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bne February 2021 Companies & Markets I 19
AFC CAPITAL: Uzbekistan’s stock market re-rating has much further to run
Scott Osheroff in Singapore
With strong performance across many listed companies on the Tashkent Stock Exchange this year, it’s worth taking a moment to reflect on the evolution of the exchange and broader economy to emphasise why the once-in- a-generation re-rating of Uzbek assets is still in its early days.
Phase I of a three phase re-rating
While select equities have run strongly this year, it is highly probable that investors have missed out on very little of what is likely to be a three-to-five-year re-rating of listed equities on the Tashkent Stock Exchange, and an even longer re-rating of the overall economy and real estate market.
The recent performance in the market is merely confirmation of “Phase I” of Asia Frontier Capital’s broader investment thesis – Phase I can be summed up as the initial re-rating of existing listed equities from being “unreasonably cheap” to simply “deeply undervalued”. This has already begun and is being accelerated by the inflation, central bank policy and bank
term deposit rates all falling, thereby making listed equities increasingly attractive to local and foreign investors.
In 2018, the once-in-a-generation valuations of the majority of Uzbekistan’s listed equities made it abundantly clear that they couldn’t get much cheaper. The country, and its equity market in particular, had been “left for dead” by foreign investors following the global financial crisis of 2009, while local investors preferred bank term deposits which at the time paid annualised interest rates of up to 22% in local currency terms.
Jim Rogers famously said: “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.” Asia Frontier Capital and a fellow frontier markets investor from Taiwan were the first foreign institutional investors to re-enter the Uzbek market in 2018 and build positions in “blue-chip” equities. Regarded as “crazy” by many locals for considering acquiring shares in the domestic capital market, and in some cases willing to purchase large blocks
of shares at prices locals deemed “expensive”, early investors during Uzbekistan’s re-opening were gifted the opportunity of ample weak hands willing to sell their shares at “deal of the decade” prices. Who wouldn’t be comfortable paying what appeared to be high prices at the time in order to build initial positions, knowing that as local and foreign investors caught on to the reality of what was happening that a stampede to acquire shares would soon drive prices higher?
Several listed companies at the time had up to 70% of their market capitalisation in cash with zero debt and were growing
their earnings by several hundred percent per annum; some even hosted dividend yields as high as 50%. While share prices have certainly risen and dividend yields have compressed, many listed company valuations, to reiterate, have merely gone from being “unreasonably cheap” to “deeply undervalued”, meaning there should be several more years of upside ahead.
Phase II approaches
As “Phase I” of our thesis continues to unfold, we believe “Phase II” is approaching as large and high-quality state- owned enterprises gradually advance toward privatisation through the stock market.
The question of what percentage of listed companies are wholly privately owned is often asked, and the answer is very few, since Uzbekistan, until 2016, was a centrally planned economy with the State heavily involved.
Since the fall of the Soviet Union, and subsequent launch
of the Tashkent Stock Exchange on 8 April 1994, state- owned enterprises have been partially privatised through
the exchange, which today hosts 144 companies and has
a market capitalisation of $5bn. Historically, listed equity valuations have been so cheap (otherwise known as highly attractive deep value opportunities) that private companies were unwilling to sell equity through the exchange. Rather, they have opted for private equity investment in order to obtain higher valuations; this is the opposite of what typically happens around the world as listed companies usually trade at higher valuations due to their liquidity premium.
Once the initial re-rating phase of existing listed companies further matures, it’s expected to start seeing high-quality
Uzbek Year-on-Year Inflation Rate
Source: AFC research, Stat.uz
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