With the Colombian economy growing steadily at above 4% (pdf) GDP per annum since 2003, except during the peak of the global financial crisis in 2008 and 2009, we are seeing not only increased investor interest in Colombia but Colombian companies becoming increasingly interested in accessing major U.S exchanges. By listing on a major U.S exchange these companies are able to access global investment markets, access a larger and more diverse global investor base, gain visibility on a global scale, raise additional capital and enhance liquidity to aid expansion. In fact for 2012 alone it is expected that Colombian companies listed on the NYSE will double. There are currently two Colombian listings on the NYSE with a total market cap of $97.4 billion.
When purchasing stock in a Latin American company it is essential that investors understand the degree of investment risk, liquidity risk and sovereign risk that they are undertaking. Typically this risk is greater than that which is inherent when investing in companies in developed countries such as the U.S or the eurozone. But as the global financial crisis and the European sovereign debt crisis have demonstrated, this is possibly no longer the case. Overall the degree of sovereign risk inherent in investing in Colombian companies is lower than would be expected, primarily due to the recent deregulation of the economy and substantial improvements in the security environment. In January 2012 the OECD awarded Colombia a 4 (pdf) on a scale of 0 to 7, with 0 being the least risky and 7 the most. Furthermore, Standard and Poor's improved the country's international credit rating to BBB- , which is the lowest investment grade rating, on the basis of the Colombian economy's growing resilience to shocks and favorable growth prospects. The degree of liquidity and investment risk can be mitigated by investing in those Colombian companies that have met the listing standards of and are listed on the NYSE.
There are currently two Colombian companies listed on the NYSE, Bancolombia (CIB) and Ecopetrol (EC). Bancolombia made history by becoming the first Colombian company to enter the U.S. market in 1995 and since listing on the NYSE its stock price has grown by over 340% to now be trading at around $65, giving it a market cap of $51 billion. Bancolombia is now 17 times larger since listing on the NYSE, making it the seventh-largest financial institution in Latin America and a major regional bank. Ecopetrol was the second Colombian company to list on the NYSE in 2008. Since listing it has risen by 141% in value to now be trading at around $60, giving it a market cap of $123 billion. In total both of these companies make up 7% (pdf) of the Latin American total listed on the NYSE, but this is well behind Brazil's 65% and Mexico's 18% stakes. Already in 2012 we have seen the listing of Andina Acquisition Corporation on the NASDAQ (ANDAU) with 4 million shares at $10 each for a total capital raising of $40 million and further listings predominantly by way of American Depositary Receipts (ADRs) are expected to continue.
The two Colombian companies expected to list on the NYSE in 2012 are Grupo Energia de Bogota (EEB:BVC) and Banco Davivienda (PFDAVVND:BVC). Grupo Energia is the leading gas and electricity provider in Colombia's capital city Bogota. It is considering going public via the NYSE in 2012. The company is currently listed on Colombia's stock exchange the Bolsa de Valores de Colombia (BVC). The key motivator for Grupo Energia for listing on the NYSE is to enhance its liquidity and cash holdings so that it can continue with an ambitious acquisitions program valued at around $1.6 billion. This program includes expanding operations in Peru and Guatemala, as well as expanding its natural gas transportation and distributions system in Colombia.
Grupo de Energia last traded at $1,055 Colombian pesos on the BVC, which is 60 cents U.S. If the company were to proceed with a listing as an ADR in the NYSE I would envisage that the ratio to be used would be 4 local shares to 1 ADR, giving Grupo de Energia a potential listing price of around $2.40 per share. However, this would also be contingent on the value of the company at the time of proceeding to listing on the NYSE.
I believe that were Grupo de Energia to list on the NYSE that it would represent a solid investment opportunity for those investors with a higher tolerance to risk seeking to diversify their portfolios. Grupo de Energia delivered solid financial results during 2011, with fourth-quarter 2011 revenue increasing by 1.7% to $217 million and net income rising by a massive 244% to $45 million. The company's balance sheet also strengthened during this period with cash and cash equivalents rising by 19% to $443 million. Grupo Energia for the full year 2011 reported a 52% rise in revenues to $808 million, but disappointingly reported a massive 72% drop in net income to $173 million.
The company also compares favorably with its competitors as well as U.S.-based energy providers and I have set out a comparison of key performance measures in the table below.
Grupo Energia de Bogota
Centrais Electricas Brasileiras (EBR)
American Electric Power (AEP)
NRG Energy (NRG)
Based on the key performance indicators above and using those that relate to Grupo de Energia's BVC stock performance the company is delivering a gross margin well in excess of a similar Latin American energy company Centrais Electricas and its U.S. peers American Power and NRG. It is also delivering a return on equity that is similar to its peers examined in the table above, but is lagging behind American Power. In addition, its trailing PE is similar to NRG's but makes the stock look expensive in comparison with Centrais Electricas and American Power.
In addition, Grupo de Energia has a strong credit rating of BBB- and this is the lowest investment grade credit rating. This bodes well for Grupo de Energia's ability to successfully list on the NYSE and it is a superior credit rating to Centrais Electricas and NRG.
Based on its last traded stock price on the BVC and earnings per share the company has an earnings yield of 12%, which is substantially higher than the risk free rate of return indicating that the company is unfairly discounted by the market. However, when considering any investment in a Latin American company investors should be aware of the additional risk they are undertaking and accordingly this means they should be seeking a higher risk premium when investing. Typically I would seek an additional 1.45% over the usual risk premium associated with investing in energy stocks. In this case with an earnings yield of 12% there is a more than adequate premium.
In my opinion were Grupo de Energia to list on the NYSE during 2012, investors who have the tolerance to accept the higher degree of risk associated with an investment in a Colombian company will see solid investment returns over time. This is due to the company's aggressive expansion plans for Central America and Colombia, which should see a substantial rise in revenue coupled with its near monopoly position in the Colombian energy supply market.
The other Colombian company predicted to list on the NYSE in 2012 is Banco Davivienda, the third-largest bank in Colombia in terms of market share with roughly 11% share of Colombia's total lending. It is also the Colombian market leader in the credit card business with an 18.4% market share. It is currently listed on the BVC and last traded at around $20,000 COP, which is around $11 USD.
Davivienda reported a strong performance for fourth-quarter 2011 (pdf), with revenue rising by 92% to $358 million and net income rising by 41% to $94 million. During this period it strengthened with cash and cash equivalents rising by 31% to $1.9 billion. For the full-year 2011 Davivienda reported a 4% rise in revenue and a 9% increase in net income.
The company also compares favorably with its competitors as well as U.S.-based banks and I have set out a comparison of key performance measures in the table below.
Bank of America (BAC)
Based on the key performance indicators above and using those that relate to Davivienda's BVC stock performance, the company is delivering a gross margin on par with Bancolombia and Citigroup and marginally less than Bank of America.
However, it is delivering a similar return on equity to Bancolombia and one that is substantially superior to Citigroup and Bank of America. Also on a price-to-earnings ratio basis it certainly looks cheap in comparison with its peers and this is what I believe is the compelling reason for buying ADR stock in Davivienda when it lists on the NYSE. It gives investors the opportunity to invest in a major Colombian bank with a strong growth story, at a price that is discounted compared with its bigger competitor Bancolombia and U.S banks such as Citigroup and Bank of America. In addition, Davivienda has not been subject to the controversy that has surrounded Citigroup and Bank of America since the GFC and like the majority of Latin American banks emerged from the GFC in quite good shape. In fact it is only the last year that the Bank of America was the subject of an investigation into flawed foreclosure practices and just recently Citigroup failed the Federal Reserve stress test.
Davivienda has recently acquired HSBC's Central American banking operations in El Salvador, Costa Rica, and Honduras, increasing the scale of its operations in Latin America and diversifying its revenue stream. This gives Davivienda a stronger presence in Latin America and further positions the company for growth. However, as a result of this Davivienda's credit rating was downgraded, but it is still rated as BBB-, which is the minimum investment grade. This rating is well below that of Citigroup and Bank of America but the same as Bancolombia and this in my opinion is lower than would be expected in recognition of the greater degree of risk associated with investing in Colombia.
Based on its last BVC trading price and earnings per share the company has an earnings yield of 7.6%, which is higher than the risk-free rate of return and indicates that the company is moderately discounted by the market. However, when considering any investment in a Latin American company investors should be aware of the additional risk they are undertaking and accordingly this means they should be seeking a higher risk premium when investing. Typically I would recommend an additional premium of 1.45% on any investment in a Colombian stock over the accepted risk premium sort for investing in a banking stock. In this case, once this additional risk premium is added to that which would normally be sort when investing in a regional bank, I believe that at its current price Davivienda is fairly valued.
Overall Davivienda is an intriguing investment to contemplate and I do believe that if it were to list on the NYSE it would certainly be an investment that has solid potential to deliver strong investor returns albeit with a higher degree of risk than your typical pre-GFC regional U.S bank. If anything it is an irresistible opportunity to make an investment in a Colombian bank that should perform just as Bancolombia has since it listed on the NYSE in 1995.
However, at this time neither company has made a formal announcement to list on the NYSE, though they have both stated that it is under consideration and more than likely in 2012.