Utilico Emerging lags rising global emerging index

Utilico Emerging lags rising global emerging index as shareholders trail MSCI return by 12.2%. Utilico Emerging has announced an NAV total return (adjusted for the exercise of subscription shares) of 26.2% for the full year to 31 March 2017. However, someone who just held the ordinary shares and no subscription shares would have made a total NAV return of 22.5% over this period. This compares poorly with a return on the MSCI Emerging markets Index of 34.7%. Against its peers, only Fundsmith Emerging Equities did worse (returning 17.1%).

Excluding the impact of Asiasat’s special dividend (last year), revenue income increased by 48.2%. Group revenue earnings per share (“EPS”) for the year of 7.70p comfortably covered the dividends of 6.65p, an uplift of 3.9% on the prior year.

Manager’s report

The manager’s report is comprehensive. Below is the section related to portfolio performance and positioning.

Rumo S.A. (“Rumo”), a Brazilian rail transport operator and a new investment for UEM, is now the ninth largest individual position in the portfolio. Transportadora de Gas del Sur S.A. (“TGS”)Power Grid Corporation of India Limited (“Powergrid”), India’s biggest grid operator, an existing investment, is now the nineteenth largest position and Grupo Aeroportuario del Centro Norte, S.A.B de C.V (“OMA”), a Mexican regional airport operator, an existing investment, climbed to twentieth position in the portfolio.

Gasco S.A., which was the eighth largest position in the portfolio last year, was subject to a tender offer during the year at a premium and the Investment Managers took the decision to exit the holding. The Egyptian Satellite Company’s share price decreased by 41.2% over the year; as a result, the investment fell from seventeenth to thirty-fifth position in the portfolio. Metro Pacific Investments Corporation’s share price rose by 2.9%, but not enough to remain in the top twenty, falling from eighteenth to twenty-second position in the portfolio. Asiasat’s share price fell by 9.0% and, as a result, the investment fell from nineteenth to twenty-seventh position in the portfolio.


Brazil is now UEM’s largest country exposure, increasing from 9.8% to 19.6% of the portfolio.

Ocean Wilsons Holdings Limited (“Ocean Wilsons”)

Alupar Investimento S.A.’s (“Alupar”) share price increased by 48.0% in the year to 31 March 2017. The past twelve months have been a particularly active period for Alupar as the regulator improved the rates of return on offer for new transmission line concessions. Alupar won five new 30-year concessions at auction, with a total investment requirement of BRL2.5bn at estimated real returns of over 12%, as well as one additional new concession in Colombia. To help fund these new projects, Alupar undertook a BRL350m capital increase at BRL12.30 per unit and disposed of its 51% stake in Transchile for USD58.9m. The lagged effect of inflation adjustments applied to its operating transmission asset revenues, combined with a 30.1% growth in energy volumes following the commissioning of the Energia dos Ventos wind farm and the Risaralda hydro plant, resulted in group revenues increasing by 4.0% in its financial year ended 31 December 2016. EBITDA growth was steady, posting a 9.6% increase, while normalised earnings grew by 15.8%. Dividends per share fell by 34.8%, reflecting both the circa 20% increase in the number of shares outstanding, as well as the company’s desire to retain cash to fund investment in the new concessions. In the year to 31 March 2017 UEM increased its position in the company by 27.1%.

Rumo is a new investment for UEM and is Brazil’s largest independent rail-based logistics operator. Rumo’s share price increased by 155.4% in the year to 31 March 2017, partly driven by the positive equity market sentiment in Brazil during 2016, but mainly due to a successful BRL2.6bn equity raise in April 2016 which has refinanced its balance sheet and enabled new management to start executing its BRL8.5bn capex plan. With the new funding, the company has been able to improve the operational efficiency of the railway network to ensure that it is able to expand capacity. On the back of the capital raise, the new management team set out clear financial targets, indicating that EBITDA by 2020 will be BRL4.5bn. To date, management has delivered on its plans, which is helping the stock price rerate. Financial performance for the year to 31 December 2016 saw revenues increase by 4.4% despite a 10.3% decline in rail volumes and a 20.2% decline in container volumes, due to lower than expected corn volumes. EBITDA was up by 5.8%, with normalised net income still negative given higher depreciation and financial costs due to the implementation of its capex plan. UEM also has a £4.6m investment in Cosan Logistics, which owns 26.6% of Rumo. As at 31 March 2017, Cosan Logistics traded at a 25.7% discount to Rumo.


China (including Hong Kong) is UEM’s second largest country exposure at 18.5%, decreasing during the year from 26.3% of the portfolio.

China Gas Holdings Limited’s (“China Gas”) share price increased by 9.6% in the year to 31 March 2017. Chinese gas distribution companies have continued to suffer from an uncertain regulatory backdrop as the market stutters towards liberalisation. A key issue has been the setting of the input gas price by the oil majors at levels which, for much of the year, were uncompetitive against fuel oil. This was surprising as it runs contrary to the Chinese government’s commitment to increase the proportion of natural gas in the energy matrix in order to reduce pollution. Nevertheless, China Gas has proven resilient, growing its customer base by 18.1% to 16.2m connections in the six months to 30 September 2016. This helped to deliver piped gas volume growth of 13.3%, while LPG volumes also grew by 25.7%. The financial impact of these strong operational figures was dampened by the lower tariffs reflecting the drop in commodity prices, resulting in group revenues falling by 6.9%. Lower cost of goods sold helped mitigate this decline with EBITDA increasing by 2.9%, though normalised net income still fell by 3.8%. Interim dividends were unchanged on the previous year. In the year ended 31 March 2017 UEM decreased its position in China Gas by 42.0%.

APT Satellite Holdings Limited’s (“APT”)

Yuexiu Transport Infrastructure Limited (“Yuexiu”)

China Resources Gas Group Ltd (“CR Gas”)

Shanghai International Airport Co Ltd (“Shanghai Airport”) saw a marginal decrease in its share price of 0.4% over the year to 31 March 2017 despite solid 2016 financial and operational results. Over its financial year to 31 December 2016, Shanghai Airport saw passenger numbers increase by 9.8%, which continues to be driven by the increase in average Chinese incomes, additional flights being offered by low cost carriers, as well as the growing appetite for travel from the Chinese population. However, the current flight restrictions at Shanghai Airport on ad hoc flights, chartered flights and additional routes issued by The Civil Aviation Administration of China in May 2016 due to an on-time departure rate of below 70% has hindered the airport from fully capturing its total passenger growth potential. For the financial year to 31 December 2016, revenues increased in line with passenger growth at 10.6%, adjusted EBITDA increased by 12.1% and net income was up by 13.3%.


Romania climbed from the fourth to third largest country exposure in the portfolio, increasing from 8.8% to 9.9%.

Transelectrica S.A.’s (“Transelectrica”) shares increased by 13.4% in the year to 31 March 2017. In its financial year to 31 December 2016, domestic demand for electricity remained steady with growth at 1.2%, but with net exports falling by 25%, domestic production fell by 1.7%. With grid losses slightly improved at 2.3%, total volume billed by Transelectrica increased by 2.0%. As the company had over-recovered profits allowed by the regulatory regime in the previous year, tariffs were cut again in mid-2016 by an average of 9.0% and as a result effective tariffs fell by 9.4%. As such, group revenues fell by 7.4%, excluding balancing market services which are profit-neutral to the company. Wage pressures and operating leverage resulted in EBITDA falling by 10.9% and, with a higher effective tax rate, normalised earnings fell by 23.7%.

Transgaz S.A.’s (“Transgaz”) share price increased by 41.9% in the year to 31 March 2017. During the year Transgaz secured a financing agreement with the EU for a new 480km pipeline connecting Bulgaria and Hungary, which is scheduled to be commissioned in 2019. This is an important step towards increasing the regulated asset base and boosting longer-term returns for the company, which could be further enhanced if the Black Sea gas field discoveries are developed into producing assets. In its financial year to 31 December 2016 domestic gas volumes transmitted fell by 1.8%, while losses remained steady at just 0.7%. With the regulator increasing the fixed component of the tariff to 60%, reducing the volumetric (i.e. seasonality) component to 40%, effective tariffs for Transgaz increased by 10.0%. As a result, domestic transport revenues grew by 8.0% which, combined with gas transit revenues which were up by 3.1%, delivered group revenue growth of 8.6%. With high operating leverage, EBITDA increased by 16.4% and normalised earnings by 21.9%. Dividends per share increased by 67.8% as the company’s main shareholder sought to increase the dividend payout to 90% of earnings. In the year to 31 March 2017 UEM increased its position in Transgaz by 11.4%.

Conpet S.A.’s (“Conpet”) share price increased by 28.5% in the year to 31 March 2017. As a consequence of the lower oil price, Romania’s main producer, OMV Petrom, has significantly reduced investments in new wells causing a decline in oil production over the past year. As a result, in its financial year to 31 December 2016, Conpet reported a 5.6% decline in domestic oil transport volume growth, which was more than offset by a 10.0% increase in imports, bringing total volume growth to 1.3%. Following the implementation of relatively small adjustments to domestic tariffs and more significant hikes in the lower import tariffs, overall effective tariffs only fell by 1.3%, resulting in group revenues being broadly unchanged on last year. Lower transport costs enabled EBITDA to grow by 3.4%, which was accentuated at the bottom line by reduced depreciation, with normalised earnings growth of 18.5%. With no debt and cash amounting to over 40% of the market capitalisation accruing on the balance sheet, the company finally looks set to return some of this excess cash to shareholders. It announced a 10.5% increase in its ordinary dividend, as well as a special dividend, taking the total dividend increase to 127%. In the year to 31 March 2017 UEM increased its holding in Conpet by 8.3%.


The Philippines increased from 6.3% to 6.7% of the portfolio and is now the fifth largest country exposure.

International Container Terminal Services, Inc’s (“ICT”) share price increased by 34.5% in the year to 31 March 2017. For its financial year to 31 December 2016, ICT had a solid performance with consolidated volumes up by 11.7%. This was driven by an 11.2% increase in Asian volumes due to the ramp-up of its Pakistan terminals and improved trading activity in Manila; a 20.0% increase in volumes from EMEA due to the contribution from a newly acquired terminal in Iraq; and a 9.7% increase in volumes from the Americas boosted by new terminals in Mexico and Honduras. Total revenue growth for the period was up by 7.1%, not fully reflecting the growth in container volumes as yield per container box was down by USD5 to USD130. Of this, USD3 was due to foreign exchange weakness and USD2 due to less favourable volume mix. Adjusted EBITDA was up by 16.3% due to stringent cost control by management and lower start-up costs as new terminals came online. As a result, operational leverage is beginning to flow through. Normalised net income was up by 16.7%. ICT’s management has indicated that it is slowly changing its investment philosophy from ‘growth’ to ‘growth with dividends’ as it looks to fully utilise its existing operations and to invest only in brownfield projects.


Other Latin America exposure (which includes Mexico) increased from 3.9% to 6.6% of the portfolio and is now the portfolio’s sixth largest geographic exposure.

OMA’s share price over the period only increased by 1.6% despite the Mexican airport operator reporting solid 2016 financial results. In line with the wider Mexican markets, OMA’s share price was unfortunately affected by the election in the US of Donald Trump whose threats of ‘ripping up’ NAFTA negatively impacted investors’ sentiment. Operationally, its financial year ended 31 December 2016 was robust, with total revenues for OMA up 23.1%, with aeronautical revenues increasing by 27.7%, driven by a 10.9% increase in passengers in addition to a tariff increase in 2Q16. Non-aeronautical revenues over the period increased by 19.7%, benefiting from the growth in passenger numbers as well as from commercial diversification by the company. Adjusted EBITDA was up by 35.7%, with EBITDA margin expanding by 470bps to 63.8%. Normalised net income was up by 48.1%. Given the increase in average wages in Mexico, along with the increased airline capacity provided by the low-cost carriers, flight penetration is expected to continue to rise from its low base over the short term, providing a positive outlook for the sector.


India’s country exposure increased from 4.6% to 6.1% of the portfolio over the year to 31 March 2017.

SJVN Limited’s (“SJVN”) share price increased by 17.5% in the year to 31 March 2017. Following a period of growth subsequent to the commissioning of the Rampur hydro project, the past year has been one of more stable performance for SJVN. In the six months to 30 September 2016, SJVN reported that energy generation from its hydro facilities declined by 2.6%, as hydrology normalised downwards following the very strong prior year. Indeed, it is notable that with a load factor of 83.9%, production efficiency remains at excellent levels. By comparison the wind farm assets performed poorly, with output falling by 27.5% due to outages caused by turbine issues. That said, the wind assets are insignificant when compared to the scale of SJVN’s hydro assets and overall output fell by just 2.7%. With minimal change in effective tariffs, this resulted in revenue and EBITDA falling by 2.5% and 3.5% respectively, while normalised earnings increased by 4.7%. SJVN has retained a very strong net cash balance sheet for many years, whilst maintaining a modest dividend payout policy of c.30% of earnings. However, this year the government has sought to address this situation in part by announcing an increase in the interim dividend of 257% (equivalent to an almost 100% payout of earnings). In the year to 31 March 2017, UEM increased its position in SJVN by 26.3%.

Powergrid is a new company in UEM’s top twenty holdings and is the portfolio’s second largest investment in India. This position was initiated towards the end of 2013. Powergrid is a “Navaratna” Central Public Sector Enterprise which has been listed since 2007 and is the dominant electricity transmission utility in India. The company operates a grid totalling c.140,000km of transmission lines and 219 substations, accounting for approximately 90% of the country’s inter-state and inter-regional network. The company is 57.9% controlled by the Government of India and its assets are fully regulated by the Central Electricity Regulatory Commission under a regime which allows a 15.5% return on equity, though the company can often exceed this via performance incentives and efficiency gains. In addition to the transmission operations, Powergrid also offers some telecoms and consultancy services, although these are much less significant to overall financials, accounting for less than 5% of group revenues.


Malaysian investments decreased from 13.7% to 5.3% of the portfolio and fell from second to the eighth largest country exposure.

Malaysia Airports Holdings Berhad’s (“Malaysia Airports”) share price increased by 2.8% in the year to 31 March 2017. Performance at the Malaysia-based airports improved during its financial year to 31 December 2016 with passenger growth for the year at 5.5%, up from the muted 0.6% passenger growth seen in 2015. Management has indicated that passenger growth for 2017 is expected to be up by 6.5% as traveller sentiment has improved since the tragic events of 2014. In addition, capacity has been added to the market through low-cost carriers, as well as by Malaysia Airlines following its restructuring in 2014/2015. The drag on Malaysia Airports’ share price has come from its 100% investment in Sabiha Gokcen International Airport (“ISG”) in Istanbul. ISG only saw 4.6% growth in passengers in 2016, compared to the highs of 19.7% growth that was seen in 2015. Passenger growth was deflated due to the political events that rocked Turkey throughout 2016. Management is hoping for traffic growth to improve in 2017 to around 7.2%. Financial performance for its financial year ended 31 December 2016 saw group revenues up by 7.8% and adjusted EBITDA up by 7.7%. Normalised net income was down for the period by 41.0%. Post full year results, Malaysia Airports reported that it has finally received government approval for the extension of its concession for its Malaysian airports until 2069.

MyEG Services Berhad (“MyEG”) continued to see strong upward momentum in its business during the period, with its share price advancing by 30.3% during the year to 31 March 2017, adjusted for a 1-for-2 bonus issue in December 2016.


Argentina’s exposure increased significantly from 0.3% to 4.8% of the portfolio in the year to 31 March 2017.

TGS is one of the portfolio’s most recent investments, having only been initiated in spring 2016 and is a new entry in the top twenty. TGS is the largest natural gas transmission company in Argentina. It transports almost two-thirds of the country’s gas, predominantly to Buenos Aires from gas fields in the south of the country. It owns a pipeline network totalling over 9,000km in length and has an operating license through to 2027, with a ten-year extension beyond this. TGS also owns a hydrocarbon liquids processing plant which produces propane, butane and ethane. This is sold on commercial terms to its major client, Dow Chemical. Under the Kirchner administration, tariff increases for the gas transmission network significantly lagged inflation, failing to provide agreed regulatory returns. However, under the new government, regulation is being reapplied in steps. As a result, TGS saw effective tariffs hiked by over 100% in the year to 31 December 2016, with further hikes of 30% and 40% being implemented in April and December 2017.


Thailand exposure has decreased from 6.8% to 4.8% of the portfolio.

Eastern Water Resources Development and Management PCL’s (“Eastwater”) shares performed poorly in the year to 31 March 2017, falling by 10.1% over the period. Eastwater continues to suffer from the lack of a proper regulatory framework. This has led to a failure by management to sustain returns through the implementation of tariff increases. This was reflected in operational figures, with raw water volumes falling by 7.4% in its financial year ended 31 December 2016. It is notable that while demand from industrial estates was relatively robust, up by 7.9%, demand from its largest customer (state-owned Provincial Waterworks Authority) fell by 17.7%. With no tariff increases, resulting raw water revenues fell by 7.0%. Meanwhile tap water demand has remained strong, boosted by recent corporate activity, with volumes up by 11.0% and effective tariffs up by 8.2%. As a result, group revenues were flat on last year; EBITDA growth was just 0.4% and normalised earnings fell by 4.6%. Dividends per share were unchanged on last year. In the period under review UEM decreased its holding in Eastwater by 19.3%.


Chilean exposure reduced from 6.2% to 3.8% of the portfolio in the year to 31 March 2017.

Engie Energia Chile S.A.’s (“E.CL”) shares increased by 9.7% in the year to 31 March 2017. Over the past year, E.CL has continued construction of its USD1.1bn 375MW coal-fired facility, as well as its USD780m transmission line project (“TEN”) to connect the central and northern grids, which are due to be connected in 2017 and 2018 respectively. In its financial year to 31 December 2016 E.CL reported electricity sales volumes down by 2.3%, as some smaller contracts from the unregulated sector (predominantly mining companies) rolled off and were not replaced. By comparison demand from regulated customers was stable at 0.9%, though revenues from these customers were impacted by the lagged effect of bi-annual indexation to Henry Hub prices and US CPI. As a result, revenues from energy sales fell by 7.2%. After a strong year for gas distribution sales in 2015, revenues from this business line fell by 90%, reflecting the volatile nature of these sales, which are dependent on E.CL’s contracting of LNG cargos and third-party demand. As a result, overall group revenues fell by 15.3% and EBITDA declined by 8.8%. Reported net profits were boosted by the sale of a 50% stake in the TEN project, however, after adjusting for the gain on disposal, normalised earnings fell by 11.4%. E.CL increased its dividends per share by 227%, demonstrating good capital discipline following the disposal. UEM increased its shareholding in E.CL by 32.9% in the period under review.

UEM : Utilico Emerging lags rising global emerging index

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