Scalper1 News
Summary Fondul Proprietatea is one the largest closed-end funds in the world. The fund currently trades at 29% discount to its NAV. The largest shareholder Elliott Associates run by Paul Singer has been recently increasing its position to 21.6%. Bill Gates entered the play with a 1% stake. This update concentrates on the highlights from the fund’s investor day. This is a pure, activist-driven restructuring play. Investment summary: Stable 6.3% non-taxable “dividend” yield. The fund is buying back up to 25% of the daily volumes of its share trading. The fund is motivated and pushed by activists to reduce the 29% discount. Portfolio restructuring should allow the fund to increase the payout to shareholders in the near future. Introduction to Fondul Proprietatea Fondul Proprietatea (LSE:0OKS) (BUH:FP) was created by the Romanian state to reimburse Romanian citizens for the assets that were taken from them by the communist regime. Since 2010, the fund is managed by Franklin Templeton, and since 2011, the fund is listed on Bucharest Stock Exchange, and its GDRs trade on the London Stock Exchange. The fund has a total NAV of USD2.9 billion, the market capitalisation of USD2.1 billion and trades at a 29% discount to the NAV. Source: Fondul Proprietatea Investor Presentation, December 2015 The main reason for the high NAV discount lies in the high proportion of the unlisted portfolio, which currently represents 55% of the total assets. The fund is 85% invested in Romanian energy companies. Source: Fondul Proprietatea Investor Presentation, December 2015 The fund is well managed by Franklin Templeton . The fund manager is working hard to narrow the NAV discount. Over the last four years, the fund has paid out over USD1.6 billion to its shareholders in the form of dividends and buybacks, which is quite significant relative to its size of USD2.9 billion. Despite this significant payout, the fund’s NAV remained stable. Source: Fondul Proprietatea Investor Presentation, December 2015 The fund’s investment strategy is simple: No new investments (except buying back its own shares, currently at a 29% discount), restructure the current portfolio to narrow the NAV discount through listing or disposal of unlisted securities, and distribute profits to shareholders. Motivation to Templeton Elliott recently pushed through a new fee structure that is quite an unusual for closed-end funds; the management fee is based on market capitalisation of the fund, and not its NAV. An additional fee is due for each day – the NAV discount is below 15%. An additional fee is paid on cash distributions to the shareholders. Why the fund will make you money This is a textbook case of shareholder activism that creates value for all shareholders. Paul Singer has a team of lawyers in Romania who put pressure on Templeton to deliver. There are major value drivers ahead: Portfolio restructuring The reason for the high NAV discount lies mainly in its high 55% proportion of unlisted equities in the fund’s portfolio. Source: Fondul Proprietatea Investor Presentation, December 2015 The largest unlisted position is the stake in Hidroelectrica , which accounts for 34% of the unlisted portfolio. In 2014, Hidroelectrica was the most profitable Romanian company with an EBITDA margin of 65%. The preliminary results in the first five months indicate even better performance for 2015. The government plans to IPO Hidroelectrica in late 2016. Morgan Stanley has been appointed for the lead manager role. The remainder of the unlisted securities represents the main stakes in local electricity distribution companies. Most of them already have foreign majority owners. Fondul has retained the investment banks to advise on the sale of the stakes. The most advanced are discussions on the sale of four electricity distribution companies to local Electrica . The companies currently represent approximately 12% of the unlisted portfolio. The fund manager in the conference stated that “the agreement on the sale is very, very close”. The market rumor is that the deal has been already agreed and is just awaiting the approval of Electrica’s newly appointed board of directors. Negotiations with Enel ( OTC:ELPSY ) on the sale of other distribution subsidiaries, which account for 13.6% of the NAV, have been restarted very recently too. If only these two transactions get executed in 2016, the unlisted portfolio would decrease from the current 55% to 30%. Active buybacks The fund is currently buying back 25% of its daily volumes. In addition, over the last two years, it has done an annual tender offer for its shares, in which every shareholder could sell 8% of their Fondul shares at around 20% premium to the market price. Each participating shareholder collected an additional 2% income through this transaction. At the conference, the fund manager stated that the fund is considering another tender offer at an appropriate time. It has been rumored, once the sale of Electrica’s distribution companies is completed, that another tender offer will be announced. High dividend yield The fund offers a dividend yield of 6.3%. The dividend is structured as a return of capital (reduction of the nominal share value), which is tax free in many jurisdictions. The fund has already called a shareholder meeting for January to approve a 0.05 RON distribution for 2016. Romanian economy is strong The fund owns mainly electricity production and distribution companies. Energy companies are proxy to the Romanian economy. Romania has been one of the best-performing EU countries which is expected to grow at 2.8% in 2015 and 3.3% in 2016. In 2014, the good macro situation was reflected on the performance of the companies in Fondul’s portfolio, causing it to report the highest dividend income ever. The strong economic performance in 2015 is reflected in the fund’s performance. Despite the decrease in energy prices, the top portfolio holdings reported a 50% increase in profitability relative to the previous year. Source: Fondul Proprietatea Investor Presentation, December 2015 Fondul Proprietatea is “the cheapest fund in the world”, said Mark Mobius , executive chairman of Templeton Emerging Markets Group, in a press conference in Bucharest, after the GSM on October 29. The investor conference introduced a list of concrete milestones that should allow investors to capitalise on the opportunity. Conclusion The investor conference brought only good news for Fondul’s investors. The most important one was the confirmation that the completion of the disposal of Electrica’s distribution companies is imminent. When completed, investors should look forward to another tender offer for Fondul’s shares at a premium to the market price. The tenders always drove Fondul’s share prices up significantly . It would be quite surprising if the same would not happen again. Scalper1 News
Scalper1 News