REG - Chrysalis Invs Ltd - Quarterly NAV Announcement and Trading Update

Chrysalis InvestmentsAnnouncement

29/01/2024 07:00

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RNS Number : 1325B  Chrysalis Investments Limited  29 January 2024

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South Africa.

 

The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulation
(EU) No. 596/2014 which forms part of domestic law in the United Kingdom
pursuant to The European Union Withdrawal Act 2018, as amended by The Market
Abuse (Amendment) (EU Exit) Regulations 2019.

 

29 January 2024

 

 

Chrysalis Investments Limited ("Chrysalis" or the "Company")

 

Quarterly NAV Announcement and Trading Update

 

Net Asset Value

 

The Company announces that as at 31 December 2023 the unaudited net asset
value ("NAV") per ordinary share was 143.37 pence.

 

The NAV calculation is based on the Company's issued share capital as at 31
December 2023 of 595,150,414 ordinary shares of no par value.

 

December's NAV represents an 8.72 pence per share (6.5%) increase since 30
September 2023.

 

Movement in the fair value of the portfolio accounted for approximately 9.89
pence per share, with foreign exchange generating an adverse movement of
approximately 1.02 pence per share. Fees and expenses make up the balance.

 

Investment Adviser Comments

 

Richard Watts and Nick Williamson (co-portfolio managers) comment:

 

"The Company's NAV rose over the period, primarily a result of
revaluations for two of our key assets, Klarna and Starling Bank. The
revaluations were driven by ongoing strong financial performances as well as
increases in the valuation of several respective peers being used as
comparatives. In the case of Klarna, some of its peers, including Affirm
Holdings Inc and Adyen have seen very significant share price increases since
September 2023 (Affirm +131% over this period, Adyen +65%) following positive
trading updates, against a backdrop of increased appetite for tech stocks as
bond yields fell.

 

At the last quarter end, we talked about the IPO market showing signs of life.
Recent downward movements in bond yields have assisted both indices - such as
the NASDAQ - and stocks, such as ARM Holdings Inc, to move higher over the
period; ARM is now well above its mid-September 2023 IPO price of USD51.
This market action is indicative of risk appetite returning, and potentially
leading to the reopening of realisation channels for the Company,
including IPO markets.

 

Recent comments from Klarna concerning a potential IPO continue to be positive
and a realisation from the portfolio could prove very significant for the
Company's liquidity, and lead to the initiation of
the capital allocation policy that will form part of the continuation
proposal that shareholders are recommended by the Board to support at the
upcoming AGM. Momentum in our key investments continues to be strong, and we
believe this is likely to be a key determinant of share price progression from
here."

 

Portfolio Activity

 

There was no investment activity in the quarter, with most investments
well-funded. In December, the Company announced a likely disposal, which is
subject to certain conditions. No further update can be provided at this time.

 

Portfolio Update

 

The portfolio in aggregate continues to perform well, particularly in terms of
the later-stage assets:

 

wefox

wefox continues to grow well, crossing the €1.5 billion milestone in terms
of Gross Platform Value (insurance premium volume transacted), and achieving
its first full month of profits in December 2023 as it continued its drive
towards profitability. While activity has some seasonality, the Investment
Adviser expects further progress on profitability over 2024.

 

As previously announced, the company boosted its governance in the quarter
with the appointments of Jonathan Wismer as its new Group Chief Financial
Officer and Mark Hartigan as Chairman. Both have considerable industry
experience. In addition, in November Paul Onnen, who has 30 years of industry
experience including with Amazon, Google and Expedia, was appointed as CTO.

 

Starling

 

Starling announced that from 1 October, it will share the benefit of increased
interest rates with its customers, by paying 3.25% AER interest on account
balances of up to £5,000. The impact of this initiative has been to generate
significantly more deposit inflows than in previous months.

 

Engine by Starling ("Engine") - the Software-as-a-Service subsidiary of
Starling - announced two deals in the quarter. Salt Bank will become Engine's
first customer. This is a new bank being set up in Romania looking to prove as
disruptive as Starling in the UK, with an expected go-live date early in 2024.
The second is with AMP, a £1.4 billion Australian listed financial services
firm with over one million customers and employing approximately 3,000 people.
Engine will build a new digital bank for AMP to go live in early 2025, with
AMP expecting to commit AUD60 million of investment.

 

These successes for Engine show that Starling has other ways to monetise its
technology, in addition to using it to run its highly profitable UK bank. In
that regard, and given ongoing supportive bank rates, Starling has continued
to generate strong operating profits over the quarter.

 

Brandtech

 

Despite a well-publicised slowdown in advertising markets, Brandtech continued
to grow and has spent the latter part of 2023 consolidating its recent
acquisitions of Jellyfish and Pencil AI.

 

In line with many of our companies, Brandtech looked to reduce its cost base
over the year, to ensure it is in the best possible position to grow
efficiently and profitably in 2024. The outlook for this year is more
optimistic, with a strong sales pipeline and significant interest in its
products, particularly its Gen-AI offering.

 

Klarna

 

Klarna released its results for the nine months to the end of September during
the quarter. These results showed an acceleration in revenue growth and
further improvements in profitability, building on its shift back into
profitability in the second quarter.

 

Revenue growth was +30% in 3Q23 year-on-year, increasing from +17% and +13%
year-on-year in 2Q23 and 1Q23 respectively. The Investment Adviser believes
this partly reflects the overlap of two quarters when growth was impacted by
the cost cutting exercise that occurred around 2Q23, but also due to on-going
work by Klarna to improve the shopping experience.

 

Credit performance was also very strong, with credit losses falling 46% in
3Q23 year-on-year to 0.33% of Gross Merchandise Volume, a figure which the
Investment Adviser believes is the lowest Klarna has reported since 2018.

 

The result of this growth, and impairments falling, was that profitability
improved again in the quarter, with Klarna reporting SEK500 million of
adjusted operating profit, up from roughly break-even in 2Q23 and compared
with losses of SEK1.6 billion in 3Q22. This implies that Klarna's quarterly
operating performance has improved by approximately SEK2.1 billion
year-on-year, or roughly USD200 million, or approximately USD800 million on an
annualised basis.

 

In January 2024, Klarna's CEO - Sebastian Siemiatkowski - gave an interview
with BNN Bloomberg in which he described a Klarna IPO as "…very likely to
happen quite soon". This builds on other comments made by him in recent months
suggesting that Klarna is gearing up for a flotation. This latest interview
also suggested that Klarna is leaning towards a US listing.

 

If Klarna did choose to IPO this year, then the Investment Adviser believes
that this would substantially alter the liquidity profile of Chrysalis.

 

Smart Pension

 

Smart announced a new SME pension solution with Mercer in the quarter, called
Mercer Smart Pension.

 

This project looks to combine Smart's market-leading technology platform -
Keystone - with Mercer's significant market reach, investment capabilities and
retirement services. to provide SMEs with the same level of service and market
access as bigger companies. Given Mercer's position in the market, the
Investment Adviser believes this could generate significant
assets-under-management ("AUM") flows in the coming years.

 

Featurespace

 

Featurespace released research in December 2023 that showed the market
backdrop for fraud prevention continues to be strongly supportive in relation
to financial crime trends. Of the financial institutions surveyed, 70%
reported that overall fraud rates had increased over the year, marking an
eleven percentage point increase over 2022. Compounding these higher fraud
rates were an increase in false positives - where a valid transaction is
blocked - which rose 20 percentage points to 63%: Featurespace attributes this
to imposition of blanket controls on customer bases. Increased false positives
lead to lower revenues for financial institutions, but also higher costs, as
customers often query why a transaction has been rejected.

 

The Investment Adviser believes Featurespace remains at the forefront of the
fight against fraud. The previously announced launch of TallierLTM, the
world's first Large Transaction Model (LTM) - a foundation AI technology for
the payment and financial services industry - is helping to preserve its
competitive advantage and potentially open up new applications.

 

Cash Update

 

As of 31 December, the Company had net cash of approximately £20 million and
a position in Wise of £13 million, to give a total liquidity position of
approximately £33 million.

 

The majority of the portfolio remains well funded. While there may be
additional funding requirements across the portfolio in the short to medium
term, the Investment Adviser considers that the Company will have sufficient
available liquidity over that period to address these.

 

Portfolio composition

 

As of 31 December 2023, the portfolio composition was as follows:

 

                       31-Dec
                       Carrying Value

 Portfolio Company     (£ millions)    % of portfolio
 wefox                  188.8          22.1%
 Starling               172.7          20.2%
 Brandtech              93.6           11.0%
 Klarna                 93.2           10.9%
 Smart Pension          77.1           9.0%
 Featurespace           59.4           7.0%
 Deep Instinct          41.5           4.9%
 Graphcore              34.8           4.1%
 InfoSum                25.6           3.0%
 Secret Escapes         25.1           2.9%
 Wise                   13.1           1.5%
 Tactus                 8.0            0.9%
 Sorted                 0.3            0.0%
 Gross cash            20.7            2.4%

 

Source: Jupiter Investment Management Limited. 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 £854 million for 31
December 2023.

 

Outlook

 

The Investment Adviser has previously expressed optimism that risk appetite
will return to markets, a key precursor to the reopening of exit channels for
investee companies, including via IPO. Although there has been some volatility
in yield expectations into 2024, fundamentally this view is unchanged.

 

Further comments from Klarna over its potential IPO suggest that the
Investment Adviser is not alone in its view that markets are now more amenable
to new issuance than over the previous couple of years. The capital allocation
policy that has been disseminated as part of the documentation for the AGM in
connection with the continuation proposals could provide a significant return
of capital to shareholders in the event of a material realisation. At the
current level of discount, at which the Company's shares trade at versus NAV
per share, any repurchase of shares by the Company could generate significant
accretion in NAV per share.

 

The Investment Adviser remains focussed on assisting other companies in the
portfolio in getting to a point where a realisation event is a realistic
possibility.

 

Factsheet

 

An updated Company factsheet will shortly be available on the Company's
website:  https://www.chrysalisinvestments.co.uk
(https://www.chrysalisinvestments.co.uk) .

 

-ENDS-

 

 For further information, please contact:

 Media

 Montfort Communications:                        +44 (0) 7976 098 139

 Charlotte McMullen / Toto Reissland /           chrysalis@montfort.london

 Lesley Kezhu Wang

 Jupiter Asset Management:                       +44 (0) 20 3817 1696

 James Simpson

 Liberum:                                        +44 (0) 20 3100 2000

 Chris Clarke / Darren Vickers / Owen Matthews

 Deutsche Numis:                                 +44 (0) 20 7260 1000

 Nathan Brown / Matt Goss

 Apex Administration (Guernsey) Limited:         +44 (0) 20 3530 3109

 Chris Bougourd

 

LEI: 213800F9SQ753JQHSW24

A copy of this announcement will be available on the Company's website at
https://www.chrysalisinvestments.co.uk
(https://www.chrysalisinvestments.co.uk)

The information contained in this announcement regarding the Company's
investments has been provided by the relevant underlying portfolio company and
has not been independently verified by the Company. The information contained
herein is unaudited.

This announcement is for information purposes only and is not an offer to
invest. All investments are subject to risk. Past performance is no guarantee
of future returns. Prospective investors are advised to seek expert legal,
financial, tax and other professional advice before making any investment
decision. The value of investments may fluctuate. Results achieved in the past
are no guarantee of future results. Neither the content of the Company's
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