The AFC Uzbekistan Fund Class F shares returned +11.8% in February with a NAV of USD 1,537.27, a new all-time high, bringing the return since inception (29th March 2019) to +53.7%, while the year-to-date return stands at +14.6%. On an annualized basis, the fund returned +25.1% with a Sharpe ratio of 1.70.
The combination of a marked increase in buyer activity and sellers raising their offer prices amid the increasing demand for shares led to a broad surge in the price of listed equities on the Tashkent Stock Exchange during February.
AFC Uzbekistan Fund valuations as of 28th February 2021
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
AFC Uzbekistan Fund underperforms Uzbekistan Composite Index (UCI)
During February, the Uzbekistan Composite Index (UCI), calculated by the “Republican Stock Exchange Toshkent” soared by 109%. The AFC Uzbekistan Fund underperformed the index with a performance of +11.8%. The index appreciated so much because of how it is constructed: re-weighted daily based on market capitalization. When the fund was launched, we chose to not make mention of the UCI due to its long list of inherent flaws which include the index not being adjusted for share splits, share consolidations, dividends and the constituents and their weights in the index not being published.
However, from November 2020 we (unfortunately) decided to make mention of the UCI in order to provide investors with some insight into the broader market. During December 2020, however, amid the broad equity rally, the index was effectively “hijacked” by an insurance company, Universal Sug’urta (TSE: UNSU). Since the weightings of the index constituents are updated daily based on market capitalization, as the price of UNSU started its rise from UZS 0.01 on 23rd December 2020 to end the month at UZS 0.06 rising further to UZS 0.88 at the end of January 2021, we believe it became an ever-larger weight in the index as the index began to mirror UNSU's price performance. UNSU continued to rise in February 2021, by 2,172%, to end the month at a price per share of UZS 20 (or up 199,999% since 23rd December 2020). The index clearly rose in near lockstep as UNSU’s price movements became more influential to the index. While the price move is certainly impressive, on certain days during the month UNSU rose on tiny volume, in some cases increasing 20% on USD 0.12 equivalent in value of traded shares.
The index is set to be replaced in due course by a higher quality, more transparent, more representative, and properly weighted index, and at such time we will transition to a focus on it. Until this occurs, in our arguably biased opinion, we view the AFC Uzbekistan Fund as a much better representation of the listed equities market in Uzbekistan, with 22 of our 27 holdings listed on the main board of the Tashkent Stock Exchange and comprised of many of the most liquid and blue-chip companies.
The stock market “ignites”!
During February, we saw broad price appreciation across the equity market as communications with several local brokers have indicated that several hundred thousand US dollars have come into the market from investors throughout Europe, Russia and the USA over the last few months and whose funds are now actively being put to work. We knew this day would come sooner or later, and it remains very early days in our view, that foreign investors would realize the immense combination of value and growth on offer in the listed equity market in a country whose macro-economic indicators are highly sound, thus creating a proverbial feeding frenzy for equities. We further knew that in order to benefit from this that we needed to launch the AFC Uzbekistan Fund when it was still taboo to be investing in the country and when several-hundred-thousand-dollar blocks of stock were still available at rock-bottom prices. In preparation for the launch of the AFC Uzbekistan Fund, we shared our marketing materials with hundreds of potential investors around the world, many of whom told us that we are crazy for investing in such a country; ironically this broad-based pessimism at the time of investing into Uzbekistan is exactly why the opportunity was and remains so attractive. As we often say to local and foreign investors, when Starbucks Coffee outlets finally open in the second-tier cities (Starbucks was slated to enter Uzbekistan prior to COVID-19), the "easy money" will have already been made; in this case, we should have many years of positive macro and micro tailwinds on our side.
February also saw the first few companies report earnings for the fourth quarter 2020, two of which are held by the fund. The fund's largest position, Qizilqum Cement (TSE: QZSM) reported outstanding 2020 profit growth of 115%, while fourth-quarter 2020 profit grew 34% YoY. Book value per share as of 31st December 2020 grew by 26% YoY. QZSM has historically paid out a minimum 50% of profits as dividends since the government remains the majority owner and is interested in receiving a nice dividend check every year, especially as the company generates plenty of cash to fund growth, for the most part, internally. If this holds true for the 2020 dividend, this will translate to UZS 659 per share, or a dividend yield of 14.2% as of 28th February 2021, after the company’s share price rose by 24.8% during the month.
Andijon Biokimyo (TSE: ABKZ), a white spirits producer located in the east of Uzbekistan, reported 2020 profit growth of 47%, while fourth quarter 2020 profit grew 405% YoY. Book value per share as of 31st December 2020 increased 17% YoY. ABKZ had historically paid 55% of profits as dividends, though it paid 42% of 2018 profits and 85% of 2019 profits as dividends. Assuming a conservative pay-out for fiscal year 2020 of 42%, this would translate to UZS 569 per share, or a dividend yield of 6.1% as of 28th February 2021, after the company’s share price rose by 48.6% during the month.
In February, Scott Osheroff, CIO of the AFC Uzbekistan Fund, was walking by the “New Tashkent City” development project, a 70-hectare redevelopment project in the Centre of Tashkent where he took the picture below of the Nest One mixed-use development project, which once completed will be the tallest building in Uzbekistan at 51 floors. The project is being constructed by Alto Aluminum, a joint venture between the local conglomerate, AKFA Group, and Kocamanlar Aluminyum from Turkey.