 Oakbloke , hot off the press......Don't CHRY because it's over£50m H1 Adj. operating Income for pre-IPO holding KlarnaThe Oak BlokDear reader"Don't cry because it's over. Smile because it happened" - Dr SeussToday's article picture is a tribute to the great Theodor Seuss Geisel (Dr. Seuss) and hopefully you can recognise which famous food condiments inspired this picture!I'm not sure what connection there could be with either the Fund Chrysalis, or its holding Klarna. Our PM might say to his new best mate "es ist nicht klar"CHRY's holding Klarna (valued 30/6/24 at £100.3m) announced revenue and profit progress in its 1H2024 update. Subscribe for free to receive new posts and support my work.Pledge your supportRevenue was up 16% year on year. Gross Profit up 22%. Operating expense is static (excluding technology and product development it's down by 10% actually*) so adjusted operating income moves from a £33.9 loss in 1H23 to a £50m profit in 1H24 - an £84m improvement!*a 10% drop suggests the much vaunted investment in AI is translating into savings in "the real world". Further evidenced that revenue per employee grew an ASTONISHING 73% in y-o-y to 1H24.?In fact at net profit level, a loss of -£24.7m in 1H24 from -£155.4m in 1H23 illustrates the strong trajectory and improvement year on year.Klarna's CEO comments:Klarna's massive global network of consumers and merchants is expanding rapidly, with continued success in the US as revenue grows 38% YoY in H124. Over 68k new merchant partnerships were established, supporting further engagement from our consumers, and driving strong revenue growth of 27% in H124. This led to SEK 1tn in payment volume through our network in the last 12 monthsThe Oak Bloke had a little shopping experience at Klarna and was gobsmacked to find a "Google-esque" experience. This is referred to in Klarna's Interim Report.?Rather than think of Klarna as purely a buy now pay later experience it's actually much more. It's a way to find what you want as a shopper. I would encourage you to watch this video to understand the powerful dual online and bricks and mortar shopping experiences Klarna has managed to create.?Klarna speak to "becoming ubiquitous". It speaks to a developing ecosystem. That means working with what were once competitors - Payment Service Providers (PSPs) for example. Strategic agreements with Adobe and WorldPay are examples where they've "lost" the gateway role but embraced thousands of merchants who use those PSPs - so overall gained far more than what they've conceded. All the major PSPs appear to be available for a merchant to "plug and play".?The ubiquity for customers: The evidence is that once people start to Klarna they keep going and return for more. This is (Klarna say) due to a combination of saving time, money and assurance. Assurance means fraud protection, hassle-free returns, and delivery tracking..... all in one place.??The ubiquity for merchants: The evidence is also that once a merchant list on Klarna that the benefits mean increasing revenue retention, and growth. Klarna now has over 575k merchants, and that number continues to grow. In the past 12 months, it added over 68k new merchants and expanded strategic partnerships with iconic everyday-use partners such as Voi, Google, and Uber. The deal with Uber is to power its payments portal, with a buy now & pay at the end of the month (when you get paid) for customers..... smart.But Uber aren't the only ones - Klarna also struck a deal with travel giant Expedia/Hotels.com too.?This 5 year view is fasctinating too. Income has increased by ~2.5X, and loans accounts for a portion of that income and these are ~3X over 5 years. What I find fascinating is the 5X growth in "deposits from the public". These exceed "loans to the public" in FY24! Also the average duration of Klarna's credit portfolio is ~40 days. This means the company can recycle its capital 9 times per year (365 days / 40 days = 9.125). Assuming a 1.5% net transaction margin and 30% pre-tax margin, each $100 would generate $100 x 1.5% x 30% margin x 9 loans per year = $4.You imagine loans to be a huge cost to Klarna (or Klarna's merchant). But no. Actually deposits and the Net Interest Margin, make loans profitable, actually! And capital light with CET1 ratio of 14.9%, that's as strong as a major bank.??VALUATIONCHRY owns 1.11% of Klarna so if a $20bn/£16bn price is achieved, the result for CHRY is a substantial £74.80m uplift and a £174.80m realisation.CHRY's £100.3m valuation (as at 30/06/24) implies a £9bn valuation. Klarna's 1H24 revenue is £1bn so £2bn annualised. A £9bn valuation is 4.5X sales. A peer for Klarna is Affirm and its current revenue to (Nasdaq-listed) valuation is 5X sales (but was a much higher multiple previously).?Affirm has similar revenue growth to Klarna but isn't as profitable.Assuming 5X is a fair multiple (which seems quite conservative) and furthermore assuming Klarna continues to grow at 27% then in FY2025 based on revenue growth to £2.5bn and expectations of a 27% growth to £3.2bn then we neatly arrive to £16bn.But isn't the Klarna story a little bit like Ebay (and Paypal)? They got divorced in 2015. Until that point weren't they "an ecosystem" and weren't they "ubiquitous"? Back in 2009 they achieved $8.7bn revenue adjusted for inflation which is approximately £3.2bn today. My FY26 expectation of Klarna. Back then a $30.5bn valuation adjusted for inflation is £34bn today or 377% of CHRY's valuation.?EBay revenue and profit "back in the day".Of course you could point to the $2.39bn net profit Ebay also achieved in 2009, which is £2.7bn adjusted for inflation today and tell me I'm over egging the pudding. But with another two years could Klarna achieve that? It would require a "flywheel" effect in growth and a lower number feels "nailed on" given the £84m improvement to the bottom line in the past 12 months.But compared to Affirm leaking between $0.5bn - $1bn a year and forecast to do so in both 2024 and 2025, the 5X multiple is a little harsh.So while I will settle for concluding the forward prospects for Klarna feel to be "at least" a £16bn IPO, I also believe the 1H24 results demonstrate how the "ubiquity" of Klarna's platform and services tap into a "Bricks vs Clicks" world in a way I have never seen Ebay do. I'm probably the last person you'd call an "avid shopper", but I can see how Klarna addresses the world in a uniquely clever and nuanced way while creating an ecosystem where retailers and brands thrive, consumers are compelled to return and that ubiquity is worth something.-ConclusionKlarna is only part of the story at CHRY. You can buy CHRY for an 82.9p ask. Its NAV is 145.25p and discount is 42.9%. So Klarna is?So effectively that £100.3m share of Klarna you can buy for £57.4m. (due to the 42.9% discount to NAV) and the implied valuation is only £5.1bn so if £16bn is correct you are buying Klarna with more than 3X upside. If "Ebay" valuations are correct make that 5X-6X.?CHRY's share price and NAVFollowing the sale of Graphcore CHRY now has £50m working capital, so any realisation will be going to buy backs.£174.8m of buy backs at 82.9p a share would buy back 210.85 shares (of 595.15m) leaving 384.3m shares.Those remaining shareholders would have £50m cash and £719.7m of assets. That's a NAV of 200.3p per share (a 55p per share accretion).And Klarna's not the only IPO brewing away at CHRY.Featurespace, Smart Pension and Starling are all mooted as future IPOs or buy outs. Visa are talks for a $925m buy out of Featurespace and CHRY hold 10.61% of shares. That would be a sale at the NAV price (not at 42.9% below as today's share price suggests)-Rev BeautyThere are even upsides valued at zero in the Net Asset Value figure. CHRY is pursuing legal action against Revolution Beauty. This is based on what CHRY say were inaccurate statements given prior to CHRY investing in REVB (which it did at great loss).CHRY on 22/04 updated on its REVB claim and said "a claim of £39m, together with a claim for consequential losses of a further £6.2m. The Company considers that it has a strong case and is willing to pursue it."If it achieves that that's £45.2m or an extra 7.5p per share?So don't CHRY because it's over, I wrote. Smile because it happened.Will the CHRYing be those who miss out? Or those who join in? That's for you to decide, and potentially to smile if it happens.Try it for yourself - the ubiquity of a Klarna shopping experience. And then consider the upside of a Klarna investment experience.Try it, try it, Sam I am. Will you not try green eggs and ham?And perhaps like me you'll find it compelling too.Regards,The Oak Bloke.Disclaimers:This is not adviceMicro cap and Nano cap holdings even those held in VC stocks might have a higher risk and higher volatility than companies that are traditionally defined as "blue chip"Thanks for reading The Oak Bloke's Substack! Subscribe for free to receive new posts and support my work.Pledge your supportThe Oak Bloke's Substack is free today. But if you enjoyed this post, you can tell The Oak Bloke's Substack that their writing is valuable by pledging a future subscription. ?? |
This sounds promising...
Lynch-backed Featurespace in talks about Visa takeover -
A bid from Visa for the Cambridge-based fraudbuster could value Featurespace, which was set up in 2008, at approximately £700m, Sky News learns.
A British fraud detection company backed by Mike Lynch, the technology entrepreneur who died this week, is in talks about a sale to Visa, the American payments giant, worth hundreds of millions of pounds.
Sky News has learnt that Featurespace, which was founded in 2008 and is headquartered in Cambridge, is in advanced negotiations about a deal.
Estimates of its potential value varied this weekend, but one insider said it could be worth more than £700m, while another said it could ultimately be worth less than that.
Sources cautioned, however, that a deal had yet to be formally agreed and could still fall apart... |
Chrysalis Investments Limited ("Chrysalis" or the "Company")
Quarterly NAV Announcement and Trading Update
Net Asset Value
The Company announces that as at 30 June 2024 the unaudited net asset value ("NAV") per ordinary share was 145.25 pence.
The NAV calculation is based on the Company's issued share capital as at 30 June 2024 of 595,150,414 ordinary shares of no par value.
June's NAV represents a 2.21 pence per share (1.5%) decrease since 31 March 2024.
Movement in the fair value of the portfolio accounted for approximately 1.72 pence per share, with foreign exchange generating an adverse movement of approximately 0.18 pence per share. Fees and expenses make up the balance.
Richard Watts and Nick Williamson, Managing Partners of Chrysalis Investment Partners LLP comment:
"The Company's NAV saw a small decline over the period, with improvements in the valuations of a number of positions offset by the material write down in wefox. Following further recent investment into wefox, the Company's position is now substantially underpinned by downside protection mechanisms, significantly reducing the downside materiality to the Company's NAV from this asset.
Liquidity has improved substantially post period end, with the announcement of the sale of Graphcore to SoftBank Group Corp ("SoftBank"), and currently stands at approximately £49 million, putting the Company in a strong capital position having met the "cash reserve" element of the Capital Allocation Policy.
Market interest in the later-stage, private assets space remains encouraging. In May, Forge's Private Markets Update showed a big drop in the level of investor intention to sell, which it notes "may be due to growing confidence in their equity holdings".
We continue to advise on maximising the value of the Company's portfolio holdings while exploring opportunities, at the appropriate price, to increase liquidity, including the option of raising debt. The potential outcomes we are advising on are at different stages of maturity and certainty and we look forward to updating the market once we have more clarity. Considering the improved liquidity backdrop the Board is now reviewing how to best implement the second phase of the Capital Allocation Policy."
Portfolio Activity
Chrysalis invested €5.5 million into wefox in the period as part of a funding solution it has been discussing with both the company and other shareholders. A portion of the Wise position, amounting to £6.2 million, was sold in the period thus more than funding this investment.
Post period end, a further €15 million was invested into wefox, which was more than covered by the proceeds from selling the entire position in Graphcore, which raised approximately £45 million, of which £44 million has been received to date. The Investment Adviser does not envisage wefox requiring further investment by the Company.
Portfolio Update
The portfolio in aggregate continues to perform robustly:
Starling
Starling's valuation rose in the period driven by multiple expansion of the listed peer group and removal of the calibration discount to the last secondary transaction (albeit an illiquidity discount is still applied). The progress of Engine has also begun to drive valuation upside for Starling.
Following significant news flow in the prior quarter, namely the appointment of Raman Bhatia as CEO and the success of Engine, this quarter saw less news flow; however, the Investment Adviser believes the company continues to perform in-line with its expectations.
wefox
The valuation of wefox fell materially in the period, reflecting both an increase in weighting towards valuation multiples in the lower quartile of the relevant group of listed peers, as well as the addition of a significant discount at group level, to reflect recent funding uncertainty. The underlying revenues that the above multiples were applied to were broadly consistent versus the last quarter.
The Company has supported wefox with additional capital and the Investment Adviser has been working closely with other stakeholders to create a viable solution to wefox's funding requirements that it believes will allow the business to continue its journey towards profitability.
Klarna
Klarna announced the sale of Klarna Checkout, which has a 40% market share in Sweden and 20% across the Nordics, in June. Klarna has been building functionality with multiple payment service providers ("PSPs") over recent years, and the Investment Adviser believes this disposal could allow Klarna to form closer relationships with global PSPs.
Elsewhere, Klarna Plus - Klarna's first subscription service for US customers - reached 100,000 subscribers. Klarna Plus allows members to waive certain service fees and get access to special deals and offers. Costing $7.99 per month, this suggests Klarna Plus is generating approximately $10 million annually, contributing towards Klarna's 1Q24 revenue growth in the US of 38% year-on-year.
Klarna's drive towards AI continues. Approximately 87% of Klarna's employees are now using AI, with the internal Kiki assistant dealing with 2,000 enquiries per day. Externally, AI has helped Klarna reduce its sales and marketing expenses by $10 million on an annualised basis, contributing to S&M expenses falling 11% in 1Q24.
Speculation concerning an IPO continues to swirl. The CEO has given a number of interviews in the quarter indicating that an IPO is likely to happen "quite soon" and intimating it would occur in the US.
The Company has already considered the ramification of such a move; at the Company's carrying value, this could imply a liquidity injection of £100 million if a full exit is made, equivalent to approximately 21% of the Company's current market capitalisation.
Smart Pension
In March 2024, Smart announced that Assets under Management ("AuM") hit £5 billion in the UK Smart Pension Master Trust ("SPMT"), with regular contributions now running at £1 billion per annum. This growth has been driven organically as well as through acquisitions, such as that of Evolve in June 2023, which added £750 million in AuM.
In June 2024, STM - the owner of the Options Master Trust ("Options") - announced it had signed an agreement with Smart to propose to Option's trustees that they consider transferring its assets to Smart; the Investment Adviser believes Options has AuM of over £500 million.
Earlier in the year, Jamie Fiveash - the CEO of SPMT - gave an interview in which he stated that he anticipates reaching £10 billion of AuM within three years, demonstrating significant growth prospects.
The valuation increase in the period reflects the progress that Smart is making.
Brandtech
A key focus for Brandtech in recent quarters has been the integration of Jellyfish, which completed in July 2023 and represented the largest acquisition in the company's history. Significant progress has been made here in recent months and management is beginning to prioritise driving customer wins and organic growth across the Media division.
Momentum is building for PencilAI, the Group's generative AI marketing solution, and this has led to a number of leading brands such as Unilever and Bayer utilising the technology. We are excited about the level of engagement we are seeing between Global brands and Brandtech with regards to the application of generative AI and we are hopeful that this translates into contract wins and revenue over the remainder of the year.
The valuation decrease of Brandtech reflects market multiple contraction during the period.
Featurespace
Featurespace has continued to grow well against a backdrop of ongoing, significant fraud in society.
Featurespace reports that three in ten UK adults have been a victim of financial fraud and 55% of them have seen an increase in scam attempts in the last 12 months. Data from the National Crime Agency shows fraud is now the most common crime in the UK, accounting for 40% of all offences recorded in England and Wales.
In the period Featurespace released its annual report and accounts for the year to December 2023, which showed 47% revenue growth to £50.4 million, with recurring revenues accounting for 79% of revenues, up from 70% in 2022. Due to this strong topline growth, the loss for the year decreased from -£20.9 million in 2022, to -£8.1 million. Despite these losses, cash flow was strong - cash rose to £28.7 million from £25.7 million - and the Group expects to maintain a "strong financial position, without the need for additional equity or debt capital".
Featurespace's valuation rose slightly in the period driven by market multiple expansion.
Cash Update
As of 30 June, the Company had net cash of approximately £16 million and a position in Wise of approximately £2 million, to give a total liquidity position of approximately £18 million. As announced on 12 July 2024, Graphcore was sold to SoftBank; the Company can confirm it has received initial proceeds of £44 million, which has significantly bolstered its current liquidity position.
The majority of the portfolio remains well funded. Having committed further capital to wefox post period end, amounting to approximately €15 million, the Investment Adviser does not expect this asset to require further material funding. Elsewhere, there are expected to be additional, modest funding requirements across the portfolio in the short to medium term - some of which are to accelerate growth - but the Company is considered to have sufficient available liquidity over that period to address these.
Portfolio Composition
As of 30 June 2024, the portfolio composition was as follows:
30-Jun
Portfolio Company
Carrying Value
(£ millions)
% of portfolio
Starling
Smart Pension
Klarna
Brandtech
Featurespace
wefox
Graphcore
Deep Instinct
Secret Escapes
InfoSum
Wise
Sorted
Growth Street
258.9
125.4
100.3
82.2
74.2
60.5
45.4
45.2
26.2
28.3
2.0
0.3
0.1
29.9%
14.5%
11.6%
9.5%
8.6%
7.0%
5.2%
5.2%
3.0%
3.3%
0.2%
0.0%
0.0%
Gross cash
16.3
1.9%
Source: Chrysalis Investment Partners LLP. Due to rounding, the figures may not add up to 100%. The above percentages are based on an aggregate portfolio value (including cash) of approximately £865 million for 30 June 2024.
Factsheet
An updated Company factsheet will shortly be available on the Company's website: |
Customisable watchlists with full streaming quotes from leading exchanges, such as LSE, NASDAQ, NYSE, AMEX, Bovespa, BIT and more.
Hot Features
Premium
