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COMMENT: Uzbekistan is being transformed, but where are the democratic reforms?
OUTLOOK 2021 Uzbekistan
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The Uzbek stock market is about to get a boost from a new law that will ease restrictions on the foreign ownership of bank shares that make up the bulk of trading on the exchange. Foreign investors are starting to eye Uzbekistan’s public markets with interest.
Uzbekistan is rapidly liberalising its stock exchange that should be the main platform for the coming privatisation programme. The government has said that it wants to get out of the economy and plans to start selling off stakes in most of its holdings – bar a few strategically important assets – in the next few years.
That means it needs foreign investors and to entice them in it is in the process of liberalising the market and, more importantly, dropping currency controls and the restrictions on foreigners owning key shares in the banking sector.
Most of Uzbekistan’s main companies are already listed. Asia Frontier Capital (AFC) is one of a handful of international investment funds that set up an Uzbek fund in March and is pioneering the entry to Uzbekistan’s pubic market for foreign investors. It has already tested the system by selling some shares and successfully sending its profits overseas.
“The potential of this market is huge,” Scott Osheroff, the chief investment officer of AFC told bne IntelliNews in an exclusive interview. Osheroff stumbled on the Uzbek market a few years ago and now is raising money for the fund.
Osheroff is clearly excited by the potential of the market, but admits portfolio investment in Uzbekistan it is at a very early stage. The country only changed presidents two years ago after the death of Islam Karimov. The new regime of President Shavkat Mirziyoyev has its work cut out for it before Tashkent registers on international investors' radar.
AFC already has $3mn assets under management (AUM), but that is still a small amount by international standards. Part of the problem is with a tiny daily turnover, even investing $1mn will cause the index to soar and any profit taking will equally deflate prices just as fast.
The Tashkent Stock Exchange (TSE) was founded in 1994, a few years after Uzbekistan gained independence, but has lain pretty much moribund ever since. In the tightly controlled republic of former president Karimov, who ruled from independence in 1991, there was little private enterprise outside of the country’s legendary bazaars, and the few stocks and bonds issued were little more than window dressing.
But since Mirziyoyev took over and started opening the country up in 2016 things have been changing fast. The biggest change has been the end of the mandatory order to sell 25% of export earnings to the state, followed by the wholesale freeing of foreign exchange in September 2016. AFC was the first foreign fund to repatriate profits earned from the exchange to make sure it works, earlier this year.
Karimov clamped down on foreign exchange in 1995 to preserve the country's reserves, but that also killed off all inbound investment at a stroke. In the very latest move the central bank announced it would no longer interfere with exchange rate fluctuations and lifted restrictions on buying foreign exchange at currency kiosks, allowing the population to freely buy dollars if they want, from August 22.
In preparation for the coming IPOs and SPOs, the government took its stock market on the road. New York hosted “Opportunities in the capital markets of Uzbekistan” this July, an investment forum organised by the Uzbek Capital Market Development Agency and the embassy of Uzbekistan in the US.
There are a total of 603 companies listed between the TSE and the over the counter (OTC), with 106 listed on the TSE and the remainder trading on the OTC, according to Osheroff.
“The whole economy is listed,” says Osheroff. “There is a wide spectrum of companies that are traded, however, the bulk of the turnover is in the banks.”
With a total market capitalisation of $6.1bn and a daily turnover of a few hundred thousand dollars per day the market is still small – at least two orders of magnitude too small to attract serious attention from Wall Street investors.
But the market is also extremely cheap, while the country is by far the biggest in the region, which is the appeal. The market is well diversified with companies in cement, cooking oil, glass and steel production listed, in addition to banks, bakeries etc. It is not an anomaly to have companies trading at P/E ratios of 1x to 3x with dividend yields of between 10% to 25%., according to Osheroff.
“I was in Kazakhstan in May 2018 at a conference but decided to come over to Tashkent and was blown away by what I saw,” says Osheroff, who is now traveling to sell the Uzbek story to international investors and raise more money.
The pitch is simple: Uzbekistan is about to boom and has all of its fast “catch up” growth ahead of it. One of the companies that Osheroff has invested into is a vegetable oil producer that has already built up revenues of $29mn a year and pays out a dividend yield of 19.7%, but only has a market capitalisation of $12mn.
TSE-listed Kyzylkum Cement is a similar story. It is the biggest cement producer in the country with revenues of $160mn per year but a market cap of only $72mn. The company trades on a p/e of 2, only 0.4 times its book value, but pays a dividend yield of 16.6%.
“At some point the whole market will be rerated, but it will take time. We were the first mover on the stock exchange and the first to repatriate profits abroad,” says Osheroff.
All the businesspeople interviewed by bne IntelliNews say the same thing: things are moving fast and growth is seen everywhere. Many of these companies have been seeing revenue growth of several hundred percent in the last year or two as new investors come in as salutary effects of the currency liberalisation kick in.
A few investors have come in and placed “placeholder” long-term bets on the eventual growth of the market. They are targeting the classic early winners from reforms such as real estate and construction services, alcohol producers and leading retailers, and especially banks.
Bank stocks to get a liberalisation bump
When the market kicks off in earnest it will probably start with the banking sector, which already accounts for circa 80% of the trading on the exchange.
“Karimov worried about foreigners walking in and buying the whole banking sector as the equity of the whole sector is only about $28bn. So, they passed a law saying that foreigners could only buy bank shares with the central bank’s approval, which they never gave, apart from a few exceptions for strategic investors,” says Osheroff. “Now the government is talking about privatising three state-owned banks and they need to get rid of this law.”
Bank ownership liberalisation is in full swing and the Central Bank is beginning to issue licenses for foreign banks to operate. Earlier this year Halyk Bank from Kazakhstan was granted a license to operate in the country and has recently set up operations, while Georgia’s TBC is expected to receive final approvals and enter the country through a digital banking platform in the coming months, says Osheroff, and this compares to the only two foreign banks operating today which are the Korean Development bank and Ziraat bank from Turkey.
The banking sector should be one of the best ways to get exposure to the economic revival ahead. The non-performing loans (NLPs) of the sector (excluding state-banks) are low at around 2%, and the capital adequacy ratio (CAR) is strong at 14%, a requirement of the central bank, so the sector looks healthy. But the prices are still low, with some banks trading on a p/e ratio of 2x and valuations that are a mere third of their book value.
“Several of the private sector Uzbek banks must be among the cheapest in the world on a P/B basis,” says Osheroff.
According to the locals a draft banking law has already been prepared that will lift the restrictions on foreigners owning up to 5% of a bank's shares that should be signed into law in the coming months.
“When it is signed there is going to be an inflow of money and that will push all the valuations up,” says Osheroff. “It will be the next big step in the liberalisation of the market.”
While the details of the law are still vague, experts in Tashkent are expecting the new law to allow any one investor to buy up to 5% of a bank’s shares. Moreover, there is no restriction on the number of investors owning these 5% stakes, provided they are not affiliated with each other.
These rules will apply to three quarters of the listed banks, but special rules will be applied to the strategically important state-owned banks that probably will be privatised via IPO or SPO at a later date.
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