FEM Q1 2021 Manager Letter

The strategy continues to be focused on identifying transformational growth companies in the Frontier and smaller Emerging markets. Africa and Asia today represent ~90% of invested capital and the strategy owns or has previously owned companies in CEE, CIS, and the Middle East. Thematically, we’re primarily invested in the three following areas:

1. Financial inclusion and the development of the digital payments eco-system (i.e.: disruption of cash) via companies operating across a variety of sectors including in banks/microfinance, communications/media/mobile money, and software
2. Rising health and wellness awareness which we express through consumer health companies selling niche FMCG and healthcare providers offering medical services to their customers
3. The formalization of offline retail with a focus on the grocery and DIY category where our retailers have a large Omni-channel advantage over pure online competition as well as a scale and cost advantage over unorganized/traditional competition

Underpinning our confidence in these themes are the large addressable markets wherein our companies operate, the fragmented and weaker level of competition, and the quality of the management teams which run them (many of whom are also owners).

We highlight two such companies in this quarter’s letter.

MTN Ghana (MTNG) – the $1.8bn market cap company embodies the frontier equity story as well as any in our portfolio. MTNG is the leading telecom service provider in the West African nation of Ghana with over 24 million subscribers and a leading market share in voice (55%) and data (72%). However, what gets us excited about MTNG is “Momo”, the company’s mobile money business which is at the forefront of the digitalization of cash in the country. Similar to Mpesa in Kenya, Momo is already the winner in its market with a 98% share of all mobile money transactions and an active base of 10.2 million wallets in the country. Momo’s contribution to MTNG’s revenue has increased by ~350bps in the last two years to reach 21% in 2020. We see Momo’s growth coming from several areas including structural adoption of mobile money for peer-to-peer transfers as well as growth in value added use cases in the areas of remittances, loans and savings, and merchant services. Despite it being a $1bn+ revenue business with returns on invested capital of ~25% and an exciting fast growing fintech business, MTNG is not covered by the sell side community. This is perhaps because Ghana as a market is unclassified by MSCI and so is neither a frontier nor an emerging market by the index provider’s standards. On the buy side, many institutional investors will access MTNG via its parent company MTN Group out of South Africa, a sub-optimal way considering the multi-country operation of the parent co. This has presented us with a unique opportunity to directly own MTNG at ~5x price to earnings over the last two years. Even after a strong re-rating year-to-date, the stock is still trading below 7.5x trail 12m earnings with a dividend yield of +8%.

Unicharm Indonesia (UCID) – the $480m market cap company is the leading baby diaper and female sanitary brand in the country of ~250m people. Indonesia has one of the lowest penetration rates of baby diaper products in the world yet is expected to generate the second biggest growth in value terms in Asia Pacific after China. This is driven by demographics (over 4 million babies are born every year in Indonesia) and higher penetration rates driven by investments in innovation and distribution (UCID sells single diapers in certain retail channels to make the product affordable). UCID has nearly 47% of the baby diapers market in Indonesia which makes it almost 2x larger than its nearest competitor which puts it in a strong position to capture the growth in the market over the long term. UCID is also the market leader in sanitary female products and adult diapers which are high margin categories given competitive intensity is lower and premiumization opportunities larger (relative to baby diapers). While the top down opportunity is attractive, UCID has low operating margins compared to global peers. We attribute this mainly to the baby diaper category where consumers prioritize price over quality; consumers in Indonesia are predominantly price driven in their choices across most FMCG products and a high percentage of the target market (parents) still view baby diapers as a discretionary product. We do not foresee a change in consumer preferences in the near term in light of the impact that Covid-19 has inflicted on purchasing power. That being said, we are still expecting margins to trend upwards as the recent entry of Kimberly Clark via the acquisition of UCID’s main competitor Sofitex is likely to bring more pricing discipline to the market by way of lower promotional activity (note: the acquisition of Sofitex was done at 3x EV/Sales compared to 0.5x EV/Sales for UCID which on its own is an indication of the undervaluation present in the shares of UCID today). As the Indonesian economy reopens, we expect UCID’s general trade channel to also open up and offer another tailwind to margins over the next two years as the company earns a higher net price compared to the modern channel which is dominated by established mini market chains. We also see the development of the e-commerce channel as potentially positive for UCID’s margins as that targets a more affluent consumer base that buys more (volume) and better (quality). We’ve increased exposure to UCID over the last month having been encouraged by latest commentary from management on the competitive dynamics in the market following the entry of Kimberly Clark which we believe is a key catalyst for the thesis.

In conclusion:

The opportunity set for the strategy continues to be attractive despite the visible underperformance relative to emerging markets. A recent FT column by Simon Edelsten brought to light a phenomenon we’ve been talking about for some time: almost 2/3^rd of the MSCI EM is in three countries (China, South Korea, and Taiwan) that have “emerged” if one judges by income levels, demographics, and market efficiency to paraphrase the article. In that light, we continue to see the frontier and emerging markets in which we specialize as a truer reflection of the classic emerging market story. Translating that opportunity to returns is still about selecting the right stocks for the long term and we believe our portfolio reflects that in its current composition.

Vergent Asset Management LLP

DISCLOSURES

1. Unless otherwise stated, all data is at March 31, 2021 and stated in US dollars (US$). Source: Connor, Clark & Lunn Financial Group, Thomson Reuters Datastream.

2. Performance history for the Vergent Emerging Opportunities Strategy is that of the Vergent Emerging Opportunities Composite. The Composite has an inception and creation date of August 2018.

3. Net performance figures are stated after management fees, estimated performance fees, trading expenses and before operating expenses. Operating expenses include items such as custodial fees for pooled vehicles and would also include charges for valuation, audit, tax and legal expenses. Such additional operating expenses would reduce the actual returns experienced by investors. Past performance of the strategy is no guarantee of future performance; Future returns are not guaranteed and a loss of capital may occur. For illustrative purposes, performance fee of 20% on added value over the hurdle rate of 6% plus the management fee of 1.25% have been assumed. Actual management fees charged to a particular account may vary.

4. There is no benchmark for the Vergent Emerging Opportunities Strategy because it has an absolute return objective

5. Standard Deviation measures the dispersion of monthly returns since the inception of the strategy.

Benchmarks and financial indices are shown for illustrative purposes only, are not available for direct investment, are unmanaged, assume reinvestment of income, do not reflect the impact of any management or incentive fees and have limitations when used for comparison or other purposes because they may have different volatility or other material characteristics (such as number and types of instruments) than the Strategy. The Strategy’s investments are not restricted to the instruments comprising any one index and do not in all cases correspond to the investments reflected in such indices.

These materials (“Presentation”) are furnished by Vergent Asset Management (“Vergent”) on a confidential basis for informational and illustration purposes only. This Presentation is intended for the use of the recipient only and may not be reproduced or distributed to any other person, in whole or in part, without the prior written consent of Vergent. Certain information contained in this Presentation is based on information obtained from third-party sources that Vergent considers to be reliable. However, Vergent makes no representation as to, and accepts no responsibility for, the accuracy, fairness or completeness of the information contained herein. The information is as of the date indicated and reflects present intention only. This information may be subject to change at any time, and Vergent is under no obligation to provide you with any updates or amendments to this Presentation. This Presentation is not an offer to buy or sell, nor a solicitation of an offer to buy or sell any security or other financial instrument advised by Vergent. This Presentation does not contain certain material information about the strategy, including important risk disclosures. An investment in the strategy is not suitable for all investors, and before making an investment in the strategy, you should consult with your professional advisor(s) to determine whether an investment in the strategy is suitable for you in light of your investment objectives and financial situation. Vergent does not purport to be an advisor as to legal, taxation, accounting, financial or regulatory matters in any jurisdiction, and the recipient should independently evaluate and judge the matters referred to in this Presentation. Vergent Asset Management LLP is registered in England and Wales with its registered office address at 8th Floor, 1 Knightsbridge Green, London SW1X 7QA, United Kingdom (Companies House number OC418829) and is authorized and is an Exempt Reporting Adviser in the USA. It is regulated by the Financial Conduct Authority (FRN: 791909).

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