Fron onti tier er Mark arkets ts ValueX ueX Berk erksh shir - - PowerPoint PPT Presentation

A clearer path By Brian Langis

Fron

• nti

tier er Mark arkets ts ValueX ueX Berk erksh shir ires es 2014

Brian is reachable

 brianlangis@gmail.com  @absolut_brian  brianlangis.wordpress.com  seekingalpha.com/author/brian-langis

Presentation Overview

 What are frontier markets?  Why invest in frontier markets?  When to invest?  How to invest?  Where to invest?  Bonus – Super Exotic Extreme Investing  Questions?

Why the Frontier Markets topic?

 Canada is 3-4% of the world’s market cap  The Toronto Stock Exchange is ~33% Energy, ~33%

Financials, then three big telecoms

 U.S: ~5% of the world population. Not 100% of investments

• pportunities

 New opportunities + growth + diversification  Not an “us vs them”. Developed world is still an excellent

place to invest.

 But the world today is different than the world twenty years

• ago. Don’t want to be left behind.

What are Frontier Markets?

Source: Bloomberg L.P .

 Formally known as Third World Countries  Early stage of development - Good economic growth

potential.

 Next wave of emerging markets  Young population, rising income, growing middle class  Little market liquidity  Marginally developed capital markets  Yet to undergo much meaningful economic development, the

potential for rapid growth and outsized returns make these markets interesting to high-risk investors.

What are Frontier Markets in Numbers

Source: IMF, Bloomberg, World Bank, MSCI index

 30% of world’s population  13% of world’s GDP  Less than 3% global market cap  70% of countries with stock exchanges are not represented

by the MSCI All-Country World Index.

 3% - Market Cap to GDP Ratios  23 of 25 fastest growing countries over the next 5 years are

frontiers

Classifications

 The line is blurry  MSCI - designates which group many economies belong to.  South Korea, developed according to FTSE but emerging

according to MSCI.

 FTSE, World Bank, IFC and others have different

classifications system.

 EMs and FMs are often lumped together.

FMs vs EMs

 Emerging Markets:  Already achieved economic lift-off  Some economic output comparable to developed economies

(China, Korea)

 Stronger institutions  More correlation and integration with global market  Not as cheap, many more investors, a lot more coverage  Easy economic reforms already achieved  More efficient markets

FMs vs EMs

 October 31, 2013 to October 31, 2014

iShares MSCI EM vs iShares MSCI FM Source: Yahoo! Finance

Developed Countries

 Most of the major asset classes appear fully valued  Significant challenge of finding growth in a slow-growth

world

 High levels of public and private debt  Political dysfunction  Aging populations among other problems  Reliable legal framework, more transparent, fully liquid.

Perception vs Reality

Perception

 Highly indebted /Poor fiscal shape  Poor  Wild Wild West of investing  Corruption, you have to bribe to get ahead  Poor corporate governance  Volatile  Mismanagement  Too commodity oriented  Uneducated/Illiterate  Malnourished kids, genocides, despots, disasters, despair

Reality

 Growing middle class. Wage increase. (Buying cars, home, goods)  Lower debt-to-GDP ratios than developed markets. (Mostly

infrastructure debt)

 Corporate governance is increasing  IMF: Around 70% of world growth over the next few years will come

from emerging markets.

 Low correlation to global assets  Profits mostly dependent on local factors.  The financial crisis and banking crisis was not a feature of African

economies.

 Less volatile than Emerging Markets – FTSE  Move from commodity-oriented growth to economies that emphasize

innovation and knowledge.

Perception: True Size

Photo Source: LeftL Peacefare.net Right: Kai Krause

Why Invest in Frontier Markets?

 It’s about showing up to the party early. First-mover advantage.

You get a head start. There’s a lot of punch left to drink. You get the best deals before the herd shows up. (Selling to the herd should be profitable.)

 Capturing where the growth is going to be  There are GREAT BUSINESSES THAT ARE CHEAP  The point is to invest in the “BRICs” before it was cool.  Imagine investing in after WWII Japan, or Korea, or Thailand forty

years ago. It’s sounded crazy, very contrarian.

 Still a lot of untapped resources.  Government reform efforts also present the potential for both

earnings growth and revaluation for frontier-market companies.

Why Invests in Frontier Markets

 High need for infrastructure development  Need FDI for everything  Low cost workforce  Low correlation to rich countries  Attractive valuation  Higher growth  Financing options limited  Technology leapfrog  Reverse “brain drain”  Remittance  Very inefficient. Limited information with limited liquidity drive

major price/valuation swings.

What To Look For?

 Having the right demographic is not enough  You need legal framework. Can foreigners get a fair deal?

Recourse.

 Open to foreign investors.  Free market principles, pro-business  Stable government/regime  Quality of the potential investable companies.  Development of capital markets  Management/Partners  The right policies. Pay attention to policies that encourage

economic growth.

The Right Recipe

 South Korea – Asian miracle II  Japan – Asian miracle I  Singapore – no natural resources, rich country  Thailand – Attracting high-tech  Botswana – big strides in governance

The Wrong Recipe

 Argentina, the “Paris” of South-America, Formerly one of the richest

country in the world.

 1962 Myanmar, richest country in Asia.  Greece  2012 Mongolia  Current France?

When To Invest In FMs To Get the Best Bargains

 When the outlook is the most miserable  Ignored due to multiple reasons  The herd “hot money” hasn’t showed up yet.  Interesting after a war, a crash, a recession, cycle

bottom…etc.

 Major reforms on the way  The reasons above give you the best deals, low PEs  Stay out when there’s a mania.

Where To Look?

 World’s worst stock market returns  The end of a recession.  The end a bear commodity cycle.  The end of a war.  Look at foreign stock exchange listing.  Look at 13F filings of funds or list of holdings  Read portfolio manager comments  Change in index component  Domestic country newspapers/news sites

Resources

 Foreign stock exchange  Foreign broker firms  Foreign papers  Industry association  Fund investments disclosing  Foreign Chamber of Commerce  Foreign financial sites

“General” Risks

 Limited size, lack of liquidity, thinly traded  Family run companies / Poor governance  You can take on too much risk  May not follow the same rules of disclosure as Western

corporations.

 Capital control  Monitor changes in index components.  Geopolitical and currency risks are real.  Factor in costs and fees.  Export Dependencies  Strong USD

“General” Risk Continues

 Ability to commit capital to any national market in large

volume, they are also capable of withdrawing that capital quickly.

 Anything from signs of weak earnings growth to an

unanticipated rate hike somewhere else in the world can trigger a shift in sentiment and precipitate capital flight.

 Be careful of countries too dependent on commodities

Advice Approach

 Macro factors such as GDP growth, the level of interest rates, et

cetera are less important in deciding whether to invest in a given country.

 Be skeptical of local brokers/analysts

 Always bullish, otherwise is seen as a traitor  Usually after own interest (Want money to increase fund size)  If bearish, will lose job, potential government business, and corporate

finance deals

 Academic papers – (guess who paid the academics)  Don’t rely too much on statistics. GDP often understated.

(Bartering, household, underground economy etc…)

 The emergence of the middle class in country X —these are

gimmicks, just marketing stories for fund managers.

Advice Approach

 If direct stock picking, do not ignore management. Good

management reduces a lot of the risk.

 Spend your time on businesses that you can understand better.  Focus on the “Blue Chips”. Find the best companies in the world.

Don’t be a cowboy. Would you invest in it even if it was American?

 Prefer dividend paying Co. Can fake earnings. Can’t fake dividend.

Shareholder oriented.

 Pick a broker that is recommended by Westerners or has Western

• roots. Be careful of front selling.

 It’s good too double check with two different local brokers.  Do business with the biggest bank  Verify if the auditor is a familiar name

Difficulties/Headaches

 Friction or extra cost  High commissions  Taxes  Duties, Stamp duty  Share registration, custodian  Language and culture

Management

 Approach management like you are building your fantasy

football team.

 Study their history and experience, operating and capital

allocation.

 You can hire firms for background check.  Shareholder friendly?  Be skeptical of strong family run companies

How To Invest?

 Developed world Multinationals  Multinationals offshoot  Direct stock picking  ETFs/Mutual Funds  Private Equity Funds  Debt market  ADRs, GDRs  FM companies getting listed on a major exchange. (FTSE,

NYSE, HK, SG)

 Frontier Market Multinationals

Notable “Real” FM Countries

 Myanmar – Massive change in political direction  Sri Lanka – 26 years of civil war ended in 2009.  Iraq – War ending soon?  Cambodia, Laos – Two SEA countries that’s catching up. New

Exchange.

 Nigeria – Biggest African economy  Ghana + Kenya – Major reforms, fast growing  The BRVM exchange – 8 West Africa Countries. 37

companies +66% 2yr return.

 ASEAN

A New Frontier

Source: IMF, Mckinsey

 Myanmar - “Reopen for business”  GDP growth – 8%. GDP to triple in the next twenty years.  Strategic location. Port, trade, etc…  Need FDI in everything  Reforms under way  Elections of 2015 will be huge  Risks: Ethnic clashes, corruption, legal, banking, a lot of

unknowns, etc…

Africa

 57 countries, 19 stock exchange  African companies getting listed on the FTSE.  Nigerian banks: P/E 6x, P/B 1.2, 20% capital ratio.  Kenya banks: more expansive 2x P/B, but more sophisticated

(credit cards, home loan, etc…)

 Shoprite – Food retailer in 16 countries, 1700 stores  Sonatel –EBITDA margin 51%, ROE 32%, 7.3% div  Enterprise Group Limited – P/E 2014 8.4x, P/B 1.6x, 2013

ROE 27.4%

Frontier Market Industries

 Some stand out more: financial services; consumer goods and

services; hotel and tourism; selected property segments; power, manufacturing and export driven industries.

 Renewable energy and agriculture are interesting because

there is a lot of support from the development banks.

 Consumers do shop. Buy basic goods and services.  Shift from agriculture and textile to manufacturing. Adopt

latest technology.

Notable Frontier Market Companies

 Yoma Strategic (Singapore company in Myanmar)  Square Pharma Bangladesh – Blue chip  GT Capital – Philippines (large bank + power + Toyota  PPWSA – Cambodian water distributor/management  BCEL, EDEL – Lao bank and energy powerhouse  NagaCorp – Casino monopoly in Phnom Penh  Bidvest Group – South African conglomerates  Dangote – Multiple African countries  Zain – Kuwait telecom, 49% Iraq and 41% Sudan  John Keells Holdings – Sri Lanka (hotel, food, ports)  Thai Beverage PLC - One of SEA's largest beverage companies

Phnom Penh Water Supply Authority (PPWSA)

Fiscal 2013 Numbers / US$

 Water utility company, $1.22/share, $106 million market cap  Price below 2012 IPO of $1.55  Revenue – $37.2m, yoy +12%  Profit – $9.3m, EPS: $0.107, yoy+10.6%  ROE – 5.62%  ROA – 3.62%  Current and Quick Ratio – 4.2x and 3.4x  Dividend Payout Ratio – 12.50% (2012: 7%)  Dividend per share: $0.013 (2012: $0.006) +116%  Great management, 99% billing collection, monopoly  Valuation: Forward P/E 10x, P/B: 0.62x,

Frontier Market Multinationals

Source: Source: Forbes, May 2014. * Excluding financial institutions

Global Multinationals

 Nestle, Unilever  Mastercard  YUM! Brands (KFC is always the first)  Total SA (Iraq, Iran, Kazakhstan, Africa…)  Philip Morris International  Diageo, Pernod Ricard, Brown-Forman  Heineken, Anheuser-Busch InBev, SABMiller  Compagnie Financiere Richemont S.A.  Value investor Tom Russo specialize in that area.

Notable Funds/ETFs

 iShares MSCI Frontier 100 ETF (FM)  ASEAN ETF - Global X FTSE ASEAN 40 ETF (Singapore,

Thailand, Indonesia, the Philippines and Malaysia)

 Templeton Frontier Market Fund  Frontaura Global Frontier Fund (Pure)  Matthews Asia (Many Asian funds)  Africa Opportunity Fund – Francis Daniels  Asia Frontier Capital - Pan-Asian + Vietnam

Templeton Frontier Market Funds

As of September 30, 2014

 AUM $2 billion,70 companies, 40% financials, MER 2%  P/E = 11.3x  P/B = 1.94x  P/CF = 7.59x  5yr annualized return: 7.73%  Top holdings: United Bank LTD, Zenith Bank PLC, Telecom

Argentina SA.

 Includes Saudi Arabia, MSCI does not.

Frontaura Global Frontier Fund LLC

 AUM $175m, 55 companies, 33 countries, 41% financials,

16% cash, MER 2%

 P/E: 6.1x  P/B: 1.1x  Dividend yield: 5.3%  ITD CAGR (Oct. 2014): 10.a% vs -2.2% MSCI Frontier

(Seven years)

 Top holdings not disclosed

Africa Opportunity Fund

 Code AOF. Managed by Robert Knapp and Francis Daniels.

Value and contrarian.

 56% annualized return between 1998-2006  Read: Reflection of a Value Investor in Africa.  Great way to buy into the African story.

Notable Region - ASEAN

Sources: Financial Times, The World Federation of Exchanges, China Daily

 300 million people  10 + 5 countries  Trading/political block. Free trade  Combined market cap: +$2 trillion  High GDP growth

Foreign Subsidary (Direct and Indirect)

 Nigerian Breweries – 54% Heineken  Guinness Nigeria – Diageo 46%  Nestle Nigeria  East African Breweries – 53% Diageo  Unilever Indonesia  Sonatel – 42% owned by France Telecom  Tanzania Breweries – 54% owned by SABMiller

Bonus Extreme Investing

 WARNING  For informational purposes.  Do your own research.  Not an investing recommendation.  Information need to be verified.  This is not an endorsement.

Extreme Investing

 Defaulted North Korea Bond from the 1970s for about

~0.15 on the dollar. The interest accrual, since their 1984 default, amounts to more than 500 percent of the principal in unpaid interest.

 Orascom Telecom (EGX:OTMT) – 1m+ subscriber in NK.

Owns 25% of Koryolink. Only 4% mobile penetration.

 Invest in Chinese companies operating in NK.  South-Korea companies operating in NK  Alternative assets: Coins, stamps, art.  Special Economic Zones on the rise. (Rason)

NK Mobile Connections

More Exotic Investments

 The world’s first pirate exchange, Harardheere, Somalia.  Open 24 hours a day, the exchange allows investors to profit

from ransoms collected on the high seas, which can approach $10 million for successful attacks against Western commercial vessels.

 There’s now approximately 72 maritime companies.  You can provide cash, weapons or useful materials.  Ransoms collects between $2 to $4 million. $9.5m for

the Smyrni, a Greek tanker.

 Risk: Attacks are dropping. 237 attacks in 2011, 75 in 2012,

15 in 2013. Is the market hitting a bottom?

Payday

People gather outside a former local bank, where pirates were dividing ransom payment

• btained for the freeing of the Spanish ship Alakrana, as they wait to collect their money in Haradheere,

northeast of Somalia's capital Mogadishu, November 18, 2009. REUTERS/Mohamed Ahmed

At the end of the day this is what matters:

 Don’t buy a stock because its from an “exotic high growth

country”.

 Valuation. Buying below its intrinsic value. Value < price.

Low/reasonable valuation.

 Margin of safety  Adjusted EBITDA good for comparing cross-country

companies.

 Predictable, consistent cash flow  Look for increasing FCF, and ability to re-invest  Reliable financial statements  Excellent management/partners