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The AFC Uzbekistan Fund Class F shares returned +1.4% in April 2023 with a NAV of USD 1,775.54, bringing the return since inception (29th March 2019) to +77.6%, while the return for the year stands at +2.2%. On an annualised basis, the fund has returned +15.1% p.a. with a Sharpe ratio of 0.96.
April saw the start of the first quarter 2023 earnings season, where several of the companies the AFC Uzbekistan Fund owns have filed reports with impressive results, providing continued confirmation that the fund is invested in the right publicly traded companies. This gives us ample leverage to Uzbekistan’s robust GDP growth, which came in at 5.5% in the first quarter 2023.
AFC Uzbekistan Fund Valuations as of 30th April 2023:
| Estimated weighted harmonic average trailing P/E (only companies with profit): |
4.51x |
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Estimated weighted harmonic average P/B:
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0.97x |
| Estimated weighted portfolio dividend yield: |
4.43% |
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
The above quote from George Soros is fitting in the current investment environment on the Tashkent Stock Exchange as we have experienced cycles, from very exciting (as we saw in 2020 and 2021 when the AFC Uzbekistan fund’s performance was 22.69% and 49.82% respectively) to very dull as we await the next phase of the multi-year re-rating. The reality is that as we wait for the next phase of the re-rating, the fund’s performance has been relatively flat, which has been, well, boring. However, this is just one of the requirements to profit from a structural bull market, willingness to stick around when things are quiet. At the same time, the fundamentals continue to improve rapidly, which is a crucial ingredient.
While the fund profited from the first re-rating in the stock market in 2020 and 2021, we believe there is much more to come and that the current consolidation is sowing the seeds for compressed valuation multiples amid a continued high growth environment which, along with several other factors, discussed below, should sow the seeds for the next phase of the re-rating of Uzbekistan’s stock market.
The Next Leg Higher
Our outlook for the catalyst to kickstart the next leg higher is a successful privatisation programme. While previous privatisation programmes have fizzled out, we attribute this to the country’s biggest challenge: a lack of intellectual capital and certainly capacity within the government to execute broad reforms on time and in a well-thought-out manner without causing investor frustration. This is naturally a challenge in all frontier markets, not just Uzbekistan, and just one of the many growing pains of a young and fast-growing economy.
So, we are optimistic that Uzbekistan’s privatisation of state-owned enterprise will occur, but patience is required, and it is likely to be well worth the wait. One positive indicator on this front is the government’s recent creation of the Agency for Strategic Reforms which oversees the government’s stake in 30 SOEs slated for privatisation and which Franklin Templeton is in negotiations with to help manage.
Another trigger for the next leg is the passing of new capital markets legislation which is currently sitting in parliament. Once passed, much of the friction in the capital markets will be resolved, enabling the opening of brokerage accounts digitally to the Tashkent Stock Exchange, integrating with Euroclear and Clearstream, enabling foreign investors to invest without opening domestic brokerage accounts.
While it is a double-edged sword, the friction in the market has provided the AFC Uzbekistan Fund the ability to build core positions in the country’s blue-chip companies. We are certainly seeing more local and foreign retail investors in the market, which has made it increasingly challenging to acquire blocks at discounts to market price. Still, once the above-mentioned friction is remedied, it won’t take much capital to drive a step-change in asset prices. This move is also likely exacerbated by significant domestic capital (not to mention foreign capital) from local investment funds and financial institutions we are aware of who are waiting on the sidelines until free-floats of listed companies increase from the privatisation process.
First Quarter Earnings Season Kicks Off
While patience is one of the hardest traits to master, as the fund trades in a range while we wait for the next leg higher, the companies we own continue to grow rapidly and many are getting cheaper on a valuation basis as their share prices remain relatively flat. This also means that several of the fund’s holdings which have historically paid double-digit dividend yields should become exceptionally more attractive to investors assuming payout ratios remain consistent with historical payouts.
As the first quarter 2023 earnings season has begun, a few of the fund’s portfolio companies have reported earnings and they continue to remain very impressive. As of 31st March 2023, Qizilqum Cement (TSE:QZSM), the fund’s second biggest position, had trailing-twelve months earnings growth of 346% and book-value per share growth of 15%. The Uzbek Commodity Exchange (TSE: URTS), the fund’s fourth biggest position, had trailing-twelve months earnings growth of 41% and book-value per share growth of 27%. Finally, Biokimyo (TSE: BIOK), an ethyl alcohol producer, had trailing-twelve months earnings growth of 97% and book-value per share growth of 25%. BIOK and QZSM currently trade at less than 5 times trailing-twelve months earnings and URTS at less than 8 times.
Patience is the not-so-secret key to the investing game. However, with the above-mentioned performance indicators and catalysts awaiting Uzbekistan’s capital market, we are happy to sit tight as the next leg higher should be more exciting and robust than the first.
At the end of April 2023, the fund was invested in 26 names and held 12.4% cash. The portfolio was allocated to Uzbekistan (87.52%) and Kyrgyzstan (0.04%). The sectors with the largest allocation of assets were materials (39.6%) and financials (30.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 4.51x, the estimated weighted harmonic average P/B ratio was 0.97x, and the estimated weighted average portfolio dividend yield was 4.43%.
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