Aberdeen Latin American misses out on Petrobras recovery

Aberdeen Latin American misses out on Petrobras recovery – Aberdeen Latin American Income has published results to the end of August 2018. The NAV retreated by 18.8% in sterling terms, lagging its benchmark’s loss of 10.9%. The share price return was -18.5%. The chairman’s statement lays the blame for the falling benchmark on “the liquidity squeeze on the US Dollar. This stemmed from the US tax reforms that encouraged American companies to repatriate cash back home, as well as the Federal Reserve’s tightening stance, both quantitatively and via its interest-rate policy. The Dollar strengthened as a result, putting additional pressure on vulnerable economies with substantial foreign debt used to finance their fiscal deficits.” This was bad news for Argentina, in particular. Mention is also made of Trump’s trade rhetoric, weaker commodity prices and politics.

The earnings were 3.8p (2017: 4.8p) per share and the dividend was maintained at 3.5p. “The Company has no current plans to alter the level of the dividends payable to shareholders.”

The manager is rebating any management fee that would push the company’s ongoing charges ratio over 2%.

Extract from the manager’s report

Stock selection in Brazil was the primary cause of underperformance during the period. Not holding the Brazilian state-owned oil giant, Petrobas, was a key driver of underperformance. Similarly, our overweight positions in certain Brazilian stocks dented performance. Food producer BRF suffered, as a meat scandal and truckers’ strike impacted second-quarter results. However, the company has taken a positive step with the replacement of its board and chairman, initiated by our efforts to drive improvement of governance within the company. The new management’s effort towards improving market share, extending debt maturity and selling assets to deleverage the balance sheet is encouraging. We added to our position in BRF after the election of its new board and the welcome improvements in corporate governance.

Another detractor was fuel distributor Ultrapar, whose net profits fell by 79% from a year ago. It failed to reassure investors on future growth, which led to a sell-off in the stock. However, we continue to have confidence in its defensive qualities and the strong distribution network that the company has across the country. Retailer Lojas Renner’s second-quarter results were weak due to the truckers’ strike, which capped same-store sales growth. Investors also took profits in mall operator Multiplan on price strength after it posted good results despite a slowdown in sales. Other key operating metrics were upbeat, including improving rents and lower delinquency rates.

Our underweight position in the miner Vale detracted from relative performance and was only partially offset by our off-benchmark allocation to Vale’s holding company Bradespar which trades at an attractive discount to Vale and held up well during the period. Vale reported good results on higher nickel prices and declared that it will return money to shareholders via a cash back and share buy-back plan. Moreover, the company may also benefit from the Brazilian government’s longer-term push for electric vehicles as demand for nickel is set to rise in line with expected demand for batteries.

In Argentina, lender BBVA Frances’ share price was weak, despite better-than-expected second-quarter results in a deteriorating macroeconomic environment. We like the company as it is well managed with a conservative strategy and a healthy balance sheet. It also has the lowest non-performing loan ratio among its peers. We took advantage of the sharp correction in the Argentinian Peso and the market, to add to the portfolio. In contrast, Argentina’s IT service provider Globant and steel-pipe manufacturer Tenaris saw their shares advance, given their limited exposure to the domestic market. Over the year, we introduced Globant, which was trading at attractive valuations. The software company is focused on the fast-growing digital consulting and emerging technologies businesses, and has a well-diversified client base. Meanwhile, we took profits in Tenaris on the back of the higher share price. Nevertheless, we do like the company for its healthy balance sheet and investments in global oil extraction.

Mexican airport operator, Asur, added to relative performance. While the company suffered from dampened sentiment following natural disasters in Mexico, its development programme is expected to be value-enhancing, reaffirming our conviction in the company. Similarly, our holding in the Mexican lender Banorte was a positive as second-quarter profits jumped 27%, driven by increases in its loan portfolio. We topped up the position during the year.

The lack of exposure to several index heavyweights in Latin America, such as education major Kroton Educacional, media giant Grupo Televisa, infrastructure concession operator CCR, cement company Cemex and card operator Cielo all proved beneficial, as they tracked the wider market’s decline over the period.”

ALAI : Aberdeen Latin American misses out on Petrobras recovery

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