valuex frontier markets presentation by brian langis

8/10/2019 Valuex Frontier Markets Presentation by Brian Langis

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A clearer path

By Brian Langis

Frontier Markets

ValueX Berkshires 2 14


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Brian is reachable

[email protected]

@absolut_brian

brianlangis.wordpress.com

seekingalpha.com/author/brian-langis


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Presentation Overview What are frontier markets?

Why invest in frontier markets?

When to invest?

How to invest? Where to invest?

BonusSuper Exotic Extreme Investing

Questions?


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Why the Frontier Markets topic? Canada is 3-4% of the worlds 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 investmentsopportunities

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. Dont want to be left behind.


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What are Frontier Markets?

Source: Bloomberg L.P.

Formally known as Third World Countries

Early stage of development - Good economic growthpotential.

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, thepotential for rapid growth and outsized returns make thesemarkets interesting to high-risk investors.


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Classifications The line is blurry MSCI - designates which group many economies belong to.

South Korea, developed according to FTSE but emergingaccording to MSCI.

FTSE, World Bank, IFC and others have differentclassifications system.

EMs and FMs are often lumped together.


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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


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FMs vs EMs October 31, 2013 to October 31, 2014

iShares MSCI EM vs iShares MSCI FMSource: Yahoo! Finance


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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.


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Perception vs Reality


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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


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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 comefrom 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 MarketsFTSE Move from commodity-oriented growth to economies that emphasize

innovation and knowledge.


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Perception: True Size

Photo Source: LeftL Peacefare.net Right: Kai Krause


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Why Invest in Frontier Markets? Its about showing up to the party early. First-mover advantage.

You get a head start. Theres a lot of punch left to drink. You getthe best deals before the herd shows up. (Selling to the herdshould 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 fortyyears ago. Its sounded crazy, very contrarian.

Still a lot of untapped resources.

Government reform efforts also present the potential for bothearnings growth and revaluation for frontier-market companies.


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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.


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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.


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The Right Recipe

South KoreaAsian miracle II

JapanAsian miracle I

Singaporeno natural resources, rich country

ThailandAttracting high-tech

Botswanabig strides in governance


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Where To Look?

Worlds 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


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Resources

Foreign stock exchange

Foreign broker firms

Foreign papers Industry association

Fund investments disclosing

Foreign Chamber of Commerce

Foreign financial sites


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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


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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


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Advice Approach

Macro factors such as GDP growth, the level of interest rates, etcetera are less important in deciding whether to invest in a givencountry.

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) Dont rely too much on statistics. GDP often understated.

(Bartering, household, underground economy etc) The emergence of the middle class in country Xthese are

gimmicks, just marketing stories for fund managers.


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Advice Approach

If direct stock picking, do not ignore management. Goodmanagement 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.

Dont be a cowboy. Would you invest in it even if it was American?

Prefer dividend paying Co. Can fake earnings. Cant fake dividend.Shareholder oriented.

Pick a broker that is recommended by Westerners or has Westernroots. Be careful of front selling.

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


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Difficulties/Headaches

Friction or extra cost

High commissions

Taxes

Duties, Stamp duty

Share registration, custodian

Language and culture


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Management

Approach management like you are building your fantasy

football team.

Study their history and experience, operating and capitalallocation.

You can hire firms for background check.

Shareholder friendly?

Be skeptical of strong family run companies


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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


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Notable Real FM Countries

MyanmarMassive change in political direction Sri Lanka26 years of civil war ended in 2009.

IraqWar ending soon?

Cambodia, LaosTwo SEA countries thats catching up. New

Exchange. NigeriaBiggest African economy

Ghana + KenyaMajor reforms, fast growing

The BRVM exchange8 West Africa Countries. 37companies +66% 2yr return.

ASEAN


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A New Frontier

Source: IMF, Mckinsey

Myanmar - Reopen for business GDP growth8%. 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


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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)

ShopriteFood retailer in 16 countries, 1700 stores

SonatelEBITDA margin 51%, ROE 32%, 7.3% div

Enterprise Group LimitedP/E 2014 8.4x, P/B 1.6x, 2013ROE 27.4%


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Frontier Market Industries

Some stand out more: financial services; consumer goods andservices; 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.


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Notable Frontier Market Companies

Yoma Strategic (Singapore company in Myanmar) Square Pharma BangladeshBlue chip

GT CapitalPhilippines (large bank + power + Toyota

PPWSACambodian water distributor/management

BCEL, EDELLao bank and energy powerhouse NagaCorpCasino monopoly in Phnom Penh

Bidvest GroupSouth African conglomerates

DangoteMultiple African countries

ZainKuwait telecom, 49% Iraq and 41% Sudan John Keells HoldingsSri Lanka (hotel, food, ports)

Thai Beverage PLC - One of SEA's largest beverage companies

Ph P h W S l A h i


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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%

ROE5.62% ROA3.62%

Current and Quick Ratio4.2x and 3.4x

Dividend Payout Ratio12.50% (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,


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Frontier Market Multinationals

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


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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.


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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 FundFrancis Daniels

Asia Frontier Capital - Pan-Asian + Vietnam


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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, TelecomArgentina SA.

Includes Saudi Arabia, MSCI does not.


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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


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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.


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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


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Foreign Subsidary

(Direct and Indirect)

Nigerian Breweries54% Heineken

Guinness NigeriaDiageo 46%

Nestle Nigeria

East African Breweries53% Diageo

Unilever Indonesia

Sonatel42% owned by France Telecom

Tanzania Breweries54% owned by SABMiller


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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.


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Extreme Investing

Defaulted North Korea Bond from the 1970s for about~0.15 on the dollar. The interest accrual, since their 1984default, amounts to more than 500 percent of the principal inunpaid 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)


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NK Mobile Connections


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More Exotic Investments

The worlds 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. Theres 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?


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Payday

People gather outside a former local bank, where pirates were dividing ransom paymentobtained 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 th d f th d thi i h t


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At the end of the day this is what

matters:

Dont buy a stock because its from an exotic high growthcountry.

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

valuex frontier markets presentation by brian langis

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