Seeking Alpha

Chris DeMuth Jr.'s  Instablog

Chris DeMuth Jr.
  • on Portfolio Strategy & Asset Allocation
  • on ETF Long & Short Ideas
  • on Fund Holdings
Send Message
"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
My blog:
Rangeley Capital on Harvest
My book:
Rangeley Capital Best Investment Ideas
View Chris DeMuth Jr.'s Instablogs on:
  • A Bull On The Russian Bear

    I am no fan of Russian politics, but believe that there are attractive opportunities in the Russian market. I began shorting the Russian inverse ETF Direxion Shares Exchange Traded Fund Trust (NYSEARCA:RUSS) last year; it is down 70% since then.

    I reiterated this idea earlier this year on my blog and in an article. How else might one get some exposure to Russia on the cheap? One of my favorite ways is via EOS Russia.

    EOS Russia's Portfolio Is An Extreme Bargain

    EOS Russia (ISIN-code: SE 0002016261) invests primarily in Russian electricity distribution companies known as "MRSKs". They are likely to be fully privatized in the future. Today, they are extremely cheap. In the developed world, electric distribution costs about 10x EV/EBITDA, 16x P/E, and 2.4x book. Emerging market distribution costs about 7x EB/EBITDA, 13x P/E, and 1.9x book. EOS Russia's distribution costs 3x EV/EBITDA, 4x P/E, and 20% of book. This is a discount to emerging market peers' EV/EBITDA of 58%. The P/E discount is 70% and the P/B discount is 87%.

    The portfolio is concentrated among four main distribution providers.

    Capture the Double Discount

    While the underlying portfolio trades at a deep discount, EOS Russia trades at a deep discount to that portfolio. The fund's NAV per share is 7.61 SEK. The market price is less than half of NAV, currently 48%. Therefore, you are able to set up distribution assets at a cost of 1.4x EV/EBITDA, 1.8x P/E, and 10% of book value.

    Transparency

    EOS Russia is audited by KPMG AB, which helps ensure transparency. Additionally, insiders are major holders, which further adds to my convince in governance.

    Insider holdings

    Seppo Remes

    Insider

    Position

    Holdings ¹

    Seppo Remes

    Chairman of the Board

    305 000

       

    Lars Bergström

    Member of the Board

    0

       

    Cristopher Granville

    Member of the Board

    0

       

    Peregrine Moncreiffe

    Member of the Board

    447 909

       

    Lauri Sillantaka

    External advisor

    227 000

       

    Ulf-Henrik Svensson

    CEO

    100 773

       

    Anders Tagde

    Auditor

    0

       
    1. This includes direct and indirect (through legal person) ownership of shares in EOS AB.

    They have been adding: Change

    Date

    Insider

    Change

    2015-04-16

    Ulf-Henrik Svensson

    +83 800

    2015-03-18

    Ulf-Henrik Svensson

    +6 973

    2015-03-10

    Peregrine Moncreiffe

    +57 456

    2014-12-28

    Peregrine Moncreiffe

    +56 700

    2014-12-19

    Seppo Remes

    +50 000

    2014-07-11

    Peregrine Moncreiffe

    +110 000

    2013-12-11

    Peregrine Moncreiffe

    +70 000

    2010-12-13

    Lauri Sillantaka

    +20 000

    2010-12-09

    Seppo Remes

    +15 000

    As a country, Russia has a lot of problems with corruption. According to Transparency International, it is the 39th most corrupt county in the world out of 175 measured. Russia ranks especially high in terms of companies that pay bribes. Its government is weak at controlling corruption when it arises.

    Economic Freedom

    Russia is mostly unfree, according to the 2015 Index of Economic Freedom. It ranks beneath the world average and its regional average.

    Its score has been improving modestly over the past few years.

    It is especially weak in monetary freedom, property rights, and the management of state spending. The country is fairly closed to trade and foreign investment. State-owned enterprises have been effective at blocking competition. The labor market is rigid and the bureaucracy is one of the most entrenched in the world. My friend Bill Browder wrote an amazing book, Red Notice, on the topic.

    Country Fundamentals

    As mentioned in a previous article on country metrics, Russia is the cheapest market in the world. As of my previous Russia update,

    Country

    CAPE

    P/Earnings

    P/Cash flow

    P/Book

    P/Sales

    Dividend Yield

    Russia

    5.5

    8.3

    2.9

    0.7

    0.6

    4.6%

    As of today,

    Country

    CAPE

    P/Earnings

    P/Cash flow

    P/Book

    P/Sales

    Dividend Yield

    Russia

    5.0

    12.1

    3.1

    0.7

    0.7

    4.4%

    Caveats

    The EOS Russia Chairman has recently been denied entry into the country. Also, the government has delayed until November 1, 2015 the revision of long-term tariffs for power distribution. Investors had expected to get some clarity by June. Until then, earnings visibility will be poor. Putin could cancel privatization reforms and freeze tariffs to help control inflation.

    Conclusion

    Risk is always and everywhere a function of price. While this situation has massive uncertainty, it is not massively risky at today's prices. By the end of the year, there will probably be greater clarity… and higher prices.

    Tags: RUSS, EOS Russia
    Jul 07 1:51 PM | Link | 18 Comments
  • Rangeley Capital Starts Second Event-Driven Fund

    Rangeley Capital Starts Second Event-Driven Fund

    Rangeley Capital, the New Canaan, Connecticut-based hedge fund, is seeking $250 million dollars for its second event-driven fund that launched on July 1, according to a person familiar with the matter.

    The new fund, Rangeley Capital Partners II, has $22 million of committed capital and expressions of interest for another $18 million, the person said.

    This fund will run pari passu to the first fund, which has $65 million dollars and has reached its capacity for new investors, according to a different person.

    Rangeley Capital managing partner Richard Townsend declined to comment.

    Rangeley's first fund is up 8.1 percent this year through May 30 after returning 11 percent in 2014, according to an investment report from the firm that was obtained by Bloomberg Brief. It lost 4.3 percent in 2013 and returned 18 percent in 2012, according to the report.

    Rangeley charges a management fee of 1.5 percent, with an incentive fee of 20 percent with a high-water mark.

    The firm was founded in 2008 by Chris DeMuth who was previously an event-driven strategy analyst for Mangan & McColl Partners.

    Jul 07 12:30 PM | Link | Comment!
  • Quote Of The Day – Tuesday, July 07, 2015

    Don't never take a chance you don't have to.

    - Maj. Robert Rogers

    Continue the conversation at Sifting the World.

    Jul 07 7:34 AM | Link | 3 Comments
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Most Commented
  1. GCVRZ Forum Archive ( Comments)
  2. GCVRZ Forum ( Comments)
  3. Event Driven Q&A Forum ( Comments)
  4. GPT Forum ( Comments)
  5. Shorts Forum ( Comments)
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.