The AFC Uzbekistan Fund Class F shares returned −0.8% in July 2023 with a NAV of USD 1,831.54, bringing the return since inception (29th March 2019) to +83.2%, while the return for the year stands at +5.5%. On an annualised basis, the fund has returned +15.0% p.a. with a Sharpe ratio of 0.96.
July saw most of the fund’s portfolio companies complete their filing of annual 2022 results, as well as results for the second quarter of 2023. In short, earnings continue to impress! While we are seeing multiple compression as share prices remain relatively flat, this gives us the opportunity to continue deploying capital into Uzbekistan’s blue-chip companies at attractive prices, in anticipation of the next phase of the re-rating.
AFC Uzbekistan Fund Valuations as of 31st July 2023:
|Estimated weighted harmonic average trailing P/E (only companies with profit):
Estimated weighted harmonic average P/B:
|Estimated weighted portfolio dividend yield:
Constitutional Reform is Net Positive
Over the past year there has been significant news and progress made on updating Uzbekistan’s constitution. Roughly two thirds of it has been amended, leading it to be referred to as a “social constitution” with significant reforms announced for education and term limits on a variety of government positions including for the speaker of parliament, supreme court justices, and governors of Uzbekistan’s regions. In March 2020, legislation was passed allowing for the privatisation of non-agricultural land, but private ownership of land was still illegal according to the constitution.
Included in these recent amendments were changes allowing for private land ownership, which we view as among the more significant changes made, for any country with a large middle class has strong private property rights. This is something we have been monitoring since we came to Uzbekistan in 2018 and we are pleased to see it having materialized, both for the health of the middle class and enterprises since almost all of our portfolio companies have sizable real estate holdings which are grossly undervalued on their books due to a lack of annual appraisals to avoid paying higher property taxes. While we attribute no upside value to the real estate holdings of our portfolio companies when determining how best to allocate capital, we do understand that stated book values are all conservative since their real estate is not accounted for at fair value. In several instances, we see some of our portfolio companies either selling assets or redeveloping them in the future which will provide a nice bump to their business and NAVs.
In the international community, the most covered news related to the constitutional reform was the extension of the presidential term limit from five to seven years. As a result of the new term limit, President Mirziyoyev announced snap elections in order to be compliant. On 9th July 2023 elections were held and he handsomely won 87.1% of the vote. As stated last month, this election was a non-event for it was a mere formality and there was no real challenge to President Mirziyoyev’s re-election.
Earnings Season Continues to Impress
With the annual general meeting season having concluded, we now have clarity into how our portfolio companies have done through the second quarter of 2023.
To highlight a few companies, a financial services company the fund holds saw trailing twelve months earnings growth of 62%, book value growth of 44%, and at month end trades at a P/E of 4.29x and P/B of 1.20x. A cement company similarly grew profits 265% YoY and book value 18%, while trading at a P/E of 3.38x and P/B of 0.51x. Furthermore, a chemicals producer grew profits 105% and book value 5%, trading at a P/E of 5.03x and P/B of 3.57x.
While we are seeing valuation multiples remain stable, or even compress, as we wait for the next phase of the re-rating of Uzbekistan’s capital markets, we remain comforted by the fact that the fund has sizable holdings in the blue-chip companies we believe will benefit most from future strong economic growth. Buttressed by significant infrastructure buildout, attracting foreign direct investment for manufacturing and a domestic consumption boom as the consumer and corporates leverage up from a very low base, Uzbekistan should see continued strong growth in the years ahead. This is further confirmed by a GDP growth forecast for 2023 of 6.5% according to the European Bank for Reconstruction and Development. Inflation has fallen into the single digits, reaching 8.94% in July, giving us confidence that Uzbekistan remains one of the bright spots in the global economy that should continue to grow regardless of the slowdown in the global economy.
At the end of July 2023, the fund was invested in 25 names and held 9.9% cash. The portfolio was allocated to Uzbekistan (90.11%) and Kyrgyzstan (0.04%). The sectors with the largest allocation of assets were materials (40.0%) and financials (35.3%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 5.07x, the estimated weighted harmonic average P/B ratio was 0.98x, and the estimated weighted average portfolio dividend yield was 3.55%.