AFC Uzbekistan Fund valuations as of 30th November 2023:
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Estimated weighted harmonic average trailing P/E (only companies with profit):
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4.88x |
| Estimated weighted harmonic average P/B: |
0.97x |
| Estimated weighted portfolio dividend yield: |
3.36% |
IPOs in the pipeline
During November, there were announcements and roadshow launch presentations for two state-owned companies, UzbekInvest and Uzbek Telecom.
UzbekInvest is the largest state-owned insurer and the second largest overall in Uzbekistan, with a 15% market share. The government plans to issue preferred shares up to 5% of authorized capital of the company, with a dividend yield set at the central bank rate (currently 14%) plus 10%. This is certainly interesting as the yield will be attractive to local entities whose average term deposit rates are currently 17.9%, lower than the ~24% retail can receive on a term deposit. The annual insurance premiums in Uzbekistan are less than 1% of GDP and have ample room for growth in the years ahead as the industry is in its nascent stages of development. Thus, we will consider a possible investment when we get greater clarity on the issuance terms and timing.
The second company, which in our view is much more interesting, is Uzbek Telecom (UZTL). UZTL has an enterprise value of USD 635 million and is a de-facto monopoly in various parts of Uzbekistan’s telecommunications infrastructure. The company has 83% market share in broadband (1.5 million subscribers) and 23% in mobile (6.8 million subscribers). The government plans to sell up to 2% of the company, which we believe will be oversubscribed by local investors. It is a very small transaction, but certainly a start for Uzbekistan’s privatisation efforts through the capital markets.
Frankly, in our view, it’s better that these placements are smaller than too grandiose in size as it makes more sense to have oversubscribed placements, and let investors obtain an “easy win”, which would incentivise demand in future placements and encourage more locals to start paying attention to the domestic capital markets and accelerate brokerage account openings.
Until it’s easier for foreign capital to enter the local market, smaller placements are more suitable. However, with what we are hearing from the new independent capital market regulator (the former regulator was an arm of the Ministry of Finance and therefore not independent from the government) is that in addition to the presidential decree in September 2023 to further accelerate reforms of Uzbekistan’s capital markets, the piping roadblock will eventually be resolved as the government is increasingly serious about creating an alternative and cheaper financing marketplace competing with traditional and prohibitively expensive bank lending. Of course, more efficient capital markets with an influx of foreign investors will also help to drive down the high cost of capital. We hope to have more to share on this front in 2024 as there are several discussions, we are privy to, which, once finalized, will make it much more attractive for foreign funds to begin investing in Uzbekistan’s capital markets.
Liberalisation of utilities is underway
Uzbekistan still has a history of heavy subsidies for utilities, including hot and cold water, gas, wastewater treatment, and electricity. This is a legacy of the formerly planned economy which of course has its roots in the days of the Soviet Union. With Uzbekistan fast transitioning to a free-market economy, the government has been assessing a steady increase in tariffs while eliminating others all at once, such as the subsidy on bread flour.
While earlier this year, the government began liberalization in prices for electricity consumption, on 9th December 2023, households will see the cost of water and waste services rise from UZS 400 per cubic meter to UZS 1,400 and from UZS 350 to UZS 1,000 respectively. For legal entities, prices will increase from UZS 1,000 to UZS 3,000 and from UZS 820 to UZS 2,200. Dollar figure-wise, these amounts are still very inexpensive, but percentage-wise, they are significant, with the cost of water rising roughly 200%.
In the medium term, this is a needed move on behalf of the government as price of utilities must rise closer to the actual cost of production since the government already incurs heavy annual losses due to subsidies, with the cost of electricity subsidies already at more than USD 1 billion per annum. Because the cost of utilities is exceptionally cheap, the concept of conserving resources is a novel (even I am guilty of having my air conditioner on 24/7 during the summer when it’s 40 degrees Celsius in Tashkent).
As the cost of these services rises, the country should see an increasing trend in conservation which will lighten the burden on the government’s supply of water and gas, among other things. Savings will also help dramatically decrease the water stress the country and region faces currently, as for example, there is an immense wastage of this resource in agriculture, estimated in a recent article at USD 5 billion per year (article below).
AFC Uzbekistan Tour 2024
For those interested in visiting Uzbekistan with us, we are planning our third AFC Uzbekistan Tour, which will be held from Sunday 19th May 2024 to Tuesday 21st May 2024. We will begin on the 19th with a day tour of Tashkent, followed by company meetings and site visits on the 20th and 21st. If you are interested in joining, please write us at This email address is being protected from spambots. You need JavaScript enabled to view it..
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