EOS Russia (EOS)
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EOS Russia
Writer: Tommy Kristiansen
Date: 01.02.2021Disclaimer: EOS makes up 7% of my portfolio at the date of this writing, and shares have been accumulated at 14kr sek.
Note that this is a brief introduction to EOS as an investment thesis. Feedback and discussion is highly encouraged.
Thesis
EOS Russia is a deep value case, currently trading at a discount to NAV. The company is currently buying back shares through a synthetic buy-back program, which is a major step on the path to unlocking value. Underlying assets are trading at a large discount to peers, as do the Russian market compared to other markets.The case is based on a limited downside due to the discount to NAV. It’s more in the way of a traditional Graham-style value play, than a compounder-situation.
Beware political risks, as well as sector-specific risks.
About the company
EOS Russia is an investment company investing in public listed Russian utilities. The company was established in 2007 as a response to the deregulation and privatization of the Russian electricity industry. Russian utilities are trading at lower multiples than comparable peers, and EOS investments are trading at a discount to the Russian utility index.More specifically, EOS is invested in electrical grid and distribution companies. The thesis is that these companies are ripe for consolidation, so you’ll be able to unlock value either by increased share prices or buy outs.
The investments are formally owned by EOS subsidiary, (EOS Cyprus), listed in (guess twice) Cyprus. The management board has six members that make all the investment decisions.
Numbers
What’s important to know, is that the company publishes daily NAV-estimates. The estimates are calculated as assets minus liabilities, whereas asset values are obtained from the stock prices of the underlying companies. As of 01.02.2021, the NAV is 19,11kr sek. With a stock price of 14kr sek, EOS trades at a decent discount.You could argue that investment companies should trade at a discount to NAV. It’s atleast not unheard of. What’s important to notice is that the underlying investments are trading at a substantial discount to peers.
*The five largest holdings in the MISX Electrical Utilities Indices.
**Numbers collected from SimplyWallSt.Additionally, the Russian market is generally cheaper than peers. Albeit there might be good reasons for it, I think the discount is somewhat undeserving taking the development in recent years (below) into account. Here’s a simple comparison.
**Numbers collected from SimplyWallSt.
Development in the underlying assets
*Numbers collected from TIKR.
Political development
An important point in the bull case for EOS, and the Russian market at large, is the developments in recent years. After a horrid 2014-2015, the Russian economy has started to improve, and the government has initiated a reform benefiting the investment community.Simply put, Russia has initiated reforms with the ambition to grow and become less affected by macroeconomic and political factors. More investments in infrastructure and shareholder-friendly measures is examples of the initiatives put in place. Equally important is that Russia is becoming more dependent on public companies, and thus incentives distribution through dividends.
The country is in no way a front-runner in terms of governance. It is indeed a difficult country to traverse, and this should be reflected in share prices. But, there’s some positive momentum that should benefit valuations.
Risks
As with all companies operating in Russia, there’s substantial political and regulatory risks. It’s not a country known for their good governance policies, even though Russia is increasingly reliant on dividends from public companies to fund their programs.With being so exposed to Russian utilities, there’s naturally sector-specific and business-specific risks involved. Interest rates, the economy as a whole and the capital intensive nature of utilities, is something to be aware of.
There’s limited insider ownership, which I deem as especially bad in this kind of business, and you need to beware of the buyback program. Essentially, the company pays the bank a fixed fee to purchase shares, whereas the company regularly makes deposits to an account from where the bank buys shares. In essence, these funds are either listed as a liability or asset on the balance sheet – depending on wherever the current price are higher or lower than the purchase price.
Additional resources
EOS Investment Case (aug. 2020): https://www.eos-russia.com/wp-content/uploads/EOS-investment-case_25Aug2020.pdf
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