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Jan Martinek
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Former investment banker spent 17 years in London covering CEE region. Now runs private family office.
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  • Top Energy Fund In Europe At 40% Discount To NAV 0 comments
    Oct 17, 2013 1:50 PM

    Fondul Proprietatea - top European investment

    Fondul Proprietatea is a Romanian restitution fund. The fund was created by Romanian state and its shares were distributed to Romanian individuals to reimburse them for assets that were taken from them by the communist's regime. When the fund started trading, the share price collapsed, as the citizens piled in to sell. Initially, there were not many buyers. After almost two years the shareholder structure is stabilizing - it is now 67% owned by foreigner institutional and private investors while the Romanian public was reduced from 100% to 24%. The state is out, 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 now trade at 0.75 RON per share while the NAV per share exceeds 1.16 RON. The shares trade at around 34% NAV discount. Dividend yield exceeds 7%. Not bad for start. Now, where the value creation could be coming from:

    1. Templeton actions to narrow NAV discount - The fund is managed by Mark Mobius´s Templeton. The major foreign investors are activists, people like Elliot Associates. They are getting aggressive with Templeton. They want more action from Templeton to narrow the NAV discount. They announced that if Templeton is not more active, they will find more willing manager. Templeton is trying to deliver. There are two actions in progress now, both should help to narrow the NAV discount:

    i) The fund is now making a tender offer for 5% of its shares at 1 Ron (25% premium to current market price). The end date is 14 Nov. That already lifted the price.

    ii) There is a shareholder meeting on 22 November to approve a capital reduction of the nominal from 1 RON to 0.95 RON per share. Again the proceeds should be distributed to shareholders as a "special dividend"

    iii) There is still a regular buyback program in which the company is authorised to buy back up to 10% of its shares. The buyback is suspended and is due to restart most likely after the tender offer. In the buyback the fund is buying back 25% of daily volume on average.

    All the above activities have two effects, both positive. First they distribute cash to investors and second, they help to increase the NAV, as all the buy backs are done well below current NAV. Both effects should contribute to NAV discount reduction.

    2. Clarification of fund portfolio valuation - at the moment the 54% of the fund portfolio is in unlisted securities, mainly major Romanian energy companies. This is changing :

    a. Romanian state is pushing for flotation of the corporates - for example in the last week of October Romgas IPO should be finalized. Romgas stake represents 9% of Fondul portfolio. Further it is expected that the IPO price will exceed the Romgas current valuation in Fondul´s books. This should help to narrow the NAV discount.

    Similarly Hydroelectrica (14% of the portfolio) will most likely have its IPO in the first half of 2014. After this the unlisted portfolio should be down to 31%.

    b. Fondul is disposing shares in regional distributors. Mandates were given to investment banks to find buyers for its minority stakes. The proceeds will be used to fund buybacks. Again, this will help to reduce the size of the unlisted portfolio of the fund.

    Again all the above have two effects, both positive. First they help to clarify the valuation of the fund portfolio and second, they mostly show, that the mkt value of the securities is higher than the value in the Fondul´s NAV calculation.

    c. Higher dividend - the Romanian energy companies had a good year. This year profit of the fund is expected well ahead of last year. Again, this would mean a higher dividend.

    The good performance of the companies should also support a revaluation of the funds portfolio. The most remarkable revaluation should come in Hydroelectrica stake. The company posted 9 months net profit of 153 mil Euro, well above expectations (vs last year loss). This should also help to revalue the stake which should help the Fondul share price.

    IN summary, there are quite a few catalysts in the next 6 months. They all contribute to a bright picture for the company and for its shareholders.

    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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: I have a position in the fund mentioned in this article. The ticker is FP:RO

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