Kinnevik Investment ABB (OTCPK:KINNF) Q4 2015 Results Earnings Conference Call February 11, 2016 4:00 AM ET
Lorenzo Grabau - CEO
Joakim Andersson - CFO
Torun Litzén - Director, Corporate Communication
Maya Chilaeva - Bank of America Merrill Lynch
Magnus Råman - Handelsbanken
Elias Porse - Nordea
Björn Gustafsson - Kepler Cheuvreux
Anna Oldinger - Citibank
Svante Krokfors - SEB
Derek Laliberte - ABG Sundal Collier
Good morning. This is Lorenzo Grabau and I am here with Joakim Andersson. Welcome to our Q4 2015 review of the full year and outlook for 2016.
If you turn to Slide number 3 of our presentation, I'd like to begin by giving you a perspective on our quarter and put it into the context of the full year. There are three important messages that you should take away from this fourth quarter. The first one, it was a very solid quarter during which we grew NAV by 2% despite some of the challenges that we experienced in the emerging market. And we ended the quarter with SEK7.6 billion of net cash or nearly 9% of our net asset value. The second message is that we have progressed well in executing our strategy, which is as you know, to create value but even more importantly to turn value into cash. And we’re particularly pleased with the outcome of the Avito project which was a eight year project during which we turned $50 million in $850 million of cash, so 16 times our money.
In addition we continue on our journey of focusing our portfolio, such that we ended the year with about 34 companies and a set of divestitures of our peripheral assets at attractive valuations. And this is allowing us to offer an attractive shareholder remuneration, which includes dividend up 7% to SEK7.75 and more importantly a buyback program which we are about to launch on Monday to repurchase up to SEK500 million of our own stock at what we believe is an attractive valuation.
The underpinning of these three messages is described on Page 3 and is coming from a solid operating performance in our various investee companies all of which are thriving through this important condition that is taking place to the mobile world. A prudent set of investments that were made during the course of 2016 in our existing companies and the resolution of a number of other important methods such as the Emesco tax dispute on which we further progressed during the year. As a result, we’re ending the year in a very strong position and well equipped for 2016.
If you turn to Page 4, we have summarized here the reports from our five largest public companies which many you will be already familiar with and so I am not planning to go through them in detail. But the summary of this Page 4 is really around three key themes. Each and every one of our companies is investing in driving the growth of their business and in driving innovation to capture the attention and interest of customers and increase monetization. Whether its Zalando reaccelerating growth, GFG building its business across 25 emerging markets, Tele2 launching its Dutch business or MTG pushing a very forceful digital investment strategy, each and every one of our companies is investing in building long-term franchises.
The second important theme is one of transformation. The only constant in technology led businesses is change and every one of our companies is transforming itself and its business model to adapt to a very different market environment. Whether its Millicom transforming itself from a mobile company into a data driven broadband and cable distributor, whether it is Rocket which started as a business builder and incubator becoming a full-integrated lifecycle investment company, or one of our small companies like Qliro building on top of its existing ecommerce business a very successful financial services company.
Lastly as I said the third theme which is very important to us, is turning value into cash for our shareholders. And we’ve accomplished a number of very important transactions like Avito, Transcom and Rolnyvik which are allowing us to be incredibly well positioned to start 2016.
If you look at Page 5, we’ve summarized here the outcome of what has been a most exciting Swedish international project which we have developed in partnership with two great Swedish entrepreneurs Filip and Jonas to build one of the greatest companies in the world of global market places. It started eight years ago and it went through a variety of key phases that included adding new investors, which is a theme that generates the leads very much into the one of open architecture and bringing great partner.
Second, consolidation which was another very important theme to improve economics and expand the franchise and then shifting in a very aggressive manner the business from desktop to mobile to capture the interest of consumers. And then when the bigger consolidation opportunity came and Naspers was keen to acquire a controlling position in the company, we worked in a very constructive manner with the founders and the management team and the other shareholders to complete a very successful transaction.
The numbers on the right hand side show the returns that we achieved but also remind you of the very conservative approach that we take to valuing our company's NAV. The business that was valued in our Q2 of SEK2.9 billion was sold as you can see for SEK7.2 billion a few months later. And so we're particularly pleased with the journey but I would also like to highlight that this is the type of journey that Kinnevik embarks upon. And what we would like all of our shareholders and our investors and our research analysts is to understand that an eight year journey is a typical journey of a Kinnevik project. And as such when you take a picture of our companies and you question some of the challenges that we experience and some of the investments that we're making you have to always bear in mind that the average age of a project is eight years. Zalando is on a seven, eight year journey, Avito was an eight year journey and for many of our other companies are only three or four years old and so they're just in the middle of this process of building a successful franchise.
With that I'll turn it over to Joakim to comment on our financial performance during the quarter.
Thank you, Lorenzo. So, on Slide 6 we have a full year's trends, a set of capital trends that have made impact on the valuation of our private assets. Starting with the graph on the left, we can see that the last quarter of 2015 showed a general rebound, in both multiples and share price from the substantial growth that we saw during the third quarter. As shown in the graph, the share prices of our peer groups were up by 18% on average. As you all know the high volatility has continued into this year and we have experienced around 15% price drop in January.
If we look at the currency trends on the right hand side we can see that the Swedish kroner traded in line with most of our important currencies for the private assets. With the exception for the Russian ruble, but once it continues devaluation during the fourth quarter our exposure to it has obviously decreased substantially with the sale of Avito.
Moving onto Slide 7 and the overview of the valuation of our unlisted assets. Excluding our divested assets, Avito and Rolnyvik, the portfolio value decrease by SEK2 billion during the quarter and as you can see the main driver was SEK1.2 billion devaluation of our shares in GFG where the sales multiple -- the slide in the valuation was taking it down from 2.9 times to 2.3 times. And that's recognizing the public equity markets increased focus on profitability at the expense of growth and the general discounting of emerging market companies vis-à-vis developed market companies.
Zooming out to our full NAV on Page 8, there are couple of points to make. Firstly Zalando continued to perform strongly over the quarter and contributed with SEK4.2 billion to the increase in NAV. Secondly we had an overall SEK1.4 billion increase in value and ended the year with a net asset value of SEK83.5 billion or SEK301 per share. However as of yesterday again based on a very volatile start of the year this number has come down to SEK248 per share. And then probably and perhaps the most noteworthy following the sale of Avito, we now have SEK7.6 billion in net cash in our balance sheet as mentioned by Lorenzo's comments again.
On the next slide, Slide 9, we have specified the investment activities on the left hand side. During the fourth quarter we executed substantially more divestments than investments with the sale of Avito and Rolnyvik. For the full year 2015 we made net investments of SEK400 million plus, excluding Avito. Our financial position on the right hand side shows the net cash position of SEK7.6 billion as per end of the year. And as Lorenzo said in the beginning based on the current pipeline of investment opportunities and the state of the capital markets, we expect to make net investments of SEK2 billion to SEK3 billion for 2016.
If we then turn to Slide 10 and our dividend proposal, based on our dividend policy and the current very well capitalized balance sheet, the Board is recommending a cash dividend of SEK7.75 per share which if approved by the shareholders at the AGM in May will correspond to yield of 3%, based on the share price as of year-end and close to 4% based on the current share price. Compared to last year this recommendation would mean that we would increase our dividend by 7%.
Finally, for this section of Slide 11 we have announced this morning to launch a buyback program of SEK500 million, the execution which should be done in line with the new Safe Harbor rules will start on Monday and end before Easter. Based on the current valuations and fulfillment of our three criteria as shown on this Slide, we think a buyback program is very attractive investment for Kinnevik and its shareholders.
Back to you Lorenzo for further comments on last year’s achievements and outlook for the year.
Thank you, Joakim. If you now turn to Slide 13, you will see what Kinnevik had as its objectives for 2015, and what I would like then do is to comment on how we have done on each and every one of these objectives. Kinnevik is executing a simple strategy which I will describe in one sentence as a prudent strategy of driving growth, innovation and where appropriate consolidation. This is what Kinnevik is all about and this is what we did in 2015, and this is what we will continue doing in 2016.
These 10 points were the ones presented to the Board in late 2014 as our key objectives for 2015, and we are pleased with the outcome of the year, because on every one of these metrics we have made significant progress. We have focused our portfolio on some of the best brands and businesses that we’re building and we’ve driven innovation, growth and attracted talent to make the business stronger. We have consolidated a number of our businesses and we have recalibrated our emerging market exposure to take into account of some of the changes that have taken place in the world around us.
We have continued to invest in building governance, risk management compliance and corporate responsibility in every one of our businesses and we have substantially strengthened our balance sheet to position ourselves for the opportunities that we see. And what we’re doing today is we are announcing our delivery on the commitment that we have made to turn our results into cash and to be very thoughtful about translating the growth and the value of our assets into attractive returns for our shareholders.
If you turn to Slide 14, you will see that our first and most important theme, driving growth. At the end of the day, Kinnevik is only as good as the value of the individual businesses and brands that its building, and the customers it has attracted. And as you can see, on the bottom hand side of the page, each and every one of our top companies grew customers into double digits and in some cases to some extraordinary levels like Lazada which grew customs more than 210%. If we don’t grow our businesses, we stop creating value. And so our first and foremost objective is to building customer franchises by investing in our brands.
Our second priority, and if you will now turn to Slide 15, is to translate the growth in customers into growth of revenues. And we’re particularly pleased that our largest investment Zalando, a company that was started only 8 years ago, was able to significantly reaccelerate growth in a profitable manner by achieving as you can see a move from the 21% to the 30% quarter-on-quarter growth in 2015. In addition, they were able to deliver a full year solid profitability, which shows that this company is building a very valuable franchise of growth and profitability in a very large market, a €400 billion market of fashion and accessories in Europe.
If you turn to Slide 16, you see the second part of the theme of our strategy which is to drive innovation. Tele2 and MTG through [capture] of Swedish consumer value have been able to reinvent themselves and build completely new franchises from within, which as you know is a continuous and constant theme in the Kinnevik led businesses. We’re particularly excited about some of the initiatives that Tele2 is conducting within the IoT machine-to-machine business by essentially expanding what is an exceptional franchise in the consumer world to next generation businesses that thrive on its excellent connectivity infrastructure.
Similarly, MTG has been prudently evaluating for a number of years a number of exciting digital opportunities and have identified the world of e-sports and multichannel networks as areas in which they could build interesting and sustainable franchises. And we’re very excited about the international potential that MTG is exploring and executing upon across many of these new exciting businesses.
As I said in the introduction and now turning to Slide 17, we are also very excited about the Qliro team's ability to invent and create a completely new company within and leveraging the very good franchise that the five e-commerce businesses that Qliro owns in its whole market of the Nordics. Presented on Slide 17 are the key statistics of what is ultimately a relatively small team, 120 people who have been able to build a SEK0.5 billion loan book in one year by essentially creating an entirely new company, focused on delivering an exciting and consumer friendly service which the Nordic consumers look for when they shop online.
The last comment I'd like to make around innovation is what Quikr one of our most recent investments has been able to achieve in India. In what is clearly a highly competitive market where literally billions of dollars of capital have flown in the last couple of years to capitalize on what is now the second largest mobile internet install base there is in the world after China. As you can see on the slide in the space of 18 months Quikr has been able not only to reconfirm it's presence across horizontal classifieds, which is clearly the most important market in which it is executing. And also to build five deep verticals in homes, jobs, services, cars and C2C goods in a way that allows them to project themselves deeper into the various verticals and deliver a enhanced experience to consumers who are increasingly becoming sophisticated in the services they search, in general horizontal classifieds.
The third theme which is very important to our value creation strategy is the one described on Slide 19. And we're particularly pleased to see that most if not all of our companies have been focusing on growth, innovation and consolidation in order to enhance their position. In Kazakhstan as you know Tele2 and Kazakhtelecom have entered into a joint venture to create a much stronger number three player in the market. In Tanzania Millicom took the opportunity to acquire Zantel, a company based in Zanzibar which not only had a strong franchise in the island but also on the continent, allowed it to build a much stronger digital presence. MTG shows to pursue a strategy of prudent returns from Russia and as such has been able to finance its new digital investment to a prudent capital reallocation process. And then finally Rocket's expensive investments in the food delivery sector have been prudent in the last few weeks in order to realize capital to invest in its core business.
These four transactions and these four developments in my opinion highlight the single theme that comes through every one of our investee companies, which is one of pursuing growth but also reallocating capital towards the segment of the business that offer the greatest opportunity.
The outcome of this process is described on the following two pages, where as you can see we have increased the value of our assets invested in Continental Europe and the Nordics, which allows us to have a very strong pace given some of the uncertainties that we face in the emerging markets and to reallocate our presence across emerging markets with a growing presence in the Asian region which as you know is offering a very exciting long term prospects both in India and in Southeast Asia.
So, if you look at Slide 21, we have delivered on our strategy of reducing the number of companies to focus on the one that has the greatest potential. We have increased our share and we have concentrated capital, in fact all our new capital in our existing companies, because we felt the valuations for our 2015 were running a little ahead of the performance of the businesses. And that has put us in a very strong position to explore now new opportunities.
And so if you turn to Slide 22, one of the key initiatives that we carried out in 2015 was to build deep expertise not only in our existing sectors but in a number of new sectors within financial services, healthcare and education. And more importantly to build an exciting pipeline of opportunities from which we can then pick the most interesting company with the best founders to build the next generation businesses that will continue to drive a long term shareholder value of Kinnevik.
And we're pleased to note that we have already in the first month of the year announced a first investment in a next generation digital healthcare company called Babylon, which has developed a complete stack of solutions and services to provide patients in the U.K. and Rwanda. Because this is a company that is operating both in developed and developing markets, an opportunity to engage and receive health services across the mobile phone and to manage digital medical records in a very efficient way. So we end the year having delivered on our promises and on our objectives and in a very strong position to capture the opportunity that we see in the years to come.
If you turn to Slide 24, this is a chart that I am sure many of you are familiar, that highlight some of the challenges that we’ve experienced through the volatility of 2015 and more importantly the sharp deterioration in the equity markets that we have witnessed in the first six weeks of 2016. These statistics are not giving full credit to the significant correction that has taken place in the digital Internet companies, which have seen in the case of Amazon and LinkedIn dropped in the share prices of between 30% and 50% in the last several months. And we are clearly a company that is focused on building digital plans. And as a result, these trends that are affecting all the companies in the world and in particular the companies in the digital world are clearly affecting the value of the Kinnevik Company.
But that to us is not a key priority and a key area of focus. We are not managing our business on a quarterly basis, we are building long-term franchises. And that is why we are reconfirming to you today and obviously we will do so on a quarterly basis, our strategy for the coming years and our priorities for 2016 as really three key initiatives across our three areas of business.
First, on our operating companies, we will continue to do what we have done this year and in the past year, drive innovation growth and where appropriate consolidation and bring stronger, more experienced, more diverse talents and establish new partnerships to strengthen our businesses. And we will continue to execute on our promise which is to build sustainable business with very good governance risk management compliance. And companies that are good citizens in every country in which they operate.
In our investing business, we will continue to contribute capital on a select basis to our priority companies to support their growth and increase our ownership. As you’ve seen from one of the statistics we presented earlier, we don’t own enough of some of the businesses we’re invested in and we might want to increase our ownership during the course of the year. We will pursue new opportunities but only in the sectors that we have told you we are focused on and in a very disciplined manner.
We are all about focusing on delivering on our promises and we will focus on the sectors we have identified as exciting opportunities to build new companies. And on a probably more modest basis given the fact that a more challenging equity markets both private and public make it more difficult to sell assets at attractive valuation, we will continue in our efforts to prune our portfolio. Although, I suspect we will not be able to reduce it as much as we did during the course of 2015.
At Kinnevik we will complete the buildup of our team. We will maintain a very strong balance sheet with a significant net cash position, which we believe is essential to capture the opportunities to come and we’ll continue on our path to deliver long-term shareholder value to the people who believe in our story and who are interested to be our partners for the long-term.
With that I open it up for questions both here in the room and of course over the telephone. Thank you.
We will start with any questions from the telephone please?
[Operator Instructions] We have a question from Maya Chilaeva. Please go ahead madam.
Congratulations and thank you very much for taking my questions. I guess going down the financials found in your morning’s press release was that 2016 could be challenging for the unquoted valuations. Lorenzo could you just explain a bit more of what you mean by that? Thank you very much.
So as you can imagine our shareholders and our analysts are able to evaluate on a daily basis the value of our public companies, because they are incredibly open and transparent, all you need to do is look at the ticker. The valuation of our private companies is a more challenging exercise because it requires taking all of the information that comes from the markets, the businesses, the competitive environment, look at the current performance, look at the historical and future outlook for the business and determine what is the right approach to take on valuing these businesses. And what is our responsibility as a management team is to try to present the best picture encapsulated in a single number for our private companies.
And clearly, the market environments that we’re seeing both in emerging markets as well as in the public equity markets in technology stock will make the valuation of our private companies reflect what is the state of a deteriorated technology market valuation. That is why I think we want to be very clear with our invested funds to highlight that we do not have a valuation methodology which is fixed in time and this regards the stage of the market. And as a result, I think what you will see, is we will look to be very much consistent with our existing valuation methodology, ensure that we give you on a quarterly basis a clear read across from how the public market and the private market and the changes that are taking place in the private markets are resulting in the valuations of our private assets.
Okay. Magnus Råman, Handelsbanken. Thank you. Maybe just a question around the share buyback program that you’ve announced today, it will be worth SEK500 million and then that will represent roughly 1% of your outstanding shares. However, the mandate that you have from the AGM says that you can buy back 10% of outstanding shares. So the question is also in regards to the investment items that you've provided for 2016 that shows if you will maintain the very big net cash position throughout this year? And if discount stays at [for 2016] to be a significant net book, proved immune to buyback programs and the [indiscernible]?
So as you can imagine our most important effort when we make investment is to pay a dividend if possible and to migrate the [business]. And so the decision to execute the buyback begins with the fact that we think Kinnevik is a great company that is building great businesses and that the value of the stock is very attractive to us. And so our most important objective is to buy as much of Kinnevik at the lowest price possible and the more we try to buy the more likely the price will go up and so we will defeat our objective which is to buy shares at the lowest possible price. So that is an important parameter. The second parameter to bear in mind is that we believe that the right strategy is to execute transactions when we are in an open window and that's why we have selected the next six weeks as an attractive window for us to purchase shares. And we have sized, the size of the program in connection with another basis of the volume of activity that is available in the share price.
So the mandate that you see described here is for us an investment decision. And the investment decisions you can only make it on the basis of information we will have at the point in time. And so we have made this investment decision. In the future we will always make investment decisions by taking into account all of the factors that we have, but I don't think it will be smarter as an investor to tell the world what our investment strategy and execution will be over the next five years because I think we need to be transparent but we also need to protect our own shareholders and our own strategy in keeping that confidential.
Maybe just a follow-up then on investment activity you've mentioned here in the presentation that you want to support or build the space you have in your current assets and holdings. Does that mainly relate to the unlisted assets or could you also see those opportunities in listed assets?
Sure as you can imagine we think a lot about that particular topic because when you see the value of our asset have such a large drop which is mainly driven by equity market sentiment as opposed to the inherent performance of the businesses, you say to yourself maybe this is a great buying opportunity. Having said all of that, at heart Kinnevik is an entrepreneur and business builder and our shareholders expect us to create and build great private companies which we then eventually put on the stock market for value crystallization. And so whilst the temptation is always there to capture market dislocation, in particular as we're going for it now, we feel that as a matter of a priority it is probably more important that we dedicate our efforts to building new exciting private company as a first matter. And as a second matter we take advantage of the opportunity of acquiring more of Kinnevik by acquiring our own shares because we believe that most of our companies are deeply undervalued today. As opposed to cherry picking whether on a relative value basis company XYZ is more or less valued by the market and leave our shareholders to make a decision if they want to double up on a particular company.
That's a good answer and maybe just a final most specific question maybe that goes you Joakim, around evaluation of Konga, you capped sharply in this quarter maybe you could comment on the leases for that and maybe if you see any need for providing new capital to Konga? Thank you.
Evaluation, yes you're right that we capped it quite sharply. I think one of the explanations is that it has a liquidation preferred structure that's actually kind of a double hit on our value on shares. So the write down on this equity value is not that material, that's the first thing. And the reason for doing it, we have previously had a transaction value and that's just kind of the methodology but we think that based on the market environment and Nigerian climates in a way we think that that the transaction value has been outdated so we moved to a multiple spaced evaluation, so that’s basically the background to it. And then on capital needs, I don’t know Lorenzo if you want to?
I think that -- I’ll just make a first observation around Nigeria. I mean, I think we all know the state of the Nigerian economy, its reliance on oil, the need to access World Bank money and see the outlook for the currency being what it is. We feel that it is important to be particularly prudent in evaluating Nigerian assets. As it relates to the capital needs, clearly building a general merchandise ecommerce company in a country the size of Nigeria will take quite a lot of capital and that’s why we are quite pleased that the burden, if you want to use that word, or the opportunity, so I use the positive word, is shared between Naspers and ourselves. Given the fact that this is a bit of a large company and a market the size of Nigeria will take quite a lot of capital. And as a result you will be at least two if not more people sharing that burden.
Elias Porse, Nordea. Firstly on the pruning of your number of companies you’re down to 34 now from roughly 50 or so a year or two back. Obviously this developing going forward do you expect -- what do you think is reasonable level of number of companies in your portfolio given your current organization?
So I think as you think about our portfolio, yes we do have 34 companies. But as you probably know, six or seven of them account for 95% of our value. So, it is important to always differentiate the fact that there is an overarching theme of reducing the number of companies. But in reality the company that really are making a difference for Kinnevik in terms of our value point of view is the much smaller ones. I think that if you think about the fact that many of our projects are eight to 10 year projects, over a long period of time, we will probably end up having less than 20 companies in our portfolio. But it will take quite many years to get to that because at the same time as we are continuing to prune the portfolio we are also going to start adding back to the portfolio starting this year. As you know, we’ve gone essentially 18 months without making any new investments but I would be surprised if by the end of the year we haven’t made at least three or four new investments. So you might see a period of time during which we actually have a marginal decline until the companies mature and they become more ripe for consolidation.
And a follow-up to that. You made an investment Babylon this year, it's quite a small investment. Can you tell us anything about the financials here in terms of valuation and what stake you have? And then do you see this as a platform for our future growth in the sector, or you do expect to do other acquisitions with similar businesses?
Given our size, the scope of our business and if we look at some of the significant investments we’ve made in the last two years, there is clearly a need for us to make investments of a meaningful size in meaningful companies such that over the next five or six years they make a meaningful impact on Kinnevik. So, all of this is to say that Kinnevik is naturally gravitating towards partnering up with entrepreneurs and business builders in slightly more mature businesses, more growth oriented businesses as opposed to venture capital type projects. That is the overarching theme that we’re interested in. Having said that, you also have to appreciate that when you are entering new sectors, which are not very developed there aren't such companies in existence and then so you have a choice. You can either not to make the investment and just sit on the fence, not learn much about the opportunities and then catch up later on or go slightly earlier than you would like and then participate in the business building.
In the case of Babylon we evaluated the sector on a worldwide basis looking at the U.S., the Americas in general, Europe and Asia and we concluded that this was very interesting sector. And we wanted to make an investment really starting from Europe because we felt that that it would be a more natural opportunity for us given that we understand the healthcare market better here than in other parts of the world. And Babylon really was the only exciting opportunity that we found in terms of the way they were thinking about addressing the full market opportunities opposed to just a single [service]. There are a number of companies that have emerged around the world that do doctor bookings a little bit like you want to book a restaurant, you want to book a doctor. But we were not interested in that. We were looking for much more of an end to end solution, a business that was able to take customers and have if you wish a health app that could resolve your basic needs in terms of having questions and queries around mild issues all the way to having a doctor consultation or a specialist referral to managing your medical records or tracking your health through a variable device. That's what we were looking for.
And Babylon was the only company that was actually building a type of full integrated stack of services and in addition was ambitious enough to think about how artificial intelligence could be brought to bear. That's what made it exciting. But this is a very young company. It's a company that's been created in the last couple of years and so by definition it is still in its infancy. You could say similar to what Avito was 10 years ago or nine years ago and so this is kind of the -- an eight to 10 year journey for the financials and really not meaningful. But what I would say which is more important than the financials is that they've been able to win already some absolutely blue chip customers such as major financial institutions based in London where they're essentially offering to all of their employees as a special healthcare service the Babylon Health App, which essentially is a great tool to enhance productivity.
Because when people are feeling not so well, as opposed to having to take four hours off of the office to travel to doctor, they can have their own solution on their phone and also as a special benefit for the whole family of the employee who all of a sudden gets a very digitally supported healthcare service. And that is hopefully a reflection of our approach which is, this is a prudent entry into a very large spectrum and whereby we're looking to build a significant presence.
Hi, Björn Gustafsson, Kepler Cheuvreux. Just a little bit more clarification of [indiscernible]. As you are able to keep exposure and your new investments as well as the sectors healthcare and education model connect. You know something that's the within those two sectors and which developing are looking at is it India as you said? And then also a follow-up question on [indiscernible], regarding Global Fashion Group and their geographic exposure and the geographies that you might want to increase or decrease?
So, we are very fortunate on Kinnevik that the [indiscernible] of the group, the presence of the group, the mindset of our owner and of all of the Kinnevik people is absolutely internationally minded and globally aware. And we believe that the best way that we have to sell our shareholder is not to narrow our focus on any particular geography and be unaware of or not engage with opportunities that might come because the world that we live is a connected world where the digital platforms are global by design. Now as you know our strategy is to look to invest in companies that have moats or productability build around them and its apps require local execution.
So just like Facebook or Google, absolutely global, we need to think globally because our businesses eventually will exist everywhere around the world just like there is a mobile company everywhere around the world. So I think one of the most important features that Kinnevik brings to its investors is that global mindset and awareness and that's when we look at any business model like I talked about in healthcare or education or financial services, we don't just say okay let's look at what's available in Europe because it's a 2 hour flight and I don't want to be away from my kids. Our mindset is we got to look at every company around the world, the best-in-class U.S., Indian, Chinese, the Australian, Latin America and then we look to figure out which one is the one that has the greatest opportunity. The market dynamic, the business position, the founder, other potential shareholders, the momentum of the business and then we look up risk adjusted returns or said differently price that we pay for an opportunity. And then we distill the opportunity down to the one that are most interesting and we pursue many in parallel.
Right now obviously without giving you too many details we are pursuing two really exciting opportunities in the same sector, absolutely at the same time. Why? Because that's the way we really understand the industry and also we figure out what's the best opportunity and then we'll obviously not make both investments, we will make only one. And so from our point of view we -- that these are the best ways for our corporate is to have a very global mindset and we will continue to look for opportunities. So as we speak we have people today in India, we have people in Africa, we have people in Germany and we have people in the U.S. and all of them are working on projects and opportunities. Then all of this comes back to the investment committee and to the Board who then decide what is the best opportunity for us to pursue. So, I don't want to give you a natural geographic mix set because until we make the investment I do not know where they will come.
As it relates to Global Fashion Group, Global Fashion Group as you know is basically six businesses in six very different regions that are exposed to six very different dynamics. Some of them are extremely challenging, some are very benign and our job as the Board of GFG and at the shareholder level is to figure out how we modulate capital allocation, how do we think about growth and the amount of risk we take in everyone of these geographies. And work in partnerships with [indiscernible] and each and every one of the founders and CEOs of the various businesses to determine in light of the level of competition we find in every market the best way to get good returns for our money in terms of customers, revenues profitability over the next 12 to 18 months. And that is a continuously iterative process whereby the reasons from a top down decision to put more money in the Philippines and less money in Brazil because Brazil is less exciting based on what we read in the newspaper that's not how we think.
We think about it the other way around which is we ask the founders and the managers to say tell us what do you think is the opportunity that you see, how should we be in a world of scarce capital and more challenging market environment. What's the best way to create value for your business because everyone of our founders and managers are shareholders and they also don't want to get diluted too much at a time when valuations might not be as exciting as they might in two or three years. So we're all partners together to create great companies and so the decision that you see are made about emphasizing or de-emphasizing certain businesses are made as a team that is seeking ultimately the same objective which is to create great company and a very valuable company.
Okay, so what's your biggest concern in the portfolio overall?
In the Kinnevik private portfolio?
Yes in the Kinnevik private portfolio.
I think the concern that I have around companies that are exposed to global business models, companies that are facing competition from much larger players where we're unable to protect them. The good news is we have very few of those. There are less than a handful and they are typically very small in our portfolio. But those are the ones that widen the most because there no matter how you work, you are up against giants that can deploy literally hundreds of millions of dollars of capital and that we have been very, very disciplined to not invest in those type of businesses but we have a couple that are globally exposed and those I think, Björn I worry the most about.
So can we just go to the telephone and hear if we have any questions from the telephone queue.
We have questions from Anna Oldinger from Citibank. Please go ahead ma'am.
Hi, this is Anna from Citibank. I just wanted to ask about some of the Board changes with Rocket and kind of your influence or relationships with Rocket and their decision around listing HelloFresh and the outcome of that and how you look at it going forward? Thanks.
Sure. So as you know Kinnevik and Rocket have had a very beneficial relationship now for six or seven years. We have been a significant enabler of Rocket and Rocket has been a significant enabler for our e-commerce strategy and that has resulted in some of the parts delivering much greater results than we could have accomplished independently from each other. And I believe that Rocket is grateful to Kinnevik and Kinnevik is grateful to Rocket to that extent. The second thing I would say is that, like all partnerships they sometimes evolve into some things better and stronger and in sometimes they disappear because people take a difference course. And what I am very pleased with is the fact that we have been able to reinvent our partnership as we have both adopted our businesses. Kinnevik as you know was five, seven, 10 years ago very much of a mobile and media company and now we've become a major international force in e-commerce marketplaces and mobile. And Rocket used to be a incubator and business developer and has now become a fully integrated business developer incubator and investor, most recently for the launch of their private equity co-investment fund.
So if you think about it, two companies that started eight years ago, nine years ago, working together in a very, very different shape have been able to continue as partners across a fundamental change in the business model and with both of them being public. And I think this is to me a real sign of the open minded approach and very constructive approach that the leaders of the two companies and the owners of the two companies have had over this period, and a relationship that is continuing to deliver very good results for both partners. If you're referring to some of the changes, which is really only one major change as far as a I am concerned in the Supervisory Board, that the Supervisory Board together with the Management Board made in December and you look at it today knowing of course what you all know today which is that Rocket has now become a fully integrated business developer incubator and investment company.
You understand that Rocket and Kinnevik are pretty much in similar businesses today, which is something that wasn’t the case a few years ago. And so because as you know Kinnevik is a champion of governance and the governance principles, we took a view, all of us together, that it will be beneficial to the company if the CEO of Kinnevik which is a major international investment company focused on building digital consumer brands, was not the Chairman of a company that is pursuing a similar strategy. Because it could create a perception of conflict of interest which you can excuse yourself if you’re a Supervisory Board Member, if there is a particular situation that we feel is in conflict.
But it is more difficult to handle if you are the Chairman which really has to direct the work of the Supervisory Board. So it was natural decision to make and I am very much excited about our upcoming Supervisory Board meeting and strategy sessions during which we can continue to contribute as a healthy and engaged shareholder.
There are no further questions at this time.
Svante Krokfors, SEB. One question regarding your guidance regarding the net investments this year to SEK3 billion. Can you give any guidance regarding how you expect that to be split into existing and new ones?
I think we expect it to be between half and half, could be 40-60 one way or the other between existing and new. I believe that our -- that the number of our existing companies could benefit and would benefit from a greater commitment of capital. There might also be opportunities to acquire some small interests at a attractive valuation given mark to market and downturn in the valuations. And we have a very healthy pipeline of opportunities which we have built over the last 12 to 15 months and we are likely to be able to execute on two or three of them. So, we feel that is about the right investment strategy and an amount in terms of capital allocation.
Derek Laliberte, ABG. So alongside the healthcare you guide on -- cite education as an interesting area for further investments. Could you just -- is it likely that the [telco] gets some -- back on to what kind of opportunities you’re looking within that sector? I know there are these companies like [indiscernible] with language learning tools that are a real marketing hope you have got there in sectors or something like that you’re looking for?
So as you know the world of education is a very diverse and a very fragmented one. I would broadly characterize three categories that exist in the world. The first one is what I will describe as the free education content that is available from, you could say, Wikipedia all the way to [PAN] or Academia and so forth, which are essentially providing content and tools to individuals and institutions in order to access knowledge and education on a very broad basis. Then you have a second group of companies, which are much closer to being publishers and by publishers I mean people actually producing the content, uploading it and obviously offering it either on a byte size, on a subscription basis. And then you have businesses that are essentially connecting content or individuals with people who are looking to acquire that content or that education. So you could call the latter group market bases for education and that is the factor we are most interested in, because it's a factor we know well from Avito to Quikr to Saltside, it is a business model we understand and that’s where we’re focusing our efforts.
If I could also ask on your target or you are -- that your expected to the 13% annual total shareholders return maybe some background on how you arrived at that target, you know it's slightly lower than what you have [shown us] historically?
Sure. If you think what Kinnevik is, it's a company that is creating great businesses and through the process of creating great businesses delivering shareholder value. And at any point in time, the assets we own, can deliver and should deliver excess in returns which is optimistically a function of the type of business we’re investing in, the stage or maturity of the company, the level of competitiveness, the country in which the business operates and so forth. And so if you take each and every one of our businesses and you do that work, really bottom up, key business unit by key business unit. So taking even the mobile companies and looking through where the capital of them allocated and you think about how much the breakdown of the portfolio has changed over the last five years.
If you think about Tele2 Russia, you think about Avito, you think about the amount of cash that we currently own and you think about the kind of reshaping and you could say reduced risk of the portfolio, you will see that and you do the analysis, which is what we've done, you will see that 13% is return that we should be achieving in order to deliver on our cost of equity. And that's why we feel that that is our target and we need to achieve it by using the three levers that we have, innovation that needs to translate into growth, that it needs to deliver attractive profitability which is one part and then the other part is of course if we're unable to do that on our own, through consolidation. And so we feel that it's important that our investors understand what it is that we're trying to achieve over the medium to long term, because of course the market sentiments will have our -- the value of our assets swing, but it's important that people understand what it is that we are shooting for.
Just one final question on GFG as you mentioned you've downgraded the value quite substantially here in the fourth quarter so, just at this level if I've overlooked something, but also is this just based on valuations of peer groups, et cetera, be around -- I'm sorry I find some inconsistency perhaps we have missed your target after the 30th of September in the last two quarters [indiscernible]. I'm just wondering, just I'm seeing that some of the peer companies stated in the reports are down some 20% to 30% additionally in this year. So, just wondering, if the [indiscernible]?
I think it's a very good question and it's -- so the answer is going to be a little complicated but because it's a very precise answer to the question that you're asking. So, the first important thing is to recognize is that what we are aiming to do is to have valuations always conservative up-to-date and as much as possible reflect the value of the asset at the point in time. And here we are talking about not the valuation today, we're talking about the valuation of December 31st. The second thing is to say is that in the case of a company like a young e-commerce business what you need to try to assess apart from transactions, which we put aside, because once they become too old they're no longer relevant. But we're looking at a standalone company.
What we're trying to determine is a judgment on whether growth is more important or profitability is more important. And as you know because you are experts and professionals in the sector, investor's attitude favors growth some times and favors profitability at other times. And what we need to do is to have as much as possible a scientific approach to something, which is qualitative, which is what is the weight you put on growth versus profitability. And for a period of time when the technology and Internet and e-commerce sector was on a very strong rise, the focus was very much on the growth side. And that is why we felt comfortable that given the exceptional growth rate that GFG was delivering in not only local currencies but also back in [euros], we could feel comfortable to apply a multiple which is as Joakim said was [2.99 times]. Now what happened is in the last few weeks of the year past, the sentiment shifted from growth to profitability and the emerging market currencies began to suffer in a more significant manner, at a time when in a couple of the countries in which we operate, notably in India, competition continued to become stronger.
And so those three factors needed to be somehow reflected into a slight change of attitude. And so despite that GFG has continued to deliver an excellent local currency performance through the investment which we expected to be, sentiment shift, currency and slightly stronger competition in a couple of countries have meant that we have to rebase the multiple we use to take it down as Joakim has described and is in the report. Now someone else might have taken a different view but we are very conservative people and our job is to always give you our best estimates by looking at a situation and trying to frame that in a conservative manner and that's why we made the decision to be thoughtful about it and then do what we did.
Do we have any questions on the telephone queue?
There are no further questions at this time. Please go ahead speakers.
[indiscernible]. I have a question related to Millicom, the share price of Millicom has come down significantly over the last year. A lot of this is FX related and I know management has been working hard on reducing corporate costs and most recently they also divested a non-performing asset in Africa in DRC. There have been still some concern related to cash flow, probably that is [yesterday]. But do you see the need to speed up transformation of Millicom in the sense of continue to divest assets, for example, operations in Africa and the power assets, online assets, et cetera or also speed up cost reduction programs? Thank you.
So my view is that Millicom is a company in transformation and is actually a company that is pursuing an exciting transformation and as you know we have to channel the company in the [route]. And we're very fortunate to have an exceptionally talented team that is highly, highly focused on executing on the agreed transformation strategy. Mauricio as you know joined us in April, Tim joined us about year and a half or two ago and Cynthia joined us in September and the three of them are really 100% committed to making Millicom a very successful company. And they have quite a lot of levers that they can pull to execute on that. The first and most important thing is they fully understand the strategies they need to execute to win in every single country in which they operate, which as you can imagine are incredibly different. I mean, there is much difference between Colombia and Rwanda as there is probably between Sweden and Italy. And so you really need to think about these countries in a completely different manner and we're very fortunate to have a very talented team that understands the industry, understands the difference and opportunities between mobile and cable, between consumer businesses and B2B businesses, the infrastructure businesses and over the top businesses. And we feel very comfortable that they have a real mastery of what needs to get done.
The second thing which makes Millicom incredibly well positioned is that by using very strong market share positions in a number of core countries. It has been able to create a very attractive integrated offering for the consumer which because they were early will be very, very difficult to replicate. And in fact I don't think anybody would want to replicate as to the [fair extent] in terms of having a new entrant which is not something you can say about many other countries, in particular in the more developed markets. The third thing is we have a team that is not only very strategic but is also highly focused on capital allocation. And the decision that the team made and obviously the Board supported of releasing capital from a very vast country which would offer huge opportunity to have a 25 year investment horizon and take that capital and put it into neighboring countries or other markets is clear sign of foresight. And I would say a very, very stringent method of saying where am I going to get good return over the next three, five, 10 years and maybe something that pays off 15 or 20 years from now, maybe we can leave that to someone else and we just focus on the things that are more on our line of sight.
To come to your question around other assets, as you can imagine all of our companies are constantly evaluating whether they're getting good return on assets. But just to pick an asset that you talked about, as you might have seen the largest French insurance company AXA has agreed to put literally tens of millions of capital into the Africa Internet Group. Now you could say why does Millicom own that asset, why didn't they sell it last year and you could ask a question like that. Well in reality this asset now is just worth a lot more than it was. And so what Tim and our team develop, what they are doing is they're evaluating all of these situations one by one and figuring out how much is the asset worth today, will it be worth more three years, five years from today, how much capital do I need, look at the capital structure. All of my bonds are essentially very long dated maturities so even if I sell an asset I am going to sit on cash because I can't repay any bank debt, am I better of keeping the asset invested and getting another 15% or 20% over the next 12 months or selling it out and doing some transactions with my bank.
So everything that I just described which is a tip of the iceberg is a kind of highly sophisticated financial work that goes on in parallel to all of the brand building, exciting new products, OTT services that [GNs] are building in the local countries. And we obviously as Board members, Chairmens and as well as shareholders support that type of engagement because that’s what creates a successful investment. Great performance in the market and pretty strong financial discipline, but as you know the world is not as simple as let's say just sell side assets and pay down debt, because if you've been shrewd as Tim has been for the last 12 to 24 months to reconstruct the capital structure to prepare for a downturn in the emerging market debt, then you have a very well staggered side of maturities that when the company which is now free cash positive you can pay down and move out the cash. But you don’t want to also sitting on a big cash position and a big debt position and just not have any returns.
Looks like there are no more questions. Thank you so much for joining us here today. Thank you for the people on the phone and we look forward to connecting again in a quarter.
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