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Kinnevik AB
Earnings Call Analysis
Q3-2023 Analysis
Kinnevik AB
The company has made strategic advancements this year by doubling down on high conviction businesses such as Spring Health, Agreena, and TravelPerk, thereby increasing the concentration of these businesses in the portfolio.
New investments worth SEK 31 million in Aira, a clean energy tech business, and EUR 75 million in H2 Green Steel emphasize the company's commitment to sustainability and belief in the long-term opportunities within the decarbonization and steel sector, expecting demand for green steel to surpass supply for the foreseeable future.
The company faced headwinds in consumer-facing e-commerce, resulting in a 48% write-down of Instabee and overall a 7% reduction in the fair value of the private portfolio, a total writedown of SEK 2.3 billion, which aligns with the trend observed in public peers.
Despite market challenges, the company continues to focus on strengthening its underlying portfolio companies, controlling capital allocation, and aiming to increase exposure to high-performing businesses, which is expected to lead to a more resilient portfolio over time.
The company is assessing new opportunities and considering further investments in software and virtual care businesses that have shown resilience despite market contractions. This aligns with the company's priority to improve the portfolio's concentration.
Looking ahead, the company plans to maintain an investment pace around SEK 5 billion annually while being flexible to market opportunities and exits. Recycling capital through significant exits is envisioned to be a part of the balanced investment strategy.
The company acknowledges the need to improve communication regarding the valuation of its portfolio to address the substantial market discount against its unlisted fair values. Efforts are underway to provide greater clarity and enhance investor confidence, which is crucial for continued investment activities.
Oda, after retreating from Germany and Finland, is seeing regrowth in Norway and experiencing positive EBITDA in certain months. The company has invested an additional SEK 50-60 million this quarter, contributing to an 18-19% increase in its carrying value, despite overall being down around 40-45% year-to-date.
With a SEK 1 billion funding towards the production capability in Aira, the company reinforces its proactive strategy in the climate tech space. This investment will enable Aira to produce innovative heat pumps with a vertically integrated model, which sets it apart from traditional players in the market.
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Good day and thank you for standing by. Welcome to the Kinnevik Third Quarter Report 2023 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Mr. Georgi Ganev, CEO. Please go ahead.
Thank you. Good morning and welcome to the presentation of Kinnevik's results for the third quarter 2023. I am Georgi Ganev, Kinnevik's CEO; and with me today is our CFO, Samuel Sjostrom; and our Director of Corporate Communications, Torun Litzen. On today's call, we will walk you through the key events during the quarter, including our most recent investment activity; we will lay out the key valuation changes; and finally, we will track our progress against the priorities and expectations we set at the beginning of the year. But first, as you all know, the market environment in which we operate continues to be very challenging. This in turn has affected the market sentiment towards high growth businesses like ours and thereby towards Kinnevik. It should escape no one that I am not satisfied with the development of our net asset value and of our share price. What matters most in times like this is how we act in the face of these headwinds.As an active owner, we are working closely with our founders and other co-investors to support our companies in navigating these volatile and uncertain times. It's more important than ever to strike the right balance between growth and profitability. It's also important for us and our companies to be able to make difficult decisions in the short term to create a more resilient portfolio and lay the foundation for strong value creation in the long term. In addition, we are also focused on creating ownership and deploying more capital in our high conviction businesses at more balanced valuation and making use of the opportunities that arise in more risk adverse markets. And we are well positioned to do this due to our permanent capital structure, our strong financial position and the full flexibility to determine the pace and magnitude of our deployments.Let's now move to Page 4 and have a look at the key highlights during the quarter. Our net asset value amounted to SEK 50.8 billion, that's down 6% in the third quarter, and Samuel will guide you through the development of the valuations of our private companies in just a few minutes. One of our key priorities this year is to invest more into our high conviction businesses and maximize the impact and concentration of those businesses in our portfolio and by doubling down in companies like Spring Health, Agreena and TravelPerk earlier this year; we're doing just that. This quarter we have deployed more capital into H2 Green Steel and Enveda. We also have a new addition to the portfolio, a SEK 31 million new investment in the clean energy tech business Aira. And I will give you some more color and expand on the reasons behind our conviction in H2 Green Steel and Aira in just a minute.During the quarter, we also released SEK 275 million from our growth portfolio through the sale of our investment in Raisin, the German fintech company we first invested in back in 2018. One part of the portfolio, which is seeing particularly strong headwinds is consumer-facing e-commerce. We have seen falling order volumes and a more price sensitive consumer for some time now. And this quarter we're writing down our investment in Instabee by underlying 48%. Samuel will talk more about the challenges in our consumer businesses and what they have faced later on. Moving on to Page 5 to give you some more details on our follow-on investments of EUR 75 million in H2 Green Steel. We first invested in H2 Green Steel last year and they have delivered on several key milestones that were crucial for the validity of the projects.They have secured relevant regulatory approvals and they have signed considerable volumes in offtake agreements with over half of the annual production volume already presold. With this funding round, they have now funded a business plan for the completion of the Boden plant and thereby risk comes down significantly, but the ambition level remains high. Operations are expected to start in 2025 and the Boden facility is expected to initially in Phase 1 produce 2.5 million tonnes of green steel annually with the capacity to double those volumes over time. A key differentiator for H2 Green Steel is that they will operate with significantly higher efficiency and lower costs compared to the incumbents in the steel industry not to mention reducing carbon emissions by 95%.Decarbonization and the transition towards net 0 is one of the most pressing challenges of our time and in that context, the steel sector represents a significant investment opportunity as it represents 7% of emissions globally and in Sweden, it represents almost twice that. With an ever-evolving regulatory landscape and an increasing number of companies setting science-based targets, the demand for green steel is expected to far outpace supply for the foreseeable future. Taking a step back, we started looking into the climate tech sector in 2021 and H2 Green Steel is the largest of the 6 companies we have chosen to back. And this creates a good bridge to talk about the sixth and the newest addition to our climate tech portfolio, Aira on Page 6. Residential heating is responsible for 10% of all Europe's carbon emissions and we believe it's on the verge of a major transformation.Over the last 18 months, we have assessed several opportunities within the residential energy and heating area at depth and before Aira, 5 of them reached the end of our funnel, but ultimately we elected to pass on each of them. What sets Aira apart is their fully vertically integrated model, which we believe is the key to capture the opportunity of electrification in an attractive way. Aira operates in a market which is characterized by high fragmentation, low installation efficiency and poor customer experience. And by connecting the full value chain, they can offer competitive pricing and higher sales conversion rates and they have a stronger margin potential and they can control the customer experience from start to finish. And importantly, with Aira's innovative and accessible solutions, households can save up to 40% on their heating cost while simultaneously reducing CO2 emissions by more than 75%.And as always in early stage investing, the team is crucially important and in the case of Aira, we believe they have an exceptionally strong setup. The management team possesses an expertise and experience typically found in later stage growth businesses, very well placed to execute on Aira's bold vision. We also know the CEO, Martin, well from our previous portfolio companies MTG and Millicom. And in addition, we believe that Kinnevik with our experience in scaling global consumer businesses can be a strong strategic partner to Aira and add considerable value as an early stage investor. Just like H2 Green Steel, Aira is founded by Vargas, a climate tech investor co-founded by Harald Mix, a member of our Board of Directors. And for the avoidance of any doubt and as per standard Swedish corporate governance processes, conflicted Board members are not part of the discussion nor the decision-making process for such investments.Let's now take a look at what our recent investment activity means for the assessment of our company's runway on Page 7. With our investments in Spring, H2 Green Steel and Enveda; we have made significant strides during the first 9 months of the year to seize opportunities in our existing portfolio. Out of the SEK 4.5 billion deployed so far this year, SEK 3.8 billion has been directed to the existing portfolio. Last quarter we said we expect the follow-on investments to make 2/3 of the total investment in 2023 and we are currently working on additional preemptive and secondary opportunities that may push this percentage share even higher. This draws on our priority to make use of the market environment and to increase our exposure to the high conviction businesses and improve our portfolio's concentration.We are on the track to allocate more than 80% of our follow-on capital in companies where we have the strongest convictions and where we are creating an ownership. Even excluding VillageMD, around 60% of our private portfolio is invested in companies that are profitable or have fully funded business plans. Only around 10% of the value of our private portfolio sits in industries whose runways ends within the next 12 months. And all this aside, we're seeing more and more interesting opportunities in this market when it comes to new investments. It's an investor's market out there meaning we have more time to evaluate new opportunities and we have strong cash position, which we are willing and ready to deploy.And with that, I would like to hand over to our CFO, Samuel, to provide you some more detail on our private valuations and the development of our net asset value starting at Page 8.
Thank you, Georgi, and good morning, everyone. So from a quarter-on-quarter valuation standpoint, Q3 was relatively straightforward, another turn of significant multiple contraction and continued challenges in consumer-facing e-commerce. So in this quarter, I'd like to take the time to also cover our valuations from a slightly longer-term perspective and touch on the different dynamics we're seeing as our companies and their valuations develop coming out of the pandemic. Let's start with the quarter-on-quarter movements on Page 9. We are taking down the fair value of our private portfolio by 7% this quarter, a magnitude in line with the development in its public peers. In SEK, that corresponds to a writedown of SEK 2.3 billion. Adding the SEK 1.5 billion invested in the quarter less the SEK 300 million worth of exits primarily from Raisin, the carrying value of the private portfolio comes down by SEK 1.1 billion to SEK 31.4 billion.This writedown is again originating primarily from multiple contraction and double-digit percentages spread across all sectors and categories. But there are also company-specific developments that bear a meaningful impact on our valuations relative to the public comparable universe. The quarter's most notable valuation revision is that we're taking a substantial writedown of our Instabee investment catalyzed by a weakened Swedish e-commerce outlook. The notable stability on the other hand is that our core software and virtual care investments are flat on average while enduring multiple compression of around 15% in a single quarter. And I'll be getting back to the parts of the spectrum of our portfolio that these differences reflect later. Looking at the more technical factors. Similar to the most recent quarters, the effect of liquidation preferences is coming down this quarter by some SEK 200 million. Why is that?Well, it's because in a handful of businesses, underlying positive valuation changes do not have an as positive impact on NAV until we've caught up to higher valuation levels than where we're marking these companies currently. As we eat into this gap, the effect declines. The flip side of this is, as you will recall, that our valuations did not fall as dramatically during 2022 when we accrued this effect which peaked at SEK 3.2 billion in Q4 '22. At quarter-end, this effect amounted to SEK 2.6 billion and it remained centered in a handful of assets representing around SEK 4 billion of NAV such as Betterment and Jobandtalent. The effects from currencies on the other hand was fairly small this quarter relative to what we've gotten used to bearing SEK 130 million negative impact due primarily to the depreciating euro.So all in all and in short, Q3 was a quarter during which our unlisted portfolio developed in line with its public peers even when absorbing the significant writedown at Instabee. On the next few pages, I will go through 3 groups of businesses of our private portfolio that share different sets of characteristics. But before that, one of our smaller more emerging clusters that captivates many is the investments in climate tech that we've built up over the last 2, 2.5 years. By end of Q3, these handful of businesses represented around 9% of the private portfolio by value or SEK 2.8 billion clearly boosted by this quarter's investments into H2 Green Steel and Aira. This group of businesses is beginning to reach a level of critical mass and we will therefore be breaking out climate tech as its own NAV category starting in fiscal 2024 along with valuation commentary on the category's more impactful investments like H2 Green Steel and Solugen.But for now, on to the historically larger categories of businesses that I'd like to give some color on spanning our fast growing core in software and virtual care through our maturing value-based care companies to our more challenged consumer e-commerce businesses whose share of our portfolio has dwindled after the pandemic. And with that, we're on Page 10. So these are our 5 largest virtual care and software businesses; Pleo, Cedar, Spring, TravelPerk and the more recent addition, Mews. This pillar of ours represents 35% of our total private portfolio and 90% of our investments in these 2 sectors. In Q3 these businesses faced 15% multiple contraction on a value-weighted average basis with aggregate fair values for the group still remaining flat quarter-on-quarter thanks to continued growth and controlled burn as they progress towards profitability.From the much more interesting longer-term perspective, these companies have faced around 70% forward multiple contraction since end of 2021, but by growing top line by around 3x between 2022 and '24 depending on how you weigh them and by meaningful profitability improvements as well as some FX tailwinds, the effect on our fair values has been less violent on average. In 2023 again on a value-weighted average basis, these companies are doubling revenues and they are more than doubling gross profit. In 2024, we expect them to grow by closer to 65% and their 2024 EBITDA loss margin is expected to come in at 15% to 20% on average spanning break-even to negative 30%. In this quarter, we're valuing these businesses at 10x revenues or 15x gross profit on average. That is the valuation level coming in line with public high growth software companies in 2024 with our companies showing as strong or stronger capital efficiency or Rule of 40 metrics as it's often referred to.Naturally these are companies where we're supportive of them working to improve profitability in a substantial way, but more importantly, we're mindful of them not overcompensating and unnecessarily compromising on the longer-term growth opportunity that their respective potential and their respective markets provide. We have deployed SEK 1.8 billion into these businesses during 2023 to-date primarily through our investments in Spring, but also TravelPerk and we are working hard to unlock opportunities to invest even more capital into these 5. Those investments may come in the form of primary equity to fuel higher or longer-term growth than what we're expecting from them now or in secondary equity to grow our influence in these companies as the case was with Spring in the previous quarter. And as importantly, managing to convert these opportunities will help accelerate our portfolio's exposure to this group of companies which is, as you know, a top priority of ours.Looking then at another category, one which has come further in shifting from high growth to near-term profitability during the last 2 years while also working against significant multiple compression, and that's our 2 large Value-Based Care companies and that means we're on Page 11. In Q3 we're taking down our fair values by 11% for VillageMD and 5% for Cityblock, levels which are within the range we're seeing in public more traditional health care providers. Looking back, since end of 2021, Village and Cityblock have faced 50% multiple contraction, but they have grown at a respectable rate and are almost doubling in size over 2023 and '24 combined while making progress on their respective path to profitability. And to be clear, that growth pace is on a pro forma basis for Village's acquisition of Summit-CityMD.Now you will have noted Walgreens report last week with guided towards 10% to 17% growth in its health care segment with a midpoint EBITDA guidance of breakeven in their fiscal '24 ending in September next year. Now that's not quite what we envisaged when the merger of VillageMD and Summit was announced late last year, but it is in line with the expectations we reset last quarter. So yes, Village has faced its share of challenges, but we have trust in Walgreens' plan and the ability to execute on it. Cityblock, on the other hand, has performed above expectations in 2023 on top line, on gross profit and on cash flow. Year-to-date they have taken large steps towards profitability and we expect them to break even on an EBITDA basis in late 2024. All the while, we see them outgrowing the more mature peer universe by 5x on top line in '24 and by upwards of 10x on contribution profit.They also enjoy having a significant net cash position, multiples more than their expected burn until reaching cash flow profitability, which clearly derisks this path. So VillageMD has arguably reached the far right end of the S-curve distribution of our portfolio while Cityblock is a few steps behind and still growing at a high pace, but not with quite the pace that we saw in 2020 and '21 and that's all very intentional. And I think intention is what brings us to the last category I wanted to touch on in showing the different types of businesses that form our portfolio. And that is a category where growth has slowed after the pandemic for other than intentional reasons and I'm talking about our consumer-facing e-commerce businesses and we're on Page 12. These businesses have probably had the toughest time of all our portfolio companies over the last 2 years facing powerful multiple contraction while their markets have been and are still swinging back after pandemic fueled consumer behavior in a [ topic ] consumption market.You all know online grocers faced the reversal of pandemic trends first and most forcefully, but their outlook is now stabilized somewhat and our companies will face easier comparables growing into 2024. Omio, our consumer-facing travel booking platform company not included on this page, naturally saw the opposite pattern. The effect on other e-commerce categories has been slightly less drastic than the case has been in groceries, but it has crept up over the last few quarters. In Sweden, e-commerce is down in single-digit percentages in terms of Swedish kronas boosted by inflation. In terms of parcel and delivery volumes, it's down by more than that in particular in certain subcategories. The consequences of this have escalated recently and the outlook for retail's always important Q4 is uncertain. This has impacted our near-term outlook for Instabee materially and it's why we in this quarter are taking down our underlying valuation of the company by 48%.That this is the category of companies in our portfolio that has had the toughest time shows also in the longer-term numbers. Forward multiples have come down by 50% since end of 2021 and by more so at our grocers. But at the same time, their respective markets have contracted materially causing these 4 consumer-facing e-commerce businesses to be expected to grow top line by a meager 10% over 2023 and '24 combined. With very limited growth to offset multiple contraction and with a loss of scale hurting profitability, this has been the main driver of the significant almost 70% cut in fair values during 2022 and '23 to date. And this in turn is what has caused our private portfolio's exposure to these companies to be cut in half during the same period from 14% in end of '21 to 7% of the carrying value of our private portfolio in the NAV we're posting today.Now this organic change in portfolio balance coming out of the pandemic together with our more forceful capital reallocation within the portfolio is what combines to shape a more resilient and attractive portfolio looking ahead. With that, I'd like to end with the full NAV's development in the quarter also considering our public investments and net cash position on Page 13. So again we're taking down the fair value of our private portfolio by SEK 2.3 billion and adding the SEK 1.5 billion invested in the quarter less the SEK 300 million worth of exits primarily from Raisin, the private portfolio comes down by SEK 1.1 billion to SEK 31.4 billion at the end of Q3. Recursion's share price continued to swing up and down ending the quarter largely where it started it and GFG had another soft quarter.Tele2 was down SEK 0.8 billion with a tough start to the quarter with concerns around CapEx and cash flow growth, which was somewhat abated after the results of the recent spectrum auctions. And this morning, they reiterated their guidance for '23 and the medium term. All in all NAV was down 6% in the quarter to SEK 51 billion, of which SEK 7.6 billion being our net cash position. Pro forma Tele2 dividends we received last week. Our net cash position amounts to SEK 8.1 billion. So to sum up, a weak quarter characterized by multiple compression, but with further steps taken to concentrate the portfolio into a smaller number of high conviction, high performing businesses and to end the year with a more promising and rewarding portfolio balance than we started.And with that, I'd like to hand it back over to Georgi for his concluding remarks.
Thank you, Samuel. Let's now go to Page 15 to take stock of our priorities and expectations for 2023. As we have said a few times by now, the environment in which we operate is highly challenging and I'm not satisfied or proud with how these challenges have impacted development of our net asset value and of course our share price. But against that backdrop, we must differentiate between what we can control and what we cannot. We cannot control the market, but we can control how we work with our portfolio companies to make them more resilient. We cannot always control which companies ask for capital, but we can control who we allocate it to. And our main priority remains to increase our portfolio concentration, making sure we increase exposure to the high conviction businesses and decrease exposure to the poor performers.This happens organically as the poor performers are struggling in this environment and their value decreases in relation to the rest of the portfolio, but is also done by disciplined and forward-leaning capital allocation. In our high conviction businesses, we're instigating transactions and actively working to accrete ownership either through primary equity that allows our performing companies to accelerate and maintain growth as you just heard Samuel explaining or in secondary equity to increase our influence. All the while, we are unsentimental around our poor performing businesses and require significant measures to change their trajectory for them to be investable. Valuations don't always reflect the underlying performance of companies. And in the face of significantly contracting multiples and a slowdown in growth, we have written down our private assets significantly since the peak in late 2021.But even so, with today's reported valuations, we post an IRR of 22% in the group of companies which we have invested in since 2018 and onwards. We believe in our strategy and we continue to execute on it with determination and grit. With our strong financial position, our active ownership model and strictly disciplined capital allocation; we're making sure we're laying the foundation for long-term value creation. We're as ever grateful to the shareholders that support our continued rebalance of our trajectory for the coming years.And with that said, we are now ready to answer your questions. So operator, please open up for Q&A.
[Operator Instructions] And now we're going to take our first question from the line of David Johansson from Nordea.
I have 3 questions. First on your new company, Aira. Could you talk about this investment from a governance perspective given the role of one of your Board members? Couldn't there be a risk here? And second, what do you think the road map for this company is ahead? That would be the first one.
Okay, David. So firstly, on the governance piece. As I said during the presentation, any conflicted Board members; in this case it's both Harald and Susanna; they have not been able to read any documentations around our investment thesis. They are not being part of the decision-making process. Any follow-on investments in the future, potential ones I should say, they will not be included in that discussion either. So I am 100% confident that we have no risk on the governance side. On the contrary, our close partnership with I mean the Swedish kind of venture arm as such, but also Vargas as a climate tech investor and how we can leverage that network internationally, is extremely powerful for Kinnevik. There is a bunch of international investors coming in now in Aira and I'm sure that that company will also be able to attract more capital over time internationally also based on our close relationship with them since before. So I have no kind of issues with the governance piece.Talking about their road map. They have communicated today that they have secured almost SEK 1 billion in this funding round in a quite difficult climate. That in itself I think is an important milestone. They have acquired a factory that are able to produce heat pumps according to kind of a new way of working. So there will be fewer models, if you will, very different from the market today that will be able to streamline everything from production to installation and sales. So consumers will have a kind of simple, easy to understand value proposition financed, which means that there is no kind of upfront cost and you're able to reduce your heating cost and massively decrease your CO2 footprint. And we think that the vertical integration of Aira and their way to produce the heat pumps, sell the heat pumps, support the heat pumps is actually what is needed to push this transformation.
Understood. And on VillageMD, you have talked about your potential exit plans for this company. Do you see the risk of that plan being delayed now with the weaker commentary from Walgreens? And maybe also who you think the potential buyers could be of your 2% stake here?
I think the main delay, if you will, according to our earlier expectations is probably the weak market overall. I mean it's no secret that Village had ideas to go public, but in a market like this it's quite difficult, right? And of course a major acquisition or a merger like the one with Summit also take some time before the company gets control and everything and can produce kind of a joint new business plan that the market will appreciate. So I think from that perspective as well, there is a delay. We think a public IPO is kind of the main default exit pass, if you will, but there could also be any type of seller that would like to have this exposure with Walgreens. We would discuss with potential buyers obviously, but given our strong financial position, there is no rush.
Okay. And just lastly on Instabee, one of your co-investors appear to make a different judgment when valuing this company. It would be interesting to hear your view on the valuation difference currently and also a bit on the runway situation. I believe you've said previously that Instabee has runway to profitability in 2024. Is still this your view?
David, it's Samuel. So with regards to our public co-investor Creades and where they end up in their valuation process, I mean all I can say is we have our process, we don't make compromises on it. Clearly we discuss developments in our industries with our co-investors and how these developments might affect how much a business is worth. But we don't set each other's valuations nor do we align with them clearly before quarterly reports. So I just summarized it as we have a slightly different view on valuation in this specific quarter, it's probably within some from a margin of error. What I would say that we share is a long-term enthusiasm about the company and where it's headed even though e-commerce is going through a rough patch. With regards to the runway, I think we're going to have to get back to you. Clearly Q4, as I mentioned, is a massively important quarter and we'll see how that pans out and we'll take it from there.
Our next question comes from the line of Derek Laliberte from ABG Sundal Collier.
All right. So I'd like to follow up on VillageMD. We've seen a couple of larger downgrades from you of late there. What would you say from this point are the main risks to your valuation? Is it operational performance or is it perhaps that Walgreens decides to do another sort of operational shift or could there potentially be a risk that you could be substantially diluted at the company to raise more funds at some point and lower future at lower valuation levels?
Derek, it's Samuel. I think what's driving the valuation this quarter really is peer multiples and not much else. The company is today performing in line with the expectations we reset in Q2 and you saw Walgreens guiding for the same expectations a week ago or 2. I think what's going to drive valuation from here on out is profitability and we understand Walgreens and Village are very focused on that. How they reach that? It seems like we're looking at options to streamline the footprint. They're shutting down unprofitable markets and unprofitable regions. So I mean we're not too worried here because you should also recognize that the Village and the health care segment is a very large part of Walgreens' equity story now. It's really their growth engine considering where their retail business is at. So it's about executing on the plan. We think risk is arguably lower in this sort of maturity level of a company and it's just about the execution really from here on out on the EBITDA.
Great. I understand. And then on Village also then on profitability, do you see a path forward for the company to strengthen the gross margin meaningfully in any way and how would that go about?
I think the gross margin and the contribution margin are sort of the key determinants for which markets are the most attractive. And those markets with the lowest gross margins and contribution margins, we would expect are sort of at the top of the cutting block if you may. So we see very strong proof points in the stronger markets that this business is able to get to EBITDA profitability within a year for sure.
Okay, great. And I was wondering if you broadly could speak on H2 Green Steel here. What your thoughts are on there's been some like to say heavy criticism surrounding the timeline of the project being way too optimistic. And if delayed by a couple of years, say how would that impact financing and valuation from your perspective broadly speaking?
Derek, so I mean start by saying yes, it's a very ambitious plan for sure. We know that being up and producing kind of green steel in '25 and scale out over the next coming years will mean that they are first in the world to be able to produce green steel with these volumes. As far as we look at this now, the business plan for Boden is fully funded and that's what's most important. I mean this Phase 1, as I said, they will be able to produce 2.5 million tonnes of green steel with the potential to double that capacity over time. That's the plan we are following. These are important milestones obviously along the way so we will be able to track it quarter-by-quarter now to see how they are progressing. But many of the binary risks that we saw when we did our initial ticket are now resolved. So there is less about those kind of binary risks and more about the execution risk in building this plant.
Okay. And finally, regarding your latest investment in Aira. I understand your optimism obviously around this. But I mean given the sort of more nearby so to speak investments in Aira and H2 GS follow-on, should we read this as you're sort of struggling a bit to find attractive opportunities on the global market here despite valuations having come down meaningfully, which should create opportunities just simply sort of speaking?
Not at all, Derek. I mean again going back to Aira. First of all, these 2 investments are very, very different. They happen to be founded by the same people originally, which I think says something about the innovation we see right now in Sweden. And going outside our border investors and climate tech companies in general, I think they are super impressed what's happening here. I think it's a bit a shame that we don't share that appreciation in Sweden actually, but that's just a side note. When it comes to other opportunities, we looked at a number of businesses that are in the same space or sector as Aira so basically residential heating or electrification. So we looked at Enpal in Germany on solar side, we looked at [indiscernible].We looked at a bunch of companies and we decided not to proceed with those investments because of various reasons. And we believe that Aira is the one having the most ambitious plan to actually do this fully vertically integrated that I was mentioning before, which we think is a prerequisite in order to really disrupt this market so you can have a product that is streamlined not only to produce, but to sell and to maintain and that's why we took the decision to invest in Aira. And lastly, we are also coming in early on in this business, which means we're backing the business from the start and we can therefore build a different type of position when it comes to ownership and influence compared to some of the other electrification companies we have looked at.
And the next question comes from the line of Joachim Gunell from DNB Markets.
So 2 questions from me. As you likely plan to have a slightly higher investment pace than the SEK 5 billion you targeted earlier this year, can you just comment a bit on if this run rate also represent what you have intended for 2024 and basically what you will have to see in terms of, say, improved exit conditions, et cetera and also when in order to maintain that momentum also into next year?
I think it's a relevant question. But again we are also not -- we don't have a budget that we strictly have to follow. It could be SEK 4 billion of investment 1 year and SEK 6 billion another, right? So calendar years for us is just a measure when it comes to talking about our quarterly reports. We always assess what we have in our funnel. We look at those opportunities we mentioned, secondary opportunities in companies like Spring all the time. And this year I think and particularly what comes really on top of the plan we have is really the Spring transaction in Q2. So that is what comes on top and we did not see that we had to decrease our ambition in the other areas because of Spring. If this will have an impact of 2024, we'll see. But right now, we are continually seeing that we will invest around SEK 5 billion a year.
And the final one perhaps for Samuel. Can you provide any commentary about what share of the private portfolio is now profitable on either net profit or cash flow basis? I know that you are searching for or prioritizing growth as long as unit economics are attractive, but any commentary there would be helpful.
Sure, Joachim. Actually I think let's pause that question and get back to you in connection with the Q4 report considering we're in budget season now and I'll be able to give you a much more accurate estimate.
And the next question comes from the line of Zino Engdalen Ricciuti from Handelsbanken.
Just a follow-up on Instabee. Do you feel that you need to take any actions now or do you want to wait until after Q4?
What do you mean by actions?
Given the developments in the company, if you feel you need to do anything in the company.
Yes. I mean there's been a lot of things that have been done all the time, right? So if we look at the integration of Instabee and -- sorry, Bugbee and Instabox, we're very happy with the cost decrease we've seen and our thesis around combining these companies have proven to be correct. But what has changed is basically the weaker market. So the volumes that we and the company was hoping for at the beginning of the year has not been materialized because of the weak e-commerce market. That's the difference. So what has been done during this period is that the company has been even more kind of on top of the cost base obviously and accelerated synergy streams between combining these 2 businesses. That has been taken and I believe it's the correct thing.
Okay. And a question on secondary market transactions. You say that you're working on preemptive and secondary opportunities. Has there been like a change in the past quarter on the opportunities on the secondary markets or is it about the same?
I think that when it comes to secondary opportunities, obviously that will be in a company not needing primary capital, right? So that's the first thing. So they need to be profitable or with a very strong cash balance. That's first to say. Secondly, to buy secondary shares in companies that are either profitable or have a very strong cash position and a proven business model and a great development is not easy. So you need to find sellers that think that the timing is right for them either because they are very early stage investors or because they need to free capital for other investments in their portfolio. So I think it's a lot of different kind of parameters we need to understand. But when we say working on it, we are today assessing all the best performing companies and looking at the cap tables to see if there is a chance for us to buy shares in those businesses. But it could also be an opportunity for us to do an investment with primary capital for these companies to actually further accelerate the growth and take market shares in difficult times like this for long-term value creation. So there's a combination and we would like to concentrate that on the companies where we have the highest conviction.
Got you. Just a final question on Oda. You made a small investment there and lifted the value. Could you just give a quick comment on the development of the company.
Sure. As you say, we invested SEK 50 million to SEK 60 million in the quarter and that adds to our carrying value. The underlying writeup is in the region of around 18%, 19% and why is that you ask. Well, look, Oda has had a very turbulent time behind them. They launched in Germany and Finland and then they retreated back into Norway with an option to expand internationally again, but perhaps in a more asset-light way. So we've taken a lot of pain this year. I think with the writeup this quarter, we're still down around 40%, 45% year-to-date. What's happened now really is that we see them regaining their footing. The price war in Norway has abated. They're back to healthy 20% growth rates. They're showing positive EBITDA certain months thanks again to their world leading fulfillment efficiency. And it's these developments that we believe warrants what's a pretty significant markup in percentage terms this quarter.
And the next question comes from the line of Oskar Lindstrom from Danske Bank.
Three questions from my side. The first 2 are around your investments and net debt level. If I understood you correctly, I mean you had a goal of investing roughly SEK 5 billion this year and then you said the Spring transaction is a little bit on top of that. Do you foresee sort of continuing investing at this pace and does that mean that all else equal, you would be -- sort of your net cash cushion would be down to SEK 2 billion to SEK 3 billion by this time next year? That's my first question.
Okay. So I mean it depends how you see it, right? First of all, we give guidance because we think that we have these type of opportunities in and outside our portfolio, right? But it also comes with exits. So this quarter you see that we exit in Raisin, which is again a way for us to recycle and reallocate capital. So it doesn't mean that we have SEK 5 billion of net investments. We can actually recycle capital as well.
And do you foresee sort of doing significant exits that would dent your SEK 5 billion roughly investment target?
I foresee us to do exits when we see that the timing is right. We have an attractive portfolio and there are potential buyers. As we are looking for secondary transactions in some of our best performing companies, we would be able to sell as well. We have no kind of clear names to share if you understand, but we absolutely have that tool in the toolbox.
All right. My second question is more around sort of short-term and valuation. I mean given your current share price right now, the market seems to be sort of applying a 60% to 70% discount to your unlisted fair values. I mean do you feel it's problematic to sort of trade cash for investments in unlisted assets at this type of a situation or what's your thinking around that and how it impacts valuation?
Oskar, look, I think the way we're going to try to address the discount is by improving how we communicate why we have valued our portfolio in a particular way. To be honest, I think we've improved quite a bit from where we're coming from and we're going to keep improving going forward as well. Clearly we'll try to stick to a given format through the fiscal year. But come Q1 next year, hopefully we can give the market and you guys some more sense and some more feel on how we reach our assessments and that will help bring confidence back into those markets. It doesn't at all affect our appetite in investing in our existing portfolio or in new private businesses the fact that we're trading at a discount. That would be a bit odd.
All right. And my final question is around Aira. Could you please explain a little bit how this business is? Is it significantly different from Nibe for example here in Sweden and was buying shares in Nibe ever an option?
Not really, Oskar, because the main difference here is that you have a full value chain, right? Production is one thing, right? But you have the sales model equally important; how you package these things, how you finance these products and therefore, how you convert sales into contracts. And once you have a customer onboarded, you will then have a relationship with them like a recurring revenue over a long period of time. So the way you maintain these services and the maintenance and so forth is also extremely important, right? That is what Aira will provide where it's actually providing already in a few kind of test markets, which is very different from what we see today. There are producers of heat pumps; yes, for sure. There are resellers, typically businesses around plumbing and there are a lot of customers out there thinking that this is a very complicated decision to make and are quite costful as well because we have to pay upfront for the solution. So Aira nothing like that, but I think a new way of taking this value prop to the end customer.
But just to understand, it will have its own production of heat pumps?
That's correct. They acquired a factory that will be used for producing heat pumps. Now initially it actually has started with OEM so models from heat pump manufacturers that you're able to add your technology. So there will be kind of measurement technology, as I said, maintenance technology and so forth in the household. Those things can be added also in the OEM machines. But over time, they will include that in a fully integrated product.
But will this require more cash in order to set up the factory or is it all set now?
That's set with this funding so they will be able to produce heat pumps. They have the factory already. But with the funding now, which is SEK 1 billion, they will be able to produce heat pumps. What's important then to understand, which is very different from this climate case and some of the other capital intense businesses we have also backed, is that we can invest as they grow. That is more kind of traditional expansion capital that you will see in any type of fast growing, more asset-light type of business. So the company has now a plan to producing, selling heat pumps according to the value prop I just explained. And then if we want to further increase the ambition level going forward, then there might be a discussion on continuing to fund this company as with many of our fast growing consumer businesses.
[Operator Instructions] And the next question comes from the line of Andreas Lundberg from SEB.
Andreas with SEB. You're talking about you're not happy with the share price, short question here. Why are you not taking action and buying back your own stock?
Firstly, because we don't have a mandate today. That's a discussion between of course our Board and our shareholders. But even if we had a mandate, I think it's important to remember 3 things. So when we buy or when we invest in our companies, we can increase the influence, which I think in itself can be very positive if we believe we are a valued partner. Two, we change the concentration when we specifically invest in 1 business as you saw in Samuel's slides. And three, we can provide 1 specific company if there's a primary transaction with more capital to grow. Those are the 3 things you won't get if you're buying your own stock. Having said that, with this type of discount we see today, we should of course look at buying our own portfolio across the line versus doing a new investment. I think that's the job we need to do so we understand the IRR difference. But anyhow, that would entail a mandate firstly.
And the next question comes from the line of Stefan Ward from Pareto Securities.
I have 3 areas I would like to ask about. One is the exit. I used the S-curve slide that we had at the latest CMD update in Stockholm where Village, Jobandtalent are in the sort of scale and profit area. I was under the impression that Cityblock might be there as well. But would you say Village, Jobandtalent and Cityblock are the most likely entities that you could exit over the next, say, 12 to 24 months?
Stefan, I think that sort of assumes that it's easier selling a profitable business than an unprofitable business and that might very well be true in this type of market. Village is, yes, probably the most mature business we have. Having said that, Jobandtalent is actually profitable today. I mean we're expecting 10% to 15% cash flow margins next year from that business and EBITDA a bit higher than that and we really see no reason not to believe that Jobandtalent could get to the level of the more sort of mature public peers that are doing, call it, 20%, 25% EBITDA. So it's not necessarily the case that just because Jobandtalent is now more of an EBITDA sort of CAGR type of investment, that doesn't necessarily mean that it's sort of on the selling list. But as you say, it might make it slightly easier in this market. But you also see this quarter we're taking around SEK 300 million out of Raisin and that's further to the left on the S-curve. So there can be transactions in that part of the spectrum as well.
Great. Another follow-up question on Village. Judging from the Walgreens report, I was under impression that Village is quite close to EBITDA break even already and that we could expect that early in 2024 both from the rapid improvement quarter-on-quarter, but also what they seem to or at least as I interpreted what they communicated for that company. Is that in line with your view, Samuel?
Yes, definitely. Again Walgreens' fiscal year ends on 30th of September. So over the next 12 months, Walgreens are expecting Village to be breakeven on an EBITDA basis and we see no reason not to believe in that.
Okay, perfect. Then I had a question on just to understand when you do new investments like the one in H2 Green Steel, the way I read that you did it at a valuation of SEK 30 billion roughly and my impression is that -- I just struggle with what sort of required return and what potential you see for that type of investment. The way I interpret what you said earlier without being too specific, it looks like maybe like 3x return on that investment. Isn't that a little bit too low for still quite a high risk in a little bit peculiar investment in that sense. Could you help my understanding on your required return assumption for that?
I think the return assumptions would be higher than what you just mentioned. Generally when we take that type of investment with a certain risk, we're looking for a higher reward for sure. And I think now looking at Green Steel with almost SEK 130 billion of contracted value, which is more than half of their annual production, we also know that the risk is significantly lower. So the question is when they can actually deliver green steel and being first in the world doing that in a market where there is a great demand and very, very low supply. That's kind of our idea here. So no, it's a relatively high risk project for sure, but it's also a relatively high reward when they succeed I should say.
Okay. And then my final question is on the 10% of the value of the unlisted portfolio that is not fully funded and the way I interpret it not fully funded and will run out of cash within the next 12 months. That's 10% of the book value that you used in the latest report. Is that the way we should think about the sort of risk exposure there?
That's correct, Stefan. And to be clear in terms of the capital need from us to sort of satisfy our, call it, [indiscernible] or more in those coming funding events, then we're talking a few hundred million. And out of those few hundred million, there's a lot of companies where we'd be more than happy to continue backing them. So just because you're at the last 12 months of your runway doesn't mean you're necessarily in our, call it, low conviction bucket.
Thank you. Dear speakers, there are no further questions. I would now like to hand the conference over to Georgi Ganev for any closing remarks.
Thank you very much for listening and for your questions. And as a reminder, we will report our results for the fourth quarter and full year 2023 on the 1st of February 2024. Thank you. Have a nice day. Bye bye.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.