The AFC Uzbekistan Fund returned +0.1% in September with a NAV of USD 1,056.43, bringing the return since inception (29th March 2019) to +5.6%.
During the month of September, the AFC Uzbekistan Fund received new money inflows as interest in Uzbekistan continues to grow from international investors as a multitude of international media coverage increasingly puts the country on investors’ radar. The fund remains the only active vehicle dedicated to investing into the Uzbek capital markets and with the new fund inflows we were able to continue deploying capital into multiple highly undervalued companies in our portfolio. Taking advantage of a lack of activity in the stock market during the first three weeks of September, likely due to the end of summer which usually results in an exodus from the cities to the mountains where locals enjoy cooler weather, we were able to allocate a sizable amount of capital into several of our existing portfolio companies at very attractive prices.
During the month the most notable news for foreign investors came on 6th September when the Cabinet of Ministers passed a decree permitting foreigners to purchase the equity of banks without prior Central Bank approval. This is a significant development for the fund, discussed in further depth below.
AFC Uzbekistan Fund valuations as of 30th September 2019
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Foreign investors permitted to buy bank stocks:
A bureaucratic rule created by the old Karimov regime in the mid 2000’s banned foreign investors from purchasing equity in banks unless prior approval from the Central Bank was given. A ploy to prevent mainly Russian interests from controlling the nascent banking sector (combined equity of all Uzbek banks stands today at roughly USD 30 bln compared to GDP of USD 48 bln), this policy caused a significant shortage of capital in the sector which only served to hurt domestic banks.
On 6th September 2019 this all changed as the reformist Mirziyoyev government continues its transition of Uzbekistan into a free market and scrapped this ban. This is a milestone for the development of the capital markets where listed banks represent approximately 83% of the market capitalization of the Tashkent Stock Exchange. For us, we now not only have access to a greater number of investable companies, but also have a new avenue to gain exposure to private small and medium enterprises and the retail consumer who are borrowing from the banks. With private credit to GDP for retail borrowers estimated at less than 15% of GDP, Uzbekistan is still highly underleveraged relative to other frontier markets. This should be favourable over the long-term, specifically for the private banks which can tap international bond markets by issuing foreign currency denominated bonds at favourable rates, and increase their equity through secondary offerings as foreign investors will be interested due to their lack of loan exposure to government related entities and low rates of non-performing loans.
Many of the 21 listed banks trade below book value and have low single-digit P/E’s while they are growing their equity well in excess of 20% per year (in some cases reaching the high 30’s). We have shortlisted several banks which we plan to begin allocating capital towards this month as the sector is young and growing rapidly.
The AFC Uzbekistan Fund will start purchasing banking stocks soon, after some administrative work is completed since legal entities from 43 countries are currently not allowed to invest.
Parliamentary elections in December 2019
On 22nd December 2019 Uzbekistan will hold general elections in which five political parties will be vying for positions in the 150-seat Legislative Assembly. It is anticipated that roughly 20 mln citizens will be eligible to vote.
What is exciting about these elections is that during my last trip to Uzbekistan (May 2019), there were several videos posted publicly on YouTube by citizens complaining about the poor representation they received in their various constituencies. These videos were followed by calls for those who posted the videos to run in this election in order to replace the old, established guard who can be slow to reform and cut red tape. This potential new generation of politicians has the ability to accelerate the reforms coming out of Tashkent which could transform the provinces in regards to receiving more investment, reducing corruption, and creating new jobs and industries which would benefit locals, something which is necessary in order to increase the standard of living for the general population.
It is widely anticipated that elections will go smoothly and hopefully we will see new progressive individuals winning seats in their constituencies.
As of 30th September 2019, the AFC Uzbekistan Fund was invested in 28 names and held 9.3% in cash. The markets with the largest asset allocation were Uzbekistan (87.3%) and Kyrgyzstan (3.4%). The sectors with the largest allocation of assets were materials (54.7%) and industrials (15.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 3.70x, the estimated weighted harmonic average P/B ratio was 0.69x and the estimated weighted average portfolio dividend yield was 8.42%.