AFC Uzbekistan Fund valuations as of 30th April 2024:
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Estimated weighted harmonic average trailing P/E (only companies with profit):
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4.22x |
| Estimated weighted harmonic average P/B: |
0.86x |
| Estimated weighted portfolio dividend yield: |
3.93% |
Capital Markets Update
During April, the government announced a revised program for privatisation of state-owned enterprises (“SOEs”) just as the government kicks off the Tashkent Investment Forum from May 2nd and 3rd 2024. However, as we have witnessed several of the government’s attempts at privatisation of SOEs through the Tashkent Stock Exchange, we will wait to comment more on the process until the infrastructure for the exchange is upgraded, as this is the lynchpin holding back the next phase of the markets’ re-rating.
As we have discussed in previous updates, the Tashkent Stock Exchange is a bit of a "walled garden" suffering from next to no international connectivity (no international custodians, clearing access for international brokers to gain exposure to the market, legislation for sub-accounts, etc.) This, of course, is a barrier for significant foreign capital to enter the market and is holding back multiple expansion of the fund’s equity positions, even though listed companies continue to post strong financial results on the back of the growing Uzbek economy.
Once this bottleneck is resolved via approved legislation, we anticipate, as stated in past newsletters, that this will be the catalyst for the next re-rating, which we imagine will lead to similar type gains to what we saw in 2020 and 2021 for the AFC Uzbekistan Fund as it will take very limited capital to generate such returns for the fund.
Again, the past two years have been boring, without mincing our words, but this is a consolidation in what we believe is a longer-term uptrend. Sitting tight in any investment is the most challenging aspect, not buying and not selling, as we live in an increasingly impatient world. However, patience should lead to solid returns in Uzbekistan as our underlying portfolio companies continue to execute.
For example, of the companies that have reported full-year 2023 earnings, two are held by the fund and are among its top five holdings. The first is Qizilqum Cement (TSE: QZSM), the country's second-largest cement producer, and the Commodity Exchange (TSE: URTS).
QZSM's trailing twelve-month EPS grew 57% YoY, while book value grew 18%. The company ended April 2024 trading at a P/E of 2.52 and P/B of 0.36x. URTS's EPS grew by 16% YoY, while book value grew 17%. The company ended April trading at a P/E of 5.72%, P/B of 3.96x, and a dividend yield of 14.86%.
The waiting game is indeed frustrating, but it’s part of the game of investing. The economy, for the most part, is moving in the right direction, while demand for materials and industrial products, and financial services, as a result of the real estate, infrastructure, and now Chinese-led investment boom, should remain strong for years to come. This will, of course, also stoke employment and trickle down to increasingly strong consumer demand. The AFC Uzbekistan Fund has direct exposure to these facets of the economy and therefore stands to benefit once the market infrastructure enables the next re-rating.
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