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2024

January

In January, we met with the CEOs and management of 40 companies from a dozen emerging markets. We noticed improving business sentiment, which bodes well for earnings of companies in our fund’s universe.

 

This month, the fund invested in a $1.5b cement producer in Saudi Arabia which benefits from an exceptionally strong long-term demand outlook in light of the massive pipeline of megaprojects in the country along with construction activities for the Expo 2030 and 2034 FIFA World Cup. The largest domestic producer, this business has been growing output capacity in the last few years by installing highly efficient brand new production lines made in Germany; it uses clean energy as opposed to diesel, thus having escaped the enormous recent diesel price hike of 53% which affected its competitors and triggered cement prices to increase over 40% in the past month – a positive for our company as the price increases go directly to its bottom line; and with a 15x LTM P/E valuation, it has cemented its place as the cheapest among peers. In addition to the perfectly aligned fundamentals and increasing cement prices, there is even more to this investment case: it comes with an extraordinary catalyst. The company has recently transferred its old factory out of Riyadh and the vast 4.7m sqm land plot under the old factory – which the company fully owns – will soon become available for sale or joint venture real estate development. Market price of this land in Riyadh is over $1b, or more than two thirds of the company’s market cap! Clearly, a lot of shareholder value is waiting to be unlocked soon.

 

The fund also bought a $75m home appliances firm in Pakistan trading at a forward P/E of only 5x, which guides for over 150% earnings growth this year on the back of strong demand and relaxation of import rules. This firm’s stock price had already doubled for our fund nearly a decade ago and we are looking for a repeat. 

 

At the end of the month, the news came out that the government of Saudi Arabia instructed Saudi Aramco (the world’s largest oil company) to halt a capex-heavy project of expanding its daily oil output capacity from 12m to 13m barrels a day. The same day, our largest portfolio position which comes from Saudi Arabia and has the word “Pipes” in its name, lost 10%. To us, this was a clear example of how our $300m company with no analyst coverage and with no active investor relations presence is misunderstood by the market: the vast majority of the company’s backlog and production is in pipes for gas projects and has nothing to do with oil exploration and drilling. Gas-related projects are a major focus of Saudi Arabia as it aims to produce more environmentally friendly energy, and there seems to be no stopping those projects in the years to come. As such, the fundamental standing of our company – which trades at its all-time-low valuation of 9x LTM P/E despite having bagged a record-high backlog last year that will drive record-high earnings in the next two years – is not affected by this news. One day of erroneous market perception would never define our long-term investment outlook; in fact, we actually quite like such misunderstood cases: it takes time for the market to understand them, but when it finally does recognize the value, the returns can be outsized. The stock has delivered nearly 50% return to the fund in the last quarter, and we estimate it has potential to double in the next 12 months. 

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