Jupiter Emerging and Frontier celebrates good year – Jupiter Emerging and Frontier Markets has published results for the year ended 30 September 2019. The share price and NAV total returns were +4.0% and +10.5%, respectively. This compares with a total return of +3.7% for the benchmark, the MSCI Emerging Markets Index. The dividend was increased by 9.5% to 4.6p.Once the interim dividend for the 2018/19 financial year of 2.4 pence per share has been paid to shareholders on 17 January 2020, the intention is to adopt a system of four approximately equal dividends annually, to be paid in January, April, July and October.
The board is disappointed that the discount widened – from a 0.8% premium to a 5.4% discount over the period. It is 4.5% today. We discussed this in our last note on the company – Unjustified discount.
Extract from manager’s report
[we love how detailed this is – it helps investors a lot when managers explain their thinking]
“Positive contributors to performance included Taiwan chip designer, Mediatek, Indian refiner and fuel marketing company, HPCL, Taiwan electrical component supplier, Bizlink and East African bank, KCB. Detractors from performance included South African health and wellness products company, Ascendis, and Bank of Georgia.
Mediatek was one of the best performing holdings in the portfolio over the period, rising by over 55% in sterling terms. As the world’s number two mobile phone chipset designer after Qualcomm, the company is very well positioned to capitalise on rising demand for 5G handsets. Our recent discussions with the company and other firms within the technology sector lead us to expect that sales and margins should both rise materially for Mediatek in 2020 on the back of new products, higher average selling prices and better volumes.
For HPCL, our long-term investment thesis is premised on increasing profitability and good growth prospects across multiple divisions, including refining, pipelines, branded lubricants and fuel retailing. Strong performance over the period was driven by several factors, including the cuts to Indian corporate tax rates, announced by the government in September of this year. HPCL will see a material benefit, as its tax rate will fall from 35% to 25% under new rules. Additionally, expectations of improving refining margins and the potential sale of stakes in domestic refining and marketing businesses to international buyers helped attract new buyers into the stock.
Bizlink, which supplies wire harnesses to Tesla and laptop PC docking stations to Dell, recovered strongly after a weak start to 2018, as investors came to appreciate the potential for continued revenue growth across its IT and auto product divisions, as well as scope for margin expansion, as product mix improves. We remain positive on the outlook for Bizlink, given meaningful barriers to entry for its key products and structural demand growth in the end markets served by the Company.
KCB is a retail and commercial banking group, which holds a leading position in Kenya and has operations across several East African countries. The company is well-positioned to benefit from rising financial inclusion in Kenya and has enjoyed strong growth in mobile banking revenue in recent years. For much of the past three-year period, however, the stock languished at close to historic low valuation levels because the introduction of interest rate caps dampened sentiment towards the sector. This has changed with the recent repeal of rate capping legislation in the country and Kenyan and financial stocks, including KCB, have begun to rerate.
Weakness in the share price of Ascendis, which sells healthcare products across Europe and Africa and distributes medical equipment to hospitals, was caused by a general aversion amongst South African domestic investors towards companies that have made European acquisitions. This negative sentiment was compounded by lower-than- expected cash generation for some divisions and the forced selling of shares by a significant shareholder of Ascendis. This year, changes have been made at board level and a new CEO has been appointed. Our conversations with the new Chairman and CEO have been encouraging and there appears to be a credible strategy in place for turning around the company’s fortunes.
Bank of Georgia’s share price fell over the year, despite the company delivering good earnings growth and we took the opportunity to add on weakness. Bank of Georgia is well-positioned to benefit from rising financial product penetration in a country that has been delivering an ambitious reform agenda. The stock was weak over 2019 due to a combination of Turkey contagion concerns and discussions for a limit on consumer lending in Georgia. Ongoing conversations with management, along with solid results from the company, give us confidence that the Georgian banking system remains robust and that changes to banking regulation are far less restrictive than previously feared. In addition to what we believe is an attractive valuation, governance at the bank is good, with most of the management team’s remuneration in the form of long-vesting equity.
Activity
During the year, several positions were exited, including Cambodian gaming business and hotel operator, Naga Corp, African telecom operator, MTN, and Chinese automation equipment maker, Hollysys. Naga, MTN and Hollysys had been held by the Company since 2017 and these sales were not driven by any fundamental concerns for these businesses (each of which has delivered good operational performance) but by opportunity cost, as we identified new target holdings that we considered to be higher conviction ideas, including Orbia in Mexico, Porto Seguro in Brazil and SK Hynix in South Korea.
Orbia (a producer of fluorspar, petrochemicals and irrigation systems) is moving from being a simple commodities business to a vertically integrated producer of speciality products and solutions, which should lead to less cyclicality, higher sustainable returns and, therefore, an improved valuation rating.
Porto Seguro is a Brazilian general insurer, which currently has quite a high reliance on auto insurance (around 50% of the company’s earnings). We believe that there are significant changes occurring that the market is yet to price in. Firstly, there is potential for auto insurance revenue to recover from last year’s very low base, as auto sales pick up. Moreover, the company is diversifying into other areas including P&C and life, which we expect will lead to a rerating of the company’s shares over the next 2-3 years.
SK Hynix is one of the world’s leading manufacturers of memory chips used in PCs, mobile phones and servers. We believe that a combination of structurally rising demand for memory chips and an industry that is now far more consolidated than in prior cycles should lead to higher sustainable returns for the company. Moreover, management of SK Hynix have committed to paying 40-50% of free cash flow out as dividends, which is a significant positive change in its shareholder returns policy.”
JEFI : Jupiter Emerging and Frontier celebrates good year