With Ukraine and Russia on the brink of war, the regions’ investors have run for cover and I don’t blame them – it requires a lot of conviction to invest within a region that is teetering on the edge.
That being said, Ukraine as a whole is not a bad place to invest. Many Ukrainian listed companies are management-owned and run, as a result, abnormal profits and shareholder returns are usually high up on the agenda.
What’s more, the threat of civil war has now pushed the valuation of some companies down to a level which mitigates much of the risk involved. P/E’s of less than 2 are common along with significant discounts to book.
But the question is, are these businesses are worth taking a risk on as a deep value play?
Of course, this is something of an all-or-nothing bet but the returns in some cases could exceed 200% to 300% and some of these companies have been in operation since the 50’s, surviving both the rise and fall of communism.
In my opinion, any company that has survived half a century of communism in one form or another, can survive almost anything.
A defensive play in Ukraine
The best value plays can be found in defensive industries and one of the most defensive industries is the production of food, or in this case eggs.
Avangardco Investments Public Ltd., Co. (OTCMKTS:AGVDY) is a London-listed Ukrainian egg producer and the company’s eggs and egg products are shipped all over the world.
Owned by billionaire Oleg Bakhmatyuk, Avangardco exports to 33 countries around the globe, primarily the fast growing markets of the Middle East, North Africa, and Central Asia. The company is currently progressing with plans designed to make it the world’s largest egg supplier.
Avangardco Investments Public Ltd., Co. (OTCMKTS:AGVDY) is well positioned for this goal. Ukraine is known as Europe’s breadbasket, thanks to the country’s rich black earth and bountiful supplies of grain, which translate into lower costs for the company and a vertically integrated production chain within Ukraine reducing the need for imports. The company has the second largest flock of egg-laying hens in the world after Cal-Maine Foods Inc (NASDAQ:CALM) of the US and expects to start exports to the Eurozone this year. Profits should jump as a result.
The volatile situation within Ukraine has had the effect of depressing Avangardo’s shares to the level where now, despite the company’s lofty growth prospects, the risk of taking a position could be worth the reward.
Based on Avangardo’s London GDR’s based in dollars, the company has a market capitalization of $626 million. Interim results show a shareholder equity value of $1.3 billion, implying a price to book of 0.48 at present levels. Avangardo’s current ratio stands at 4.4 times so liquidity is not an issue. Net debt for the reported period was only $200 million, a gearing ratio of 15%.
Avangardo’s earnings are weighted to the fourth and second quarters but based figures supplied by the Financial Times, the company reported a net income of $350 million on trailing twelve month basis. With just under 640 million shares in issue, figures imply that Avangardco Investments Public Ltd., Co. (OTCMKTS:AGVDY) is trading at a TTM P/E of 1.9. Net income has grown at a CAGR of 24.6% during the past five years.
A cyclical play
Unfortunately, the majority of Avangardo’s facilities are located within the East of Ukraine, where the recent violence has been taking place. In the West of the country, the side that is still, for the most part loyal to the government and committed to the Eurozone, Ferrexpo Plc (LON:FXPO) is based. Ferrexpo is one of the world’s largest and lowest cost iron ore miners. The company trades on the London Stock Exchange.
Kostyantin Zhevago, Ferrexpo’s majority owner and chief executive, is also a parliamentarian in Ukraine, (Ukrainian businessmen have significant political influence across the country, and the majority are local or national politicians) and Ferrexpo has been mining its current facilities since the 60’s.
It has been said that up to one third of all the steel produced within Europe is made with iron ore from Ferrexpo’s mines and the company is reaping the benefits as production costs per ton are coming in at around $60.
For full-year 2013, Ferrexpo Plc (LON:FXPO) reported EBITDA of $506 million, up 25% year-on-year. Profit before tax jumped 15% and diluted EPS grew 21% year-on-year as shown below.
A special and regular dividend of 9.9 US cents, or 6p per share, as per Ferrexpo’s London listing equates to a yield of just under 4% at present levels. EPS of 44.7 US cents, or 26.8p translates into a historic P/E of 5.8.
Thankfully, Ferrexpo Plc (LON:FXPO) also sought to reassure investors within this full-year release about the situation within Ukraine, stating that:
“We would like to express our profound sadness for the loss of life as a result of the recent political turmoil in Ukraine, and extend our deepest sympathies to the families, communities and colleagues who have been affected.
We are hopeful of a satisfactory political outcome reflecting democratic principles.
At the time of writing, there have been no disruptions to Ferrexpo’s operations in Ukraine.”
However, since the above update was issue, Ferrexpo has issued a further production update, stating that total iron ore pellet production jumped 10.4% year-on-year during the first quarter of 2014, up 2% from the fourth quarter of 2013 and the production of higher grade (65% Fe) pellets produced increased by 320 kt, or 31% year-on-year. It would appear that Ferrexpo is certainly not feeling any sort of impact from the crisis going on in the East of the country.
So both Avangardco Investments Public Ltd., Co. (OTCMKTS:AGVDY) and Ferrexpo Plc (LON:FXPO) present compelling investment opportunities. Both companies are world leaders, they are both profitable, have relatively clean balance sheets, trade at distressed valuations and offer a prospective upside of more than 100%.