Fondul Proprietatea (ISIN US34460G1067) – Where discounted Romanian stocks meet Paul Singer & Mark Mobius
Fondul Proprietaeta is a Romanian based closed end fund which was set up in 2005 to compensate victims of communism by granting them shares in the fund which in term held most of Romania’s state-owned stakes in Romanian companies.
The fund has been traded on the Romanian stock exchange since 2011 and now finally starting April 29th, the fund is also traded via GDRs on the London Stock Exchange.
I have mentioned the fund a couple of times on the blog already as it is both, a shareholder in Romgaz as well as a 22% minority holder of the operating subsidiaries of Electrica.
What is in there ?
Luckily, the fund has “Top notch” reporting. On the website one finds monthly fact sheets and the top 10 positions. The full list is published Quarterly, under this link you’ll find a handy Excel spreadsheet. Those are the Top 10 positions from End of April and the portfolio composition:
1. The portfolio is heavily tilted towards Energy
2. There are also a lot of unlisted participations in the fund. Overall the percentage of unlisted companies is 50%.
There is a very recent and good presentation available on Fondul homepage.
Templeton / Mark Mobius
Before moving into more investment detail’s, lets look at some specialities of the fund. On of the special features of this fund is the interesting fact that Templeton is managing it as a sole investment manager. If you look into the annual report one actually sees a picture of this guy who actually signed the annual report:
Again, this is not Dr. Evil but Mark Mobius, boss of Templeton. Templeton won a contest in 2010 to run the fund which was then not even listed.
Templeton gets 60 bps per annum which is slightly less what they normally charge for their funds. Templeton seems to be quite active in managing the portfolio,especially in pushing the Government to list more of the unlisted companies such as the Bucharest Airport and the port of Costanza which could turn out good investments. As we know from Electrica, they are not always succesful but honestly they are much more trustworthy than any Government related agency.
Paul Singer & Elliott
To make things even more interesting, famous activist investor Paul Singer owns around 20% of the fund, having increased his stake as late as April this year. If I understand correctly, he was also one of the driving forces behind the London listing.
Interestingly, and I assume this is also due to Singer’s influence, Templeton has actually a formal target to narrow the discount vs. NAV to a value of 15%. For Singer this is a major position. So far his activities have been quite beneficial for all holders as the NAV discount has clearly narrowed. In my personal experience however one has to be carefull when one invests “along” Singer/Elliott. More often than not they will try to get special deals which only benefit them and not the shareholders. So far this hasn’t happened here to my knowledge but one should keep that in mind.
“Discount” to NAV & Valuation
As of April, the discount to the NAV was around 25%. Historically, the discount has been much higher:
One critical issue with regard to the “discount” is of course the fact that for the unlisted shares the verification is quite difficult. Readers of my blog and myself of course do have a small informational advantage. In my last post on Electrica, I had quoted the following about the negotiations between Electrica and Fondul:
Fondul Proprietatea holds stakes of about 22% in each of these companies, which are valued at EUR 173 million in its portfolio. Electrica, which is 49% controlled by the state, was looking to pay a price closer to EUR 100 million, according to sources familiar with the negotiations.
According to Fondul’s annual report, the value unlisted companies in the following way:
Illiquid or unlisted securities are valued using either the value of shareholders’ equity, as per the latest available annual financial statements, proportionally with the stake held, or according to international valuation standards which permit fair valuation.
One could say OK, valuing at book value is even conservative. But if we look at Electrica itself, which is currently valued at around 0,72 x Book, one could argue that valuing 22% minority stakes in subsidiaries at book is optimistic based on current market values. In Electrica’s case I would argue that the intrinsic value is a lot higher but still, market values are market values. So for the time being, I would adjust all the minority stakes of the electricity distribution companies at least by 25% to reflect current market valuations.
The big “unknown” however in the portfolio is Hydroelectrica. With around 17% of the portfolio, it is the second largest position after OMV Petrom. The interesting fact is that currently the company is still insolvent at the time of writing. According to Fonduls annual report however, the company is now profitable again and the most likely candidate for the next privatization. In any case, the actual value of this stake does have some uncertainty as well. As most of the big Romanian energy shares trade below book value (Transelectrica at 0,8, Electrica at 0,7 etc., I would also discount this position by 25%.
So a very simplified valuation with a 25% discount on all unlisted shares and values as reported for the rest would give an NAV (based on April 30th) of:
Listed + Cash 6.641
Unlisted 4.858 (6.477*0,75)
– liabilities – 43
Divided by 12.200 mn shares we would get an “adjusted NAV” of around 0,94 RON against a price of 0,90 RON end of April with a resulting discount of around 4,2%. Still a discount but clearly lower as the “official” discount.
+ short-term catalysts (Sale of OMV Petrom, IPO of Hydroelctrica)
+ active management including share buy backs
+ underlying assets are also in principle attractive
+ Romanian economy on a growth path
– relatively low discount with conservative adjustments
– “oil price risk”
– be careful when investing alongside Singer/Elliott
All in all it is an interesting position but not a “must buy” for me at the moment. What could change my perception ? I guess mostly a strong drop of OMV-Petrom which will most likely directly feed through into the fund price and/or a succesful float of Hidroelectrica.