During the International Value Investing Conference 2018 (IVIC 18), we had the chance to talk to Steve Gorelik of Firebird Management about Value Investing in Eastern Europe. Steve joined the company in 2005 and is currently the Head of research.
Steve originated from Belarus. As a business school student, he decided to focus on Value Investing in Eastern Europe. With Firebird Asset Management he found the “natural place to work” as the company focusses on investing in Eastern Europe.
The good and bad thing: Valuations in Eastern Europe are low
In his eyes, the bad and the good thing about Eastern Europe is, that the market always look(ed) attractive: Currently, the multiples are low – but they also have stayed low for a while.
There are a lot “headline topics”, like corruptions or sanctions, that hinder investors from considering Eastern Europe as an attractive target. Steve experienced in his engagement on the ground, that the headlines don’t reflect a lot of positive changes, that were and are happening. He also thinks, that these positive changes are overlooked by the market.
For Steve multiples also seem to be too low. At the time of our interview the MSCI Eastern Europe was trading at a PE of 7, while the MSCI World is trading at a PE of 16. The valuations look even more compelling, if you recognize the dividend yield of around 5% in the Eastern European markets and Russia. 2005, where the PE was in the same ranges, the dividend yield is was only 1,5%. Today the market has a higher quality: The companies are way more experienced in acting in a capitalist market as they were years ago. Cash allocation and the focus on return of capital has improved dramatically.
Asked on risks in Eastern Europe and especially political risks in Russia, Steve answered that the system in Russia allows you to make money, if you know the rules and stick to them. They had court battles and won them against local interests. So, there is a certain protect for foreign investors.
Hunting for two types of businesses
At Firebird Management Steve and his team is looking for two types of businesses:
- Companies with high quality assets. This are for instance oil companies in Russia or Kazakhstan, that can extract a liter oil for around 5 $ per barrel.
- Companies, that developed over time and have learned to compete in a very competitive environment with local and foreign competitors. These businesses can be especially found in countries like Romania, Georgia or in the Baltic.
In both types of businesses Firebird is looking for good capital allocation. This is becoming easier and easier, as good capital allocation is becoming more engrained in the way of doing business.
For Steve competitive advantages, that come from businesses models or assets are the main field of research and investment. For him the competitive advantage must create cash and the cash must be distributed in a good way for shareholders. If companies fit to that criteria, they can be an investment for the fund. At the time of the interview the overall Firebird fund had a PE of 7-8 and a dividend yield of 4,5%. During the last years the companies in the fund were growing by 13 %.
Georgia as an interesting country for Value Investing in Eastern Europe
In Steve’s eyes, Georgia is very interesting country for considering investments. As the company opened and became capitalistic Firebird Management was one of the first investors in the country. Since then they participated in a very interesting and good development of the country. Through their presence they got to know a lot of good run companies with great capital allocation.
An area, where they found compounders in Eastern Europe, are locally owned, locally run banks. A good example is the Bank of Georgia. Firebird Management was one of the earlier investors in the company. Since then the bank was and is compounding a from a low base. A growth of annually 10-15% was coming from banking assets. 3-4% was GDP growth. The bank has a sustainable ROI of 20-25%. Currently it is trading at a PE in the low tens – and could create a yearly return of 20-25% without multiple expansion.
Another idea Steve Gorelik mentioned during the IVIC18 is the polish media company Agora. Enjoy his presentation here:
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