Q1 Update + Launch of the VGV Portfolio
Updates on Kaspi, Airtel Africa and HIFS after Q1 earnings - plus the official launch of the Very Good Value portfolio, and some thoughts on a unique airline.
The S&P 500 has had a very strong first half of 2024, up 15.7% year-to-date at the time of writing. In comparison, the three stocks I have covered so far have moderately outperformed in aggregate - HIFS is at the same price as when I wrote it up on Feb 2nd, AAF is up ~26% since March 9th, and KSPI is down ~2% since April 2nd.
Of course, share price changes on such a short timescale mean very little. What matters is developments in the underlying businesses - I’ll get to that soon.
To give a brief and unsolicited summary of my current views on US stocks, I continue to find the vast majority of the S&P unattractive at present valuations. The aggregate PE ratio is now 28.5 according to GuruFocus, and the Shiller PE (which uses 10Y avg. earnings) is above 35 - both of these numbers are pretty unusual historically (the median Shiller PE over the past century is 16).
However, UK and emerging markets still seem to have a lot of decent opportunities and my list of things to look into now is longer than ever. Globally, banks also continue to sit at low multiples to earnings and book - if you can find those where strong deposit franchises and quality management overlap, I suspect you’ll do very well.
As mentioned in my recent post on Kaspi, I plan to begin doing shorter, more digestible analyses, alongside some more casual investing-related ramblings; unfortunately, with uni exams coming up in June I’ve been unable to find any time to get deep into anything (even this post is eating my precious revision time, but Lord Almighty did I need a break from pipe network analysis). However, with any luck I should be able to get a couple more write-ups out over the summer.
For the time being, let’s look at those I’ve already written up - Kaspi, Airtel Africa and Hingham Institution for Savings.
Kaspi
I described Kaspi as the definition of high-risk, high-reward, which means no news is generally good news - and Q1 2024 was pretty unremarkable. YOY comparisons still look excellent (payments volume up 42%, marketplace revenue up 108%, total finance value up 48%) due to excellent growth throughout 2023. On a QOQ basis, payments volume is down 2%, marketplace GMV down 3.5%, TFV down 5.6% - but a decrease is to be expected, as Q1 is their weakest quarter; and in fact if we compare to the same two quarters last year, when the equivalent figures were -8%, -20% and -18%, it looks very strong. Management reiterated their guidance of 25% net income growth.
If I had to pick out a couple interesting points:
Marketplace is shifting quickly from m-commerce to e-commerce - the ratio of the two was 60:40 in 2023, but in Q1’24 was 51:49. This shows the people of Kazakhstan are continuing to put more trust in Kaspi’s marketplace, as well as being good for earnings since e-commerce is higher take-rate.
Their offerings around cars (classifieds marketplace, direct car sales, auto-lending, parts, vehicle registration, tax payments and so on) seem to be developing into a nice cohesive ecosystem. They directly (as opposed to 3P marketplace) sold 1200 cars in the quarter via their new 1P car business, already at a positive net margin, and car loans rose from 3% of TFV to 4%.
In Kazakhstan as a whole, there haven’t been any major developments. Currently, the biggest story in the country is the trial of a Kazakh ex-minister, Bishimbayev, who beat his wife to death. The outcome of the trial will serve as an indicator of whether Tokayev intends to keep to his promise of a more transparent government.
Kaspi’s stock is currently at $129, down 2% since I posted the write-up - I think it continues to represent excellent value.
Hingham Institution for Savings
HIFS is currently at $170, the same as when I posted my write-up in early Feb. Q1 earnings were in-line with my expectations - NIM dropped another 4bps to 0.85% (which I suspect will be the bottom), deposit growth continued at high single-digit rates, and credit quality remained pretty flawless.
Notable points:
M&A and refinancing activity in the San Francisco market has begun picking back up, and they have hired a new specialised deposit group manager in SF (I like that this bank is run leanly enough that the hiring of a new banker is a notable point)
“The net interest margin appears to be stabilizing at this point, as short-term market rates have remained stable, the pace of increase in the Bank’s deposit costs has slowed or reversed in some products, and asset yields continue to climb slowly and sustainably.”
Several “respected competitors” in Boston, Washington and SF have pulled out of these markets or merged with larger regional banks, which should slightly reduce competitive intensity for HIFS
My write-up largely focused around the path to recovery of Hingham’s NIM, as interest rates come back down. At the time, treasury future prices indicated an expectation of ~4 rate cuts by the end of 2024, and I was more than happy to accept market consensus on that one (if I could predict interest rates better than the market, I wouldn’t need any of this value stuff to get filthy rich). However, rate cut expectations have been tempered as mentioned, and now the expectation is for 2 cuts by year-end.
This is ultimately bad for HIFS, but it doesn’t ruin the thesis or anything - just pushes the recovery time back a few quarters. So perhaps it will now be 2026 before they’re earning $60m again, but with the market cap still under $400m, that’s fine by me.
Airtel Africa
AAF is currently at 119 GBp, 26% higher than when I posted the write-up in March
The big uncertainty when I wrote the piece was around the Nigerian currency crisis. I had sort of hoped the currency might steady itself by now, but that doesn’t really seem to have happened - after hitting over 1600 NGN per USD in March, when I published the piece, the Naira climbed to 1100 in April, but has since slumped back to ~1500.
(Interesting side note - AAF’s stock price didn’t really follow the Naira like one would expect during this period; even as the Naira fell 30% back to 1500, the stock rose higher. Reminds me of this post from YAVB on broken correlations.)
One likely cause of the slump is the fall in oil exports. They fell from 1.4mbpd in May 2023 to 1.25 this May, far below OPEC’s 1.5m target, despite the NNPCL’s claimed progress in fighting oil theft. The Dangote refinery, which should mean Nigeria can finally stop importing refined fuels from *Europe*, is also taking a little longer than expected to come online - the ramp up to full production is now expected to take until 2026, though volumes in 2024 and 2025 will not be insignificant.
Interestingly, Nigeria actually fared the best of AAF’s three geographical segments in Q1 in terms of margins - EBITDA margin was virtually flat YOY, while East Africa and Francophone Africa saw drops of 4.0% and 4.8% respectively, mainly due to energy price inflation. Malawi’s reserve bank also dropped the Kwacha’s exchange rate from 1180 to 1700 last quarter.
Unfortunately though, the worst is probably yet to come in Nigeria. The price of diesel (which they use to run towers) increased sharply - a year ago it was around 850 NGN/L, by the end of 2023 it was 1100, and now it’s more like 1400. For every 100 NGN/L, their margins should fall by about 1%. It’s difficult to know how much impact is already baked into their most recent results without knowing what their fuel contracts are like in Nigeria - but we can probably expect a 2-4% EBITDA margin drop in the next couple quarters. Although, the ramp up of Dangote Refinery may start putting downward pressure on diesel prices again.
However, I don’t want to miss the forest for the trees here. As I said in the write-up, it’s Africa. Currencies are weak, corruption is rife, economies are vulnerable - but so long as (1) Africa as a whole continues to grow and digitalise, (2) Airtel Africa maintain, and hopefully continue growing, their high market share, and (3) they maintain their impressive cost leadership (aided by access to Bharti Airtel’s enormous supply chains), they are bound to do well over time. From that perspective, the quarter has actually been very good. Regarding growth, total customer base is up 9% YOY to 153m, data customers up 18%, data usage up 45%, and mobile money customer base is up 20%. On market share growth, they wiped the floor with MTN, their closest competitor, who only saw a 1% increase in customers YOY. And on cost leadership, MTN suffered much more, with EBITDA margins dropping 5.8% YOY.
Altogether, the shares are slightly less attractive than when I posted due mainly to the price increase, but I still believe they’re a good way undervalued, and have no intention of selling for a while yet.
The Very Good Value Portfolio
I quite like the idea of rigorously tracking the performance of the analyses I post on here over time - I think it will be useful for myself and others to be able to look back and see which theses worked and which didn’t, which strategies (GARP, cigar butt, special sits) I’ve done best with, and so on. It’s also just an element I really like in other investing blogs I read.
So, this is the official beginning of the VGV portfolio. Some basic rules:
It will only include stocks I’ve posted write-ups on - I don’t like the idea of broadcasting a pick without broadcasting the idea behind it. So it won’t exactly match my actual portfolio, but it should drift closer over time.
It will be fully invested all the time (if the market reaches a point where I literally can’t find anything interesting, this may have to change, but this seems unlikely)
Weightings will only be updated explicitly in posts, not behind the scenes (though they will change as the stocks fluctuate)
Dividends will be immediately reinvested into the stock that paid them
The starting amount will be $10,000
Performance will be tracked with this google sheet.
Obviously, I’ve only written up three companies so far - but if three’s a party, three can be a portfolio. The starting weights, based on my conviction, are 40:30:30 for Kaspi, Airtel Africa, Hingham.
(The share prices don’t quite align with the publish date as it took me a while to get this post out - official start date, from which performance will be measured, is May 3rd 2024).
A Brief Note About Allegiant Air (ALGT)
Allegiant Air is, in my opinion, the best-run airline in the US. They’re an ultra-low-cost carrier (ULCC), similar to Spirit or Frontier, and have achieved by far the highest operating margins of any major US airline over the past decade.
The reason they’re able to achieve this, other than just strong cost control, is their route model. Almost all major US airlines run the ‘hub and spokes’ model, with frequent flights between major hubs, then short flights from a regional hub to surrounding small cities. Airlines running this model tend to prioritise having the planes in the sky as much as possible (high-utilisation), rather than having each flight be as full as possible (high-capacity). Allegiant takes a different approach, offering 543 direct routes from 90 small cities across the country to 33 larger destination cities, mostly in the sunbelt. On 428 of these routes, they face no direct competition.
For example: if I wanted to travel from Bozeman ID, to Austin TX on May 30th with any non-Allegiant airline, my best bet would be a $150, 5h30 flight with a stopover in Dallas. Allegiant offers a 3-hour direct route for $45.
The great strength of this model is that most of these routes have low enough demand that it doesn’t really make any sense for another airline to move in, not to mention that it wouldn’t fit in well with their flight model generally (the more you have to move planes between airports without any people on them, the worse your costs get). This leaves Allegiant with a reasonable amount of pricing power, which allowed them to reach operating margins often in the 20s during the 2014-19 stretch (in 2015 it was almost 30%!), while other operators were generally hovering around 15%. And in 2020, while other operators recorded operating margins of negative 40-90%, Allegiant’s was just -12%.
However, the curse of low-cost airlines is a higher sensitivity to fuel prices - with the spike in kerosene prices over the last couple years, their results have fallen more in line with the crowd.
In response, the market has, in my opinion, massively overreacted. After peaking at over $250 in March 2021 (a very optimistic time, admittedly), shares are now trading at just $54. For context, that’s the same as back in 2012, when their revenue was 40% of what it is now. Earnings between 2015-2019 averaged over $200m, and the market cap is just $930m at the time of writing - even if they can’t get back to the same margins, revenue has increased significantly since then, and they should be able to get their earnings back up to $200m within a couple years, if jet fuel stays where it is. So one could quite easily view this as a growth company, trading at <5x normalised earnings due to short-term headwinds.
That’s the other weird thing here - jet fuel prices have been coming down over the last few months and are almost back to “normal” levels now, and yet the stock price has been coming down with them. It’s another one of those seemingly broken correlations.
That being said, there are still significant headwinds remaining. One of the biggest is the pilot shortage, which is driving payroll costs up across the board but especially for the smaller operators, who tend to bleed pilots to the better-paying legacy airlines (American, Delta, United and Southwest) every year.
Anyway, I’ll leave it there for the time being. Hopefully I’ll be able to get out a more in-depth analysis of Allegiant within the next few weeks, but in the meantime if anyone is familiar with the company, please do send me a message - would be great to hear any thoughts, positive or negative.
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Well done on HIFS - 30% appreciation in the past month.