Nevertheless, total NAV increased by 2.5% to €102.2m following the issue of 250,000 shares at a price of €20.75 in April. The only transaction concluded in H118 was the second part of the Series A financing round of nextmarkets, with €6m proceeds bringing the total amount raised through this series to €9.5m. New shareholders were brought on board, including Axel Springer Media for Equity, Cryptology Asset Group and the British hedge fund manager Alan Howard.

As per management estimates, the favourable post-balance sheet date events should translate into NAV per share of c €23.0 at end-September 2018, ie around 18% ahead of the end-June 2018 figure. The most significant impact came from the latest financing round of Deposit Solutions combined with the partial exit from the investment. The capital increase resulted in an additional US$100m, putting Deposit Solutions’ value at US$500m. The new shareholders have also acquired part of FinLab’s stake valued at US$11.5m. Following the deal, the company retained a 7.7% stake valued in excess of €30m and realized a gain, which will be fully reflected in FY18 earnings (a contribution of c €15m in IFRS terms), increasing NAV per share by more than €3.0, as per management estimates.

Moreover, in July 2018, the company finalised the second part of the Series B financing round for kapilendo, with €6.0m raised from Axel Springer Media for Equity following the €7.0m collected in the first part, completed in 2017. Another positive impact will come from the latest financing round of Authada, which enjoyed an undisclosed, seven-figure sum provided by FinLab and Commerzbank Group.

In parallel with the capital increase, nextmarkets launched its real-money offer after being granted a banking licence in Malta (which was required to enter the EU markets). This means the company is now offering real-money trading accounts rather than only demo accounts. It intends to launch its ETFs and cryptocurrencies offering, and introduce real-time trading ideas on the web and mobile devices. Currently, its team of 14 investment professionals covers more than 1,000 markets including stocks, indices, foreign exchange and commodities. nextmarkets will now focus on dynamic growth in Europe, although it also has aspirations to grow globally.

Deposit Solutions facilitated more than €9bn in deposits by September 2018 (vs €4.0bn in 2017 and €5.0bn in Q118) and now connects banks from 16 European countries. Proceeds from the latest capital increase will be used not only for investments in current markets, but also to attract banks from other locations. According to the founder, Deposit Solutions may enter Switzerland with its B2C offering as early as October this year, with plans for a possible expansion into three other markets thereafter.

In January 2018, the eID-Core solution from Authada became the first and only identification procedure in Germany certified by the Federal Office for Information Security (BSI). In H118 Authada expanded its business and in May its digital identification solution was introduced at the German/British social trading platform, ayondo. In July 2018, eID-Core was implemented by the Austrian paysafecard, one of the global market leaders in the field of online prepaid payment methods. Further developments at Authada could be assisted by the strong customer authentication requirement introduced by the Payment Services Directive II (PSD2), which will come into force in September 2019, as the company’s product already meets the standard.

In March 2018, Block.one (the developer of blockchain software EOS.IO) and FinLab announced the $100m FinLab EOS VC Fund, which will invest in projects using EOS.IO blockchain software and seek to benefit the EOS ecosystem. The fund, managed by FinLab, concluded its first transaction in September 2018, as it invested an undisclosed seven-digit amount in Instaffo, the developer of VAEON, an independent and open protocol with built-in governance that seeks to redefine how personal data are structured, exchanged or sold.

In September 2018, FinLab concluded a seven-figure investment into awamo, a provider of cloud-based core banking systems for small to medium-sized microfinance institutions in Uganda. This brings FinLab’s total fintech portfolio to 10 holdings, which is already at the lower bound of management’s target of 10-12 investments.

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.

Against the backdrop of a 6.3% decrease in NAV per share in H118, the company’s share price dropped by 17.7%, translating into a narrowing premium to NAV from 13.7% to null. If we factor in the NAV of €23 expected by the management at end-September, the company’s shares trade at a discount of nearly 11%. Moreover, c 32% at end-June 2018 represented its holding in Heliad, which was valued at a 28.2% discount to its own NAV (the share price at end-June was €7.45 vs NAV at €10.38). While it is typical for investment companies to trade at a discount, it could be useful to consider the impact on FinLab’s NAV if Heliad’s assets were reflected at fair value (NAV) given that Heliad’s discount has been gradually falling in recent years. If the discount were removed, FinLab’s NAV (as at end-June 2018) would rise to €22.01 per share, suggesting that shares would have traded at a discount to last reported NAV of c 11% at end-June.

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