“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

The above quote from George Soros is fitting in the current investment environment on the Tashkent Stock Exchange as we have experienced cycles, from very exciting (as we saw in 2020 and 2021 when the AFC Uzbekistan fund’s performance was +22.69% and 49.82% respectively), to very dull as we await the next phase of the multi-year re-rating. The reality is that as we wait for the next phase of the re-rating, the fund’s performance has been relatively flat, which has been, well, boring. However, this is just one of the requirements to profit from a structural bull market, willingness to stick around when things are quiet, while the fundamentals continue to improve rapidly, which is a key ingredient.

While the fund profited from the first re-rating in the stock market in 2020 and 2021, we believe there is much more to come and that the current consolidation is the result of compressed valuation multiples amid a continued high growth environment which, along with several other factors, discussed below, should sow the seeds for the next phase of the re-rating of Uzbekistan’s stock market.

The next leg higher

We have always said that the key catalyst to kickstart the next leg higher is a successful privatisation programme. While previous privatisation programmes have fizzled out, we attribute this to the biggest challenge the country faces: a lack of intellectual capital and certainly capacity within the government to execute broad reforms on time and in a well thought out manner without causing investor frustration. This is naturally a challenge in all frontier markets and not just Uzbekistan, merely one of the many growing pains of a young and fast-growing economy.

So, we are optimistic that Uzbekistan’s privatisation of state-owned enterprise will occur, but patience is required, and it is likely to be well worth the wait. One positive indicator on this front is the government’s recent creation of the Agency for Strategic Reforms which oversees the government’s stake in 30 SOEs slated for privatisation and which Franklin Templeton is in negotiations to help manage.

Another trigger for the next leg is the passing of new capital markets legislation which is currently sitting in parliament. Once passed, much of the friction in the capital markets will be resolved, enabling the opening of brokerage accounts digitally, to the Tashkent Stock Exchange integrating with Euroclear and Clearstream, enabling foreign investors to invest without opening domestic brokerage accounts.

While of course a double-edged sword, the friction in the market has provided the AFC Uzbekistan Fund the ability to build core positions in the country’s blue-chip companies. We are certainly seeing more local and foreign retail investors in the market, which has made it increasingly challenging to acquire blocks at discounts to market price, but once the above-mentioned friction is remedied, it won’t take much capital to drive a step-change in asset prices. This move is also likely to be exacerbated by significant domestic capital (not to mention foreign capital) from local investment funds and financial institutions we are aware of who are waiting on the sidelines until free-floats of listed companies increase from the privatisation process.

First quarter earnings season kicks off

While patience is one of the hardest traits to master, as the fund trades in a range while we wait for the next leg higher, the companies we own continue to grow rapidly and many are getting cheaper on a valuation basis as their share prices remain relatively flat. This also means that several of the fund’s holdings which have historically paid double-digit dividend yields, should become exceptionally more attractive to investors assuming payout ratios remain consistent with historical payouts.

As the first quarter 2023 earnings season has begun, a few of the fund’s portfolio companies have reported earnings and they continue to remain very impressive. As of 31^st March 2023, Qizilqum Cement (TSE: QZSM), the fund’s second biggest position, had trailing-twelve months earnings growth of 346% and book-value per share growth of 15%. The Uzbek Commodity Exchange (TSE: URTS), the fund’s fourth biggest position had trailing-twelve months earnings growth of 41% and book-value per share growth of 27%. Finally, Biokimyo (TSE: BIOK), an ethyl alcohol producer, had trailing-twelve months earnings growth of 97% and book-value per share growth of 25%. BIOK and QZSM currently trade at less than 3 times trailing-twelve months earnings and URTS at 8 times.

Patience is the not-so-secret key to the investing game. However, with the above-mentioned performance indicators and catalysts awaiting Uzbekistan’s capital market, we are happy to sit tight as the next leg higher should be more exciting and violent than the first.

Mark your calendar: Second AFC Uzbekistan Fund Investor Tour

We would like to inform you, that we are planning to hold the second AFC Uzbekistan Investor Tour from Sunday, 24^th September 2023 to Wednesday, 27^th September 2023. On Sunday we will organise a sightseeing tour around Tashkent, followed by company visits on Monday and Tuesday, including meetings with government officials and organizations. On Wednesday, we will organise a day trip to Samarkand. Please stay tuned for more detailed information in the next couple of weeks.