Category Archives: Uncategorized

Egyptian Pound is the most undervalued currency in EM

Please read my Egyptian Pound published here last week
23 May, 2017 FT.com
 Egyptian pound ‘cheapest in EM’ after central bank hikes rates – RenCap
Better late than never.Analysts at emerging-market specialists Renaissance Capital had practically given up hope of an interest rate rise from the Central Bank of Egypt after predicting one earlier in the year, but now they see some good opportunities after the central bank finally moved overnight. The CBE surprised observers by increasing all its rates by 200 basis points (2 percentage points), taking the overnight deposit rate to a record high of 16.75 per cent in an effort to combat the country’s eye-watering inflation rate.The central bank has been struggling to contain inflation since it devalued the pound and moved to a floating exchange rate regime last November, as the weaker pound has driven up the cost of food imports. Headline inflation hit an annual rate of more than 30 per cent in April, with food prices climbing at least 3 per cent six months in a row. RenCap had predicted a rate hike would be needed in February or March, and chief economist Charlie Robertson admits that by last week “we wondered if the CBE was just trying to ‘wait out’ the inflation cycle, given how weak domestic demand was”.While the move may have come a little later than hoped, Mr Robertson says it is good news for the Egyptian pound:It shows a commitment to getting inflation back down again, after months where it has consistently been running high.Currency stability – which should be supported by the higher interest rate – will help drive down month on month inflation. Currency appreciation should help more.Despite the inflation difficulties, RenCap thinks the Egyptian pound is the cheapest emerging market currency, with current levels of around E£18 per dollar “cheap” compared to a fair value of between E£14 and E£15 per dollar.The pound did briefly approach those levels at the start of the year, rallying more than 14 per cent in just two weeks. However, analysts had suggested the extent of the climb may have been influenced by CBE intervention and it quickly erased the gains.At publication time the currency stood at E£18.10 per dollar, a 0.5 per cent climb for the day.While the central bank’s move is expected to reduce pressure on prices, the CBE admitted that bringing inflation down will take some time. Policymakers said higher inflation will be “temporarily tolerated”, with the bank targeting a decline to around 13 per cent by the end of next year, and “to single-digits thereafter”.

Investment idea: Long Egypt Government bonds

Investment idea: Invest in local currency Egypt Government debt instrument yielding 16% + benefit from the currency comeback after a steep devaluation

Summary:

  • Last year Egypt enacted reforms required by IMF. IMF provided funding to Egypt
  • Further reforms laws are being enacted
  • As a part of the IMF lead reforms Egypt devalued its currency by 100%.
  • To balance its budget Egypt stopped fuel subsidies
  • Interest rates are around 16%
  • The Egyptian economy is benefiting from the reforms and is starting to recover
  • 16% yield represents a downside protection. If the economy improves part of the shock devaluation would reverse. An investor would make the 16% + a gain from currency uplift.

 

 

My favorite Greek play

Greece is still not recovering. It will. Especially when they finally agree to write off part of the debt as IMF is repeatedly suggesting. My favorite Greek recovery play is OPAP. You get a 6.5% dividend yield for waiting and an upside from Greek recovery and from implementation of VLT machines

Until recently most analysis attributed no value to the VLT machines build up, due to low visibility. The visibility is now improving. See below just published research summary from Wood and Co.

*** OPAP: Greek non-financials top pick ***

We maintain our BUY rating on OPAP and increase our 12M price target (PT) to EUR 11.60/share (from EUR 10.00), due to: i) our forecasts increases; and ii) our WACC cut. First, we have increased our 2017-19E EBITDA forecasts by 1-7%, to factor in the new agents’ commission scheme, the details of which were announced together with the 4Q16 results. Second, following the recent EUR 200m bonds issue in March at 3.5%, barely half the Greek sovereign bond yield, we now consider our old WACC assumption of 11% as excessive. With respect to the multiples, despite the 50% rally since mid-2016, OPAP is still only trading at a 2018E EV/EBITDA of 7.1x, 29% below its peers’ average. Moreover, with a dividend yield of 6.6%, the stock is strongly ahead of its 4.4% peer average. Overall, despite the 50% rally since mid-2016, we still see OPAP’s risk/reward profile as appealing. OPAP remains our top pick within our Greek non-financial universe. To download the report, please click on the following link: Greece_Consumer Discretionary_OPAP_Update_12Apr2017.pdf, (504 KB)

New agents’ commissions should cut costs. Together with its 4Q16 results, OPAP announced the details of its new commission scheme, which has already been accepted by 90% of agents. Under the new arrangement, OPAP has replaced the old system, based on c.8% of wagers, with the share of NGRs easing from 39% in 2017 (triggering virtually no change in costs to ensure a smooth transition), to 37% in 2018E and to 35% +1% in 2019-21E. We estimate that the new set-up should save c.EUR 33m in 2019E. We have increased our EBITDA forecasts by 1% to EUR 308m in 2017E, 5% to EUR 409m in 2018E and 7% to EUR 469m in 2019E. Accordingly, we have upped our earnings and DPS forecasts by 8% for 2018E and 11% for 2019E.

EUR 200m bonds issue at half the Greek sovereign rate. In mid-March, OPAP issued EUR 200m of five-year bonds at a yield of 3.5%, which is barely half the Greek state 10-year bond yield. Interestingly, according to the company, the issue was more than 2x oversubscribed (total demand of EUR 421m). As a result, OPAP has not only improved the efficiency of its capital structure, but has also proved that our previous assumptions of a cost of debt of 9% (7% sovereign + 2ppts debt premium) and an effective WACC of 11% were inappropriate. To address both these issues, we have trimmed our cost of debt assumption to 3.5% and our WACC to 8.1%.

Our new PT of EUR 11.60/share offers 34% total return potential. Our valuation methodology is 50/50 based on our DCF model and our 2018E multiples. Adjusting for our higher forecasts and the WACC cut, our new DCF model implies a 12-month PT of EUR 11.70, up 25%, from EUR 9.40 previously. With respect to the multiples, despite the 50% rally since mid-2016, OPAP is still only trading at a 2018E EV/EBITDA of 7.1x, 29% below its peers’ average. Moreover, with a dividend yield of 6.6%, the stock is strongly ahead of its 4.4% peer average.

Risks. The major downside risks for our positive stance are: a deeper slowdown in the Greek economy; regulatory risks, especially in the case of VLTs; losing exclusivity to online gambling; and further GGR tax hikes.

Czech koruna trade

Speculators piled in over 70 billion into CZK in anticipation of  CZK appreciation after the Czech National Bank currency support ends. It ended today. CZK did strenghtened a bit. Now expect the reversal. THe speculative position is very significant and when they start closing it, expect strong short squeeze. CZK could devalue significantly. Go long EURCZK.

Elliot Associates Romanian play

Wood and Co research on Fondul Proprietatea published 2/22

We continue to regard Fondul Proprietatea (FP) as one of the most attractive investment opportunities in Romania. We see it as a play on: 1) the restructuring of state companies and corporate governance improvement; and 2) the eventual longer-term recovery of energy prices; as well as 3) the ability of the Fund’s manager, Franklin Templeton, to apply the right methods for reducing the discount to NAV. Our NAV estimate, derived by marking to market the listed holdings and valuing some of the unlisted stakes, is RON 1.196/share, which is in line with the official NAV of RON 1.208/share (as of January 2017). However, for some of the listed companies, we see further upside as possible (e.g., Petrom). We believe the current 25% discount to NAV is too high, and we see ways of narrowing this. We increase our price target (PT) to RON 1.11/share, using a 15% fair discount to NAV and a 9.5% cost of equity, implying 23.4% upside. We maintain our BUY rating on the stock.

Potential catalysts for the NAV discount to narrow. We see more asset disposals or listings from the unlisted part of the portfolio, followed by cash distributions to shareholders, as potential catalysts for the discount to narrow. The Fund has already disposed of its stakes in Transgaz, Transelectrica, Romgaz and unlisted E.ON, and has partially reduced its participation in Petrom and Conpet. We believe more disposals are possible from both the listed and the unlisted parts of the portfolio (e.g., a 10% stake in Hidroelectrica, once listed; an eventual sale of the stakes held in Electrica’s subsidiaries to the parent company). The proceeds of any disposals, as well as any dividends that the Fund receives from its listed holdings, are to be distributed to FP’s shareholders, either via buybacks or via reductions of the share par value.

NAV discount too high. The discount to NAV is at 25% currently, from 30% a year ago. The Fund pays a low amount of tax; generates an average yearly earnings yield close to its cost of equity; has been able to sell stakes at a discount of less than 5% to their NAV; and has taken important steps towards either listing other stakes in the portfolio or disposing of them. Therefore, we see no reason for the NAV discount to remain this high.

NAV could see further upside. Not only should the discount to NAV narrow, in our view, but we also see growing support for FP’s NAV to increase, as it is highly exposed to the prices of oil & gas and electricity (46% of NAV). We see oil & gas and electricity prices moving slowly higher, to the benefit of oil & gas producers like Petrom (17.7% of NAV) and electricity producer Hidroelectrica (26.4% of NAV). Moreover, we see more upside for the currently unlisted stakes once the IPOs have been undertaken, as we are currently applying a discount to them in our valuation (Hidroelectrica and Bucharest Airport being the largest).

For more details go to:http://seekingalpha.com/article/3757246-invest-paul-singer

Perfect summary of the current market stage

The two critical variables are the US fiscal program that will finally pass, and the extent to which the Fed tightens in response. Investing in the US — and everywhere else, given the weight of the US in the world — will for the foreseeable future revolve around those variables.
If we get a big stimulus and the Fed stays dovish, the market is priced correctly. This is possible but unlikely. In the event of a big stimulus and a strong Fed response — possibly the single most likely outcome — we can expect bond yields to move a lot higher. Stocks would be at some risk. And if Mr Trump fails to deliver as much as hoped in tax cuts (unlikely but possible), while the Fed presses on with three or four rate rises this year, investors in both stocks and bonds should brace to lose money.
From FT´s Long View by John Authers, published this Saturday

I am closing my EDL idea at 80% IRR

I am closing my EDL idea published at SA (see the link below). The idea made 60% return and 80% IRR. As expected Disney made an offer for EDL at 2.00 EURO per share. The price at the time of writing the article was 1.24. Hope you enjoyed the ride.

Idea for this week – see my Petrom article (link below). The company is reporting on 2/15/17. Romanians had a very strong winter, expect good numbers and further re-rating.

Link to Petrom idea

http://seekingalpha.com/article/4034808-omv-petrom-special-situation-oil-play-due-mishandled-spo-major-shareholder

 

Link to EDL idea

http://seekingalpha.com/article/3964804-disney-park-activist-play-200-percent-return-potential

 

 

 

OPAP – Greek play

Wood and co research on OPAP published today:

*** OPAP: VLTs not yet priced in (stays Buy) ***

To download the report, please click on the following link: Greece_Consumer Discretionary_OPAP_Update_25Jan2017.pdf, (650 KB)

We maintain our BUY rating on OPAP, with an increased 12M price target (PT) of EUR 10.00/share (from EUR 8.50 previously), due to full inclusion of the VLT project. Accounting for the VLT contribution on the one hand, and related cannibalisation of legacy games on the other, we are increasing our EBITDA estimates by 7-54% in 2017-19E. We expect a 2016-19E EBITDA CAGR of 13% and DPS of 0.51-0.68, yielding a decent 6-8% in the respective period. In light of our new figures, we still find the company’s 2018E EBITDA of 6.6x, 30% below peers’ median, attractive. Finally, since the announcement of positive changes in VLT regulations, OPAP’s share price has discounted only c.25% of the project value.

VLTs back in the game. In November, just before the potential expiry of OPAP’s licence (historical cost of EUR 560m), the Hellenic Gambling Committee released amendments to the market regulations. As a result, OPAP has now announced that the VLT project will finally be launched in 2017E. Accordingly, OPAP has significantly reduced its claim against the government under the litigation process within the UK arbitrage court. On a negative note, however, we underline that, as a result of the new regulations, OPAP’s catchment area is unlikely to grow by as much as we had initially expected, due to some machines being placed in the existing agents’ shops.

We expect a full launch of VLTs by 2H18E… According to the updated licence agreement, OPAP should now be able to fully deploy 16.5k own-use machines by 1 May 2018. For the 18.5k sub-contracted machines, we expect the process to be delayed by around half a year, as the company has not yet prepared the tender for sub-concessionaires. In our model, we have assumed full deployment of VLTs by the end of 2018E, with effective 2017/18E utilisation of 25%/77% for owned machines, and 3%/63% for sub-contracted ones.

…triggering our EBITDA forecast upgrades of 7-54% in 2017-19E. Taking into account the VLTs’ contribution, and their cannibalisation effect, we have increased our GGR forecasts by 7% to EUR 1,436m in 2017E, followed by a massive 77% hike to EUR 1,882m in 2018E, and another 117% increase to EUR 2,183m in 2019E. Given the structurally lower profitability of the VLT business, the increase in our EBITDA forecasts is more limited, amounting to 7% to EUR 308m in 2017E, 35% to EUR 388m in 2018E and 54% to EUR 438m in 2019E.

Valuation gap still not closed. We have increased our 12M PT to EUR 10.0 from EUR 8.50. Since the announcement of the VLT relaunch, OPAP’s market cap has only increased by EUR 250m, equivalent to less than 50% of the exclusive licence value and 25% of the claim against the Greek state. On our 2018E forecasts (which still do not include the full VLT contribution), OPAP is trading at an EV/EBITDA of 6.6x and P/E of 13.9x, 30% and 7% below its peers’ median.

Risks. The major downside risks to our positive stance are: a deeper slowdown in the Greek economy; regulatory risks, especially in VLT case; losing exclusivity to online gambling; and further GGR tax hikes.