Utilico Emerging Markets Limited

Transcription

1 Utilico Emerging Markets Limited Structural growth in emerging markets Investment companies Utilico Emerging Markets Limited (UEM) is a closed-end investment company investing in utilities, infrastructure and related companies in emerging markets. Its specific sector focus differentiates it from other emerging market funds, as does its dividend yield of over 3%, reflecting its focus on cash-generative businesses. NAV total return performance has exceeded peer group averages over one, three and five years and it has the lowest ongoing charge within the peer group. With sentiment towards emerging markets showing signs of improvement, investors may wish to consider using UEM to gain exposure to companies that are integral to the long-term growth in these markets. 12 months ending Total share price return (%) Total NAV return (%) MSCI Emerging Markets (%) MSCI EM Infrastructure Capped (%) 5-10 yr UK gilt yield post-tax +2% +RPIX* (%) 30/06/ /06/ (1.9) (13.7) (3.0) /06/ /06/ Note: Twelve-month rolling discrete total return performance. Note: *Performance fee benchmark subject to an 8% minimum. Investment strategy: EM infrastructure and utilities The manager pursues a bottom-up stock selection process aiming to identify companies where the market price does not fully reflect the quality of the business, including the prospective sustainability and growth of cash generation. The manager seeks to invest mainly in companies and sectors displaying the characteristics of essential services or monopolies such as utilities, transportation infrastructure, communications or companies with a unique product or market position. There is a top-down overlay to control sector and geographic exposures in the portfolio. Outlook: Positive for the medium term Medium-term growth prospects for emerging economies appear strong relative to developed economies as highlighted by the IMF s April 2014 respective forecasts for 5.3% pa and 2.3% pa average growth from 2014 through to There also appear to be reasonable grounds to expect infrastructure and utilities sectors to grow at or above GDP growth in emerging economies where they are likely to be instrumental in the development process. In addition to the positive economic outlook, emerging market valuations compare favourably with developed markets, with the MSCI Emerging Markets and MSCI World indices trading on respective forward P/E multiples of 10.5x and 15.1x. Valuation: Recent widening of discount Despite the positive performance of emerging markets since the end of January 2014, UEM s share price discount to NAV has widened from 2.8% in mid-april 2014 to 9.2% currently, which is towards the higher end of its three-year range, perhaps reflecting investors preferring more cyclical exposure in a rising market rather than infrastructure and utilities. 10 July 2014 Price 185p Market cap 393m AUM 447m NAV* 199.0p Discount to NAV 7.3% NAV** 203.1p Discount to NAV 9.2% Yield 3.3% *Excluding income. **Including income. Ordinary shares in issue 213.2m Code Primary exchange AIC sector UEM LSE Global Emerging Markets Share price/discount performance* Share Price Three-year cumulative perf. graph week high/low 192.5p 166.5p NAV* high/low 199.7p 181.3p *Excluding income. Gearing Gross 4.0% Net 4.0% Analysts Jun/13 Jul/13 Aug/13 Sep/13 Oct/13 Nov/13 Dec/13 Jan/14 Feb/14 Mar/14 Apr/14 May/14 Jun/14 UEM Equity Gavin Wood +44 (0) Andrew Mitchell +44 (0) investmenttrusts@edisongroup.com Edison profile page Discount Discount (%) Jun/11 Sep/11 Dec/11 Mar/12 Jun/12 Sep/12 Dec/12 Mar/13 Jun/13 Sep/13 Dec/13 Mar/14 Jun/14 UEM Equity MSCI Emerging Markets Utilico Emerging Markets Limited is a research client of Edison Investment Research Limited

2 Exhibit 1: Company at a glance Investment objective and fund background Recent developments Utilico Emerging Markets investment objective is to provide long-term total return 24 April 2014: Decision to leave capital structure unchanged and not proceed by investing predominantly in infrastructure, utility and related sectors mainly in with bond offering. emerging markets. 17 March 2014: Management fee changed from 0.5% of gross assets to 0.65% of net assets. Performance fee 8% minimum hurdle introduced, cap set at 1.85% of average net assets. Forthcoming Capital structure and fees Fund details AGM September 2014 Ongoing charges 0.90% Group ICM Interim results November 2014 Net gearing 4.0% Manager Charles Jillings Year end 31 March Annual mgmt fee 0.65% of net assets Address UK office: PO Box 208, Epsom, Dividends paid Sep, Dec, Mar, Jun Performance fee 15% of outperformance (cap: 1.85% avg net assets) Surrey KT18 7YF. Launch date 20 July 2005 Company life Indefinite (cont. vote) Phone +44 (0) Continuation vote AGM 2016 and 5- yearly Loans, facilities 50m facility, 26.3m drawn Website Dividend policy and history Share buyback policy and history The fund is managed for total return, but the board broadly seeks flat or rising dividends. DPS (p) Full year div payment Special dividends Subject to annual renewal, UEM has authority to repurchase up to 14.99% of the issued share capital and to allot shares up to 10% of the issued share capital. Shareholder base (as at 23 June 2014) Sector exposures of portfolio (as at 31 May 2014) Utilico Investments Ltd (27.0%) F&C AM (9.4%) No of shares (000s) Repurchased Total cost Allotments Total proceeds Ports (19.8%) Gas (16.5%) Water & waste (12.1%) Cost/proceeds ( m) Lazard AM (8.1%) Investec (6.9%) Satellites (9.0%) Airports (8.2%) Electricity (7.5%) Top 10 holdings (as at 31 May 2014) Rathbone IM (5.0%) Other (43.6%) Toll roads (6.8%) Other infrastructure (5.2%) Other (14.9%) Portfolio weight % Company Country Industry 31 May May 2013* Malaysia Airport Malaysia Airports International Container Terminal Services Philippines Ports China Gas Hong Kong Gas Ocean Wilsons Brazil Ports Eastern Water Resources Dev. & Mgmt. Thailand Water & waste MyEG Services Malaysia Other infrastructure Asia Satellite Telecommunications Hong Kong Satellites APT Satellite Hong Kong Satellites 4.0 N/A China Everbright International Hong Kong Water & waste 3.0 N/A Gasco SA Chile Gas Top N/A Source: Utilico Emerging Markets, Edison Investment Research. Note: *Where no figure is shown for 2013 portfolio weight, the stock was not in the top 10. Utilico Emerging Markets Limited 10 July

3 Market outlook: Favourable for EM infrastructure Exhibit 2 illustrates that since UEM s launch in July 2005, emerging markets have delivered a stronger performance than developed markets, represented by the FTSE All-Share Index. The chart highlights that over the last three years, the infrastructure sector has outperformed while emerging markets as a whole have been range bound and underperformed developed markets. Of note is the fact that the infrastructure sector has kept pace with the broader market during the recent rally. Exhibit 2: MSCI Emerging Markets, MSCI EM Infrastructure and FTSE All-Share indices rebased to 20 July Jul-05 Mar-06 Nov-06 Jul-07 Mar-08 Nov-08 Jul-09 Mar-10 Nov-10 Jul-11 Mar-12 Nov-12 Jul-13 Mar-14 MSCI EM MSCI EM Infrastructure FTSE All-Share Source: Thomson Datastream, Edison Investment Research. Note: Total return performance, indices sterling adjusted. Across emerging markets, positive recent events such as the landslide victory of the BJP party in India and China signing a landmark gas supply agreement with Russia have been balanced by less favourable developments such as insurgency in Ukraine and a military coup in Thailand. However, markets have quickly rebounded from negative news with the improving global economic outlook and favourable emerging market valuations proving more influential. Exhibit 3: Growth and valuation metrics emerging markets vs advanced and world markets Emerging economies, advanced economies & world GDP growth forecasts MSCI Emerging Markets and MSCI World indices valuation metrics % GDP growth, constant prices Emerging economies Advanced economies World 0.0 Div Yld (%) P/E P/E Fwd Price/book Average Average Average e MSCI Emerging Markets MSCI World Source: IMF April 2014 World Economic Outlook, MSCI June 2014, Edison Investment Research Medium-term growth prospects for emerging economies appear strong relative to developed economies, as exemplified by the IMF s forecasts shown in Exhibit 3. There also appear to be reasonable grounds to expect infrastructure and utilities sectors to experience growth at or above GDP growth in emerging economies where they are likely to be instrumental in the development process. In addition to the positive economic outlook, emerging market valuations appear attractive relative to developed markets (right-hand chart in Exhibit 3), suggesting the potential for positive market trends to continue. Utilico Emerging Markets Limited 10 July

4 Fund profile: Emerging markets infrastructure and utilities Launched in July 2005, UEM is a Bermuda-registered investment company listed on the London Stock Exchange. UEM s investment objective is to provide long-term total return to investors through investing predominantly in infrastructure, utilities and related sectors, mainly in emerging markets. UEM uses modest short-term borrowing to provide gearing with the aim of enhancing shareholder returns and derivatives are used to provide an element of downside protection against major market corrections. The fund is run on a bottom-up benchmark-agnostic basis, while comparison is made with the MSCI Emerging Markets Index, but the performance fee is calculated compared to the FTSE UK Gilt five to 10 year index post-tax yield, plus RPIX inflation, plus 2%, subject to an 8% minimum and capped at 1.85% of average net assets. UEM s investment manager is ICM and the investment team responsible for the management of the portfolio has been headed by Charles Jillings since UEM s launch. The fund manager: Charles Jillings The manager s view: Focused on structural growth stories Charles Jillings views UEM s financial year to 31 March 2014 as having been challenging for funds invested in emerging markets in general given the strong divergence between developed and developing economies amplified by currency movements. This is illustrated by the 10-15% declines over the year in market indices in Brazil, Chile and Thailand in local currency terms with the additional impact of 18-22% local currency declines against sterling. He views UEM s negative 3.4% NAV total return against a negative 12.5% return for the MSCI Emerging Markets index during FY14 as demonstrating the strength of UEM s investment strategy in declining as well as rising markets. Jillings highlights UEM s positive underlying performance excluding the negative 14.2% impact of currency movements and confirms that there is no intention to seek to hedge the portfolio against currency movements, partly due to the difficulty and cost of hedging against all currency exposures in the portfolio, and his view that over the next five years currency fluctuations are more likely to have a positive impact on performance. Top 10 holdings APT Satellite, Gasco and Malaysia Airports highlight some of the investment characteristics sought by the manager. APT Satellite is an owner and operator of telecommunications satellites, which has been able to launch new satellites and fill capacity faster than expected by the market and should benefit from the move to high-definition TV increasing data requirements. It has a strong entrenched position with its existing satellites and has another new satellite launch scheduled for 2015 that should drive growth. Gasco owns and operates natural gas and LPG infrastructure in Chile, Columbia and Argentina. It is the monopoly city gas supplier in Santiago and its LPG distribution business has 27% market share in Chile and 23% in Columbia. Malaysia Airports operates 39 of Malaysia s 40 airports, as well as two in India and one in Turkey. It is one of the fastest growing airport operators globally, having seen an 18.4% increase in passenger numbers during 2013, driven by the ongoing expansion of low-cost airlines and 10 new airlines using its facilities. The growth outlook remains positive with the third runway at its flagship KL International Airport having come on line in May Asset allocation Investment process: Benchmark agnostic stock selection The manager pursues a benchmark-agnostic, bottom-up stock selection process seeking to identify established cash-generative companies with strong franchises where underlying values are not Utilico Emerging Markets Limited 10 July

5 reflected in the market price. This could be the result of strong growth drivers, but also other factors including changes in regulation, technology and competition. There is a top-down overlay to control sector and geographic exposures in the portfolio and the manager employs its own internal investment limits 1 in addition to those prescribed by the board. While there are no fixed regional allocations, the manager prefers to invest in emerging market countries benefiting from political stability, economic development, an acceptable legal framework and an encouraging attitude to foreign investment. The manager seeks to invest mainly in companies displaying the characteristics of essential services or monopolies or with a unique product or market position in sectors such as utilities, transportation infrastructure and communications. Most investee companies are asset backed and generate strong cash flows supporting above average dividend yields. UEM generally seeks to invest in companies with strong management who have the ability to grow their business and manage risk. UEM believes it is generally appropriate to support investee companies with their capital requirements while at the same time maintaining an active and constructive shareholder approach, including encouraging the optimisation of capital structures and business efficiencies. The investment team maintains regular contact with portfolio companies and UEM is often among its investee companies largest international shareholders. Current portfolio positioning UEM aims to maximise value for shareholders by holding a portfolio typically comprising 60 to 90 stocks. Portfolio turnover is relatively low, averaging 25% since FY09 and only exceeding 30% in FY10. As illustrated in Exhibit 1, eight of the top 10 portfolio holdings at 31 May 2014 were top 10 holdings a year earlier. China (including Hong Kong), Brazil and Malaysia remain the three largest geographic exposures representing 65% of the portfolio at 31 May 2014 compared to 63% a year earlier. However, within this, China and Malaysia saw 4.9 and 3.5 percentage point increases and Brazil saw a 6.6 point decrease. These changes are a reflection of relative market performance as well as investments and realisations during the year rather than asset allocation decisions. Exposure to China appears likely to be trimmed as it currently stands slightly above management s internal 30% investment limit. Exhibit 4: Sector exposure at 31 May 2014 Exhibit 5: Geographic exposure at 31 May 2014 Ports (19.8%) Gas (16.5%) Water & waste (12.1%) Satellites (9.0%) Airports (8.2%) Electricity (7.5%) Toll roads (6.8%) Other infrastructure (5.2%) Other (14.9%) Source: Utilico Emerging Markets, Edison Investment Research China incl.hong Kong (32.5%) Brazil (16.6%) Malaysia (15.8%) Philippines (8.2%) Thailand (6.5%) Other Far East (7.0%) Other Latin America (5.3%) Europe (4.3%) Other (3.8%) Source: Utilico Emerging Markets, Edison Investment Research While ports, gas and water and waste remain the three largest sector exposures, they accounted for 48% of the portfolio at 31 May 2014 compared with 53% a year earlier. Within this, gas increased from 10% to 17% of the portfolio and water and waste reduced from 20% to 12%. These 1 Internal investment limits set with respect to gross assets at the time of investment: single investment 10%; single country 30%; unquoted investments 5%; gearing 25%; top 10 investments 60%, single sector 25%. Utilico Emerging Markets Limited 10 July

6 movements reflect market performance as well as a 4.7m investment in Gasco and a 4.6m partial realisation of the investment in Eastern Water. The decrease in ports exposure from 22% to 20% reflects the 7.3m partial realisation of International Container Terminals, as well as market movements. UEM also increased its exposure to airports through a 2.3m additional investment in Malaysia Airport Holdings, which represents UEM s largest holding at 31 May Performance: Outperformance over most time periods UEM has outperformed the MSCI Emerging Markets Index in terms of price and NAV total return over one, three and five years and since launch, reflecting the fund s focus on infrastructure and utilities and the outperformance of this segment. Over three and five years, UEM has also outperformed the MSCI EM Infrastructure Index. UEM has outperformed its absolute return benchmark over five years and since launch, reflecting both the strong longer-term performance of emerging markets and UEM s outperformance over most time periods. Exhibit 6: Investment company performance Price, NAV and index total return performance, one-year rebased Price, NAV and index total return performance (%) Jun/13 Jul/13 Aug/13 Sep/13 Oct/13 Nov/13 Dec/13 Jan/14 Feb/14 Mar/14 Apr/14 May/14 Jun/14 Performance m 3 m 6 m 1 y 3 y 5 y SI UEM Equity UEM NAV MSCI Emerging Markets UEM Equity UEM NAV MSCI Emerging Markets Source: Thomson Datastream, Edison Investment Research. Note: Launched 20 July Three-year, five-year and since inception (SI) figures are annualised. Exhibit 7: Share price and NAV total return performance, difference versus benchmarks (percentage points) One month Three months Six months One year Three years Five years Since launch Price versus MSCI Emerging Markets (0.8) (1.2) (4.2) NAV versus MSCI Emerging Markets 2.1 (0.2) Price versus MSCI EM Infrastructure Cap (1.0) (3.1) (6.4) (20.0) NAV versus MSCI EM Infrastructure Cap 1.9 (2.1) (1.6) (2.0) Price versus FTSE All Share (2.8) (3.7) (5.8) (2.1) 56.0 NAV versus FTSE All Share (6.6) (9.5) (1.1) 73.9 Price versus benchmark (0.6) 0.8 (4.9) 2.1 (0.1) NAV versus benchmark (0.1) (0.8) (3.8) Source: Thomson Datastream, Edison Investment Research. Note: Data to end-june Benchmark is UK Gilt 5-10 year post-tax yield plus RPIX plus 2%, subject to an 8% minimum from 1 April Discount: Recent widening above three-year average The board and manager closely monitor UEM s share price discount to NAV. UEM has shareholder approval to repurchase and issue shares to assist in the management of the discount and there is an inclination but not a commitment to repurchase shares when the discount moves above 10%. During FY14 the discount ranged between 1.9% and 10.5%, averaging 6.8% with 2.3m shares bought back and cancelled. UEM s share price discount to NAV has widened since mid-april 2014 from 2.8% to 9.2%, towards the higher end of its range over the past three years. This is in spite of the positive performance of emerging markets since the end of January 2014 and perhaps reflects investors seeking more cyclical exposure as confidence in the rising trend increases. Utilico Emerging Markets Limited 10 July

7 Exhibit 8: Discount over three years Jun/11 Oct/11 Feb/12 Jun/12 Oct/12 Feb/13 Jun/13 Oct/13 Feb/14 Jun/14 Source: Thomson Datastream, Edison Investment Research. Note: Positive values indicate a discount. Capital structure and fees UEM has 213.2m shares in issue following the repurchase and cancellation of 2.3m shares during FY14 with no repurchases being made since the year end. UEM had 21.8m debt at 31 May 2014 denominated in sterling, US dollars and euros and gearing stood at 4.0%. In April 2014, UEM planned to increase gearing to c 20% and establish longer-term facilities to provide a better match with its long-term investment cycle through issuing a 10-year retail bond. Although there was strong support within debt markets, a number of UEM s equity investors were firmly against such structural leverage, given UEM s emerging market asset class and it was decided not to proceed with the bond offering. A number of changes to the fees payable to ICM as UEM s investment manager came into effect from 1 April The investment management fee was changed from 0.50% of gross assets to 0.65% of net assets, a minimum hurdle of 8.0% was introduced on the performance fee benchmark (see Fund profile: Emerging markets infrastructure and utilities) and performance fees in any financial year were capped at 1.85% of average net assets (including dividends paid). Had this new fee structure applied since inception, total fees paid to the investment manager would have been more than 10% lower. Dividend policy Dividends are paid quarterly and form a key component of the total return to shareholders. The board s objective is to maintain or increase the total dividend and great importance is attached to at least maintaining the dividend. This has been achieved every year since UEM s launch in Dividends can be paid from capital as well as revenue reserves, enabling the dividend payment to be maintained at a higher level than if solely paid from dividend income. The total dividend for FY14 increased 5.2% to 6.10p comprising four quarterly dividends, one of which was paid from capital reserves. Although dividend income has declined as a result of the portfolio s increasing Asian exposure relative to Latin America, UEM would like to see the dividend payment fully covered by income. Peer group comparison Exhibit 9 illustrates a comparison of UEM with the AIC global emerging market closed-ended peer group (excluding different share classes). Although UEM differs from other funds in the sector with Utilico Emerging Markets Limited 10 July

8 its focus on infrastructure and utilities, its geographical exposure across emerging markets provides relevance to the comparison. UEM s NAV total return is higher than the peer group averages over one, three and five years. Considering risk-adjusted returns, UEM s negative and marginally positive Sharpe ratios over one and three years are similar to the peer group and reflect the volatility and recently subdued returns in emerging markets. UEM s 8% share price discount to NAV is modestly wider than the peer group average, but ranks close to the mid-point within a broad range. UEM s 0.90% ongoing charge is the lowest in the peer group and its 3.3% yield ranks it second of the six dividend-paying trusts in the peer group. Exhibit 9: Global emerging market investment companies as at 9 July 2014 Fund name Market cap m NAV TR 1 year NAV TR 3 year NAV TR 5 year Sharpe 1y (NAV) Sharpe 3y (NAV) Discount (ex-par) Latest ongoing charge Perf fee Net gearing Utilico Emerging Markets (0.3) 0.4 (8.0) 0.90 Yes Advance Developing Markets (11.5) 41.0 (0.6) (0.2) (11.7) 1.05 Yes 93 Advance Frontier Markets (7.3) 1.54 Yes 101 Africa Opportunity 27.6 (14.9) (0.1) Yes Ashmore Global Opp GBP 69.9 (22.4) (39.8) (27.9) (2.3) (1.5) (23.0) 2.45 Yes 83 BlackRock Frontiers Yes Fundsmith Emerging Equities No Genesis Emerging Markets (0.1) 78.0 (0.3) 0.1 (8.4) 1.68 No 98 JPMorgan Emerging Markets (3.2) (3.7) 64.2 (0.5) (0.0) (10.6) 1.14 Yes JPMorgan Global Emerg Mkts Inc (0.3) Yes Templeton Emerging Markets UK 1, (9.3) 74.5 (0.5) (0.1) (9.1) 1.29 No Simple average (0.3) 0.1 (5.5) Weighted average 3.1 (0.5) 71.8 (0.4) 0.0 (7.1) Source: Morningstar. Notes: TR=total return. The Sharpe ratio is a measure of risk-adjusted return. The ratios we show are calculated by Morningstar for the past 12- and 36-month periods by dividing a fund s annualised excess returns over the risk-free rate by its annualised standard deviation. Net gearing is total assets less cash/cash equivalents as a percentage of shareholders funds. NDY (%) The board The board comprises five non-executive directors, four of whom are deemed independent of the manager. The independent directors are Alexander Zagoreos (chairman), Kevin O Connor (deputy chairman), Garry Madeiros (appointed in June 2007) and Anthony Muh (appointed in October 2010). The chairman and deputy chairman have served since the inception of the company. Susan Hansen (appointed to the board on 23 September 2013) is deemed not to be independent due to her directorship of RESIMAC, which has the same majority shareholder as the investment manager. She is a chartered accountant with considerable experience in the financial services sector. 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