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AFC Uzbekistan Fund valuations as of 30th September 2024:
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Estimated weighted harmonic average trailing P/E (only companies with profit):
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3.52x |
| Estimated weighted harmonic average P/B: |
0.70x |
| Estimated weighted portfolio dividend yield: |
4.76% |
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Uzbek Commodity Exchange Secondary Offering Announcement
In the final week of September, the government announced that it will conduct a secondary offering to sell down 4.44% of its stake in the Uzbek Commodity Exchange (TSE: URTS). This will bring the government’s ownership to 40% after the offering and will help further increase the liquidity of the company’s shares, with a current free-float of 15%. The 4.44% stake equates to 3,326,031 shares or approximately USD 4 million as of 30th September 2024. The offering will be a Dutch auction with a price range set from UZS 12,900 to UZS 18,000 per share, equating to a dividend yield of 20.16% at the low end and 14.44% at the high end of the range.
The government's decision to sell off non-core holdings is excellent news as it reflects the ongoing opening up of the Uzbek economy. However, this announcement led to a weak performance for the fund in September. The price of URTS dropped 5% from its mid-month high of UZS 16,200 on 23rd September 2024, ending the month at UZS 15,398. Despite this, the company is poised for continued strong growth, as discussed further below. The share price decline is primarily due to retail investors selling in the hope of buying new shares at a lower price, causing temporary weakness.
The book build is already underway, having started on 26th September and closing on 25th October 2024, with settlement and execution of trades on 29th October 2024. Open to all investors, Uzbek nationals will be given preference with the right to subscribe for up to 1,000 shares each, followed by Uzbek legal entities, and then anyone else (whether Uzbek nationals bidding for more than 1,000 shares or foreigners). With our experience in the Uzbek market from 2018, this is the most attractive secondary offering we have seen and we will be looking to participate if there is room in the book as URTS is a de facto monopoly, and with Resolution 570, signed by the Cabinet of Ministers on 12th September 2024, the company looks set to strengthen this position as well as begin onboarding new products.
The resolution signed on 12th September points to the requirement to increase minimum share capital of commodity exchanges to UZS 100 bln (~USD 7.8 million) by 1st November 2024 and to UZS 200 bln (~USD 15.7 million) by 1st July 2025, with the aim of protecting the financial interests of business entities engaged in commodity trading, as well as improving settlement guarantees, settlement and requiring annual audits by one of the “Big 4” accounting firms going forward.
URTS is likely to increase its minimum share capital, now at UZS 47.2 bln, by capitalizing retained earnings (UZS 206.2 bln as of their 1H 2024 financial report) via the issuance of 4 “bonus shares” for every share held. While this may affect dividends paid for 2023 on a one-off basis, historically, the issuance of bonus shares in companies has boosted share prices. When URTS issued bonus shares last in August 2020, the stock price saw a subsequent 20% spike.
Additionally, the resolution discusses the launch of local access for international trading of non-deliverable forward contracts (derivatives, which URTS has worked with American institutions to develop) on a special platform of the Uzbek Commodity Exchange. This would allow URTS to establish trading connections with international markets and, in due course, introduce hedging mechanisms for commodities traders and Uzbek companies, which historically haven’t been able to hedge FX due to the high costs. FX hedging could significantly impact the trading of key export commodities including copper, natural gas, and uranium. This is also likely to be launched in parallel with a platform for the trading of electricity by the private sector.
URTS remains a core holding of the AFC Uzbekistan Fund, and the government sell-down and potential for derivative and broader commodity trading give us confidence that the company remains far too cheap and should in due course be revalued as market liquidity from increased investor participation improves.
Hungary’s OTP Bank joins the Sandbox
In September, Hungary’s OTP Bank received regulatory approval from Uzbekistan’s National Agency for Advanced Projects (the capital markets agency) to be registered as a custodian bank in the regulatory sandbox regime alongside Bank of Georgia, which we have discussed in previous letters. It is encouraging to see another multinational bank entering the sandbox as custody is a big issue for large foreign funds who want a private sector custodian rather than the Uzbek government. In the coming months, we expect the key infrastructure to be completed, which will enable foreigners to open accounts with these two custodians to buy government bonds, corporate bonds (with plans for UZS and USD corporate bond issues), and of course equities. In parallel with these launches, we hope to see the hosting of equity and debt quotes on Bloomberg, which has been a long time in the making.
This is the progress we have been patiently waiting for, and it’s good to see the proverbial ingredients beginning to turn into an increasingly solid base of new capital markets infrastructure. While we are not quite there yet, such news as the above is significant progress from where the capital markets were at the beginning of the year. Hopefully, things accelerate from here, and we begin to see a much-anticipated increase in capital flows into the market, something which is already starting but whose acceleration and increase in size will be most welcomed for fund performance.
