The AFC Uzbekistan Fund (Non-US) Class F shares returned +2.0% during the period from 1st March 2022 to 30th April 2022 with a NAV of USD 2,024.25, bringing the return since inception (29th March 2019) to +102.4%, while the year-to-date return stands at +0.7%. On an annualized basis, the fund returned +25.7% p.a. with a Sharpe ratio of 1.74.
During April 2022, the previously mentioned stock dividend issue with the fund’s largest holding, Uzmetkombinat (TSE: UZMK), was resolved and the stock resumed trading, ending April up +53.9% from 28th February 2022. This helped lead the fund to end the month higher.
AFC Uzbekistan Fund valuations as of 30th April 2022:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Uzmetkombinat pricing issue resolved
On 12th April 2022, after a multi-week trading halt, Uzmetkombinat (TSE: UZMK) resumed trading and its share price subsequently adjusted lower to account for the 10 bonus shares received in lieu of a cash dividend. Shares of the company ended April 53.9% higher from 28th February 2022, ending the month at UZS 17,490.
On the privatisation front, during April 2022 the Ministry of Finance announced a request for proposal from underwriters as the ministry looks to place up to 5% of the shares it holds in Uzmetkombinat for sale. The government currently holds 80.68% of UZMK, and this further privatisation is the first phase in the government’s plan to decrease its ownership. We believe this share sale represents a great opportunity for investors looking to enter Uzbekistan’s capital markets, especially those seeking bigger tranches of shares which are challenging to acquire on the open market due to the low free-float.
UZMK is set to remain a long-term core holding of the AFC Uzbekistan Fund as it provides us with high quality exposure to the rapidly growing Uzbek economy. Furthermore, in the middle of the decade, once UZMK has completed its capacity expansion, the company should be able to expand on its current 70-75% domestic market share in the steel market and further crowd out foreign imports.
On the earnings front, during April UZMK reported first-quarter earnings results which were once again spectacular. First-quarter earnings per share and book value per share grew by 50% and 70% respectively. This translates into a P/E ratio on a trailing-twelve-months basis of 5.52x and a price-to-book value of 2.62x. The stock therefore remains cheap relative to its growth prospects, even though the company’s month-end closing share price represents a 1,649% gain from our initial purchase of shares, excluding dividends!
We are optimistic about a handful of listed companies with similar growth prospects to UZMK and continue to see long-term growth opportunities on the Tashkent Stock Exchange continuing to trade at deep value prices, indicating to us that we are still in the early innings of Uzbekistan’s secular growth story.
Uzbekistan - better positioned than most for a potential global food crisis
The 2020’s may very well come to be characterised as the “decade of instability” due to volatile commodity prices which will likely lead to social unrest in many countries left unprepared. Therefore, we think it is worth taking a brief look at Uzbekistan’s agricultural sector and how the industry is being repositioned to bolster domestic food security, along with preferential policies in the broader consumer market for agricultural products. While the AFC Uzbekistan Fund has only a moderate exposure to agriculture through consumer goods companies and vegetable oil crushing plants (we are consistently looking for ways to grow this exposure), as the world is in the early throes of what is shaping up to be a prolonged energy and subsequent food crisis, maintaining Uzbekistan’s economic and social stability through ample supply of food and energy will be critical in positioning the country to prosper over the long-term.
As Sri Lanka, and surely other countries in due course will show, food and energy security are paramount to maintaining economic and social stability in a world of shortages and inflation. Sri Lanka is among the most pronounced cases today of a country that has lost control of its economy, having nearly run out of foreign exchange to purchase fuel and rapidly heading toward an IMF bailout. The effects of Sri Lankan President Gotabaya Rajapaksa’s move to lower income taxes led to falling government revenue, which was exacerbated by COVID-19, and the government then decided to ban the import of various goods, including fertilizer, to slow the rate of foreign exchange depletion. As the country pivoted toward more organic agriculture in light of the fertilizer import ban, within six months farmers were witnessing a 20% decrease in rice yields. The general strain put on countries who are net importers of food and energy is not to be taken lightly, and while we are of course biased, we believe Uzbekistan is among the best countries in Asia, if not the world, to weather the growing storm.
The sixth-largest producer of cotton in the world, Uzbekistan’s cotton sector is water-intensive, while the Central Asian region is experiencing rising levels of water stress due to increasing agricultural output and rising populations. The Uzbek government has therefore been looking to decrease cotton allocation and reallocate land for grains and horticultural products.
Uzbekistan is surprisingly quite self-sufficient in satisfying its protein demand, with 93% of animal protein (chicken, beef, lamb, fish) produced domestically, the balance of which is sourced mainly from Kazakhstan and Belarus. However, the grains (soy, corn, and wheat) used in the production of animal protein are mainly imported, along with oilseeds (soy and sunflower) which are then crushed to produce cooking oil. It thus makes sense that the government is searching for ways to further increase the resiliency of the country’s food supply chain.
Uzbekistan hosts a little over 4 mln hectares of arable land, equating to about 10.3% of the country’s land area, and on roughly 1 mln hectares of this land, cotton is grown. In a bid to increase domestic food production, last November President Mirziyoyev announced that 80,000 hectares of land for cotton would be re-allocated for food production. This is in line with the government’s plan to increase wheat production to 7.7 mln tons (up from 6.5 mln tons in 2020) and 23 mln tons of horticultural products. It was further announced that the Ministry of Agriculture will be tasked with reclaiming 100,000 hectares of agricultural land in order to further increase planting area.
In April, the government also proposed extending the exemption of value-added tax (VAT) on imported foodstuffs through the remainder of 2022 in order to decrease domestic prices and counteract rising inflationary pressures. The VAT exemption will cover meat, oilseeds, butter, and a variety of horticultural products.
While we are anxiously waiting for some food processors and dried fruit companies to IPO (we believe they will in due course as the capital markets develop further, making it easier for companies to raise larger amounts of capital), in the meantime, we believe Uzbekistan is well-positioned in the current global environment of rising protectionism and resource nationalism. Uzbekistan continues to impress us with its semi-protectionist policies and focus on decreasing reliance on the global economy for its economic and social stability. Certainly taboo in the context of “pro-globalisation”, we don’t think it would be unlikely to see countries following in Uzbekistan’s footsteps over the coming years as the battle to secure resources and bolster domestic supply chains goes mainstream; this is one of the key ingredients to Uzbekistan maintaining social stability and allowing the government to focus on growth and further liberalization initiatives. We continue to remain optimistic about Uzbekistan and believe now is the time to be involved in the country’s growth story as the proverbial train is only just leaving the station.
At the end of April 2022, the fund was invested in 28 names and held 8.0% in cash. The portfolio was allocated to Uzbekistan (91.93%) and Kyrgyzstan (0.04%). The sectors with the largest allocation of assets were materials (53.0%) and financials (23.2%). The fund’s estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 6.09x, the estimated weighted harmonic average P/B ratio was 1.29x, and the estimated weighted average portfolio dividend yield was 4.68%.