The way I invest is simple. I look where value could be unlocked. When looking for investments I also look where activist investors go. They often initiate value creation. My currently most favorite opportunity was found this way. It is Fondul Proprietatea, a Romanian restitution fund. The fund was created by Romanian state and distributed to Romanian individuals to reimburse them for assets that were taken from them by previous communist's regime. When the shares were distributed to Rumanians, the share price collapsed, as the citizens piled in to sell. There were not that many buyers initially. After almost two years the shareholder structure is stabilizing - it is 60% owned by foreigners while the Romanian public has reduced from 100% to 29%. The state out too, it owns 0%. The selling pressure is mostly gone; it is time for value creation.
The fund is 85% invested in Romanian energy companies. The shares trade at 0.55 RON per share while the NAV per share exceeds 1.14 RON. The shares trade at around 50% NAV discount. Dividend yield exceeds 7%. Not bad for start. Now, where the value creation could be coming from:
- Over 60% of assets represent companies in the portfolio are not listed. It is therefore not clear, what is their market value. Romanian state passed a law that forces large state companies to list on public market. The listing is due during 2013. The largest companies are already making preparations for the listings. Templeton also hired investment banks to advice on sale of smaller distribution companies. We should therefore see most of the portfolio listed in 2013, which would resolve the valuation uncertainty and should drive the NAV discount down.
- One of the largest holdings is Hydroelectrica, that accounted for 20% of fund assets. The company was burdened by disadvantages contracts with local businessmen. Under the IMF pressure the state put the company into insolvency so that it can be cleaned of those grossly disadvantages energy sale contracts that cost the company 200 mil EUR per year. The company is now cleaned and is expected to get our from insolvency in first half of 2013 and list subsequently. Again, this would be very positive for the Fondul shares.
- The company has authorised share buyback of up to 10% of the fund. The fund has cash ready for this. As it would be buying its shares at 50% discount, the NAV per share would further increase from the transaction.
- The major holding by the fund is OMV Petrom, an oil and gas company. Most of the sales of gas is to domestic market at regulated prices. The government approved gradual gas price deliberalisation starting January 2013 ending 2015.
- Another positive step is listing of the shares in Warsaw. Warsaw stock market is more accessible and provides higher liquidity than Romania.
Of course there are risks there too. The fund is managed by Mobius run Templeton, so the risk of mismanagement is low. But the investor is still exposed to Romanian shady and corrupt legal system. Romania is an EU state, but still behaves sometimes like an African nation. Despite that I feel that this is very attractive investment.
For disclosure purposes I confirm I have a long position in the Fondul Stock
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long in the shares of Fondul Proprietatea