Commentary
FEM Q4 2024 Manager Letter
January 28, 2025
The strategy focuses on investing in frontier and emerging market companies that our team expects will benefit from demographic trends, changing consumer behaviour, policy and regulatory reform and technological advancements.
Below, we explore several key factors that influenced returns in 2024 and share observations on the portfolio and the markets.
Internet and technology portfolio
The portfolio’s investments in the internet and technology sector propelled returns in 2024. This was driven by FPT Corporation (FPT), the Vietnamese IT services company, which established a relatively early mover advantage in the AI consultancy space. This placed the company firmly in the AI winner camp in 2024 and led to a re-rating of its shares. FPT also benefited from continued IT capex recovery from its traditional markets in the APAC region as well as strong execution in the US and Europe, which drove a ~30% growth in the company’s global IT services revenue in the nine-month period ending September.
The sector also saw strong contribution from Kenya due to improvement in the macroeconomic environment there. This was reflected in a strong appreciation of the Kenyan Shilling and a lower cost of equity that transmitted favourably into the valuation of Safaricom PLC (SCOM) (which we own primarily for its fintech asset, M-Pesa). We took advantage of the macro-induced rally and reduced our exposure to Safaricom in the first half of 2024.
We were also fortunate to have the opportunity to participate in discounted share sales by the private equity owners of Baltic Classifieds Group PLC (BCG), the leading online classifieds group in the Baltics. This helped the strategy increase its investment in the company at attractive prices. BCG continued to flex its market leadership in auto and real estate classifieds through calculated price increases and the introduction of value-added services which translated to an 18% growth in operating profits in the six-month period ending October.
We experienced a drag in returns from our investment in Allegro.eu S.A. (ALE), the leading Polish online marketplace. Allegro’s management provided relatively downbeat commentary in their guidance with their nine-month report which it attributed primarily to competition from Chinese players (mainly Temu). The stock had already come under pressure from the unexpected resignation of Roy Perticucci from his CEO role, and so the incremental negative news on competition put extra pressure on the stock. Fortunately, we decided to reduce exposure to Allegro following the news of the departure of the CEO but the strategy still experienced a drawdown from the stock’s reaction post the nine-month results. We still have a small position in Allegro as we believe it will weather the current competitive pressures given its dominant position in the Polish online marketplace.
While we made changes to our internet and technology portfolio during the year to reflect relative valuation preferences and make room for new ideas, the sector remains the largest bet in the portfolio entering 2025 (the end-of-year exposure to the sector is equal to the average exposure in the year). The combination of improving macro, evolving consumer habits, benign regulatory environment and strong management execution is likely to drive another year of strong earnings growth in 2025.
Retail portfolio
Retail was the second major contributor to returns in 2024, but contribution was top heavy, with the shares of Philippine Seven Corp (SEVN) and Mr D.I.Y. Group (M) Berhad (MRDIY) in Malaysia generating nearly all the returns. With Seven, the resumption of dividend payments (via a special dividend) after a three-year hiatus proved to be a powerful catalyst that woke the market up to the company’s strong fundamentals and growth prospects (14% growth in EPS in the nine-month period ending September 2024 and one of the fastest growing 7-11 convenience store networks in the region).
Mr D.I.Y. Group’s shares benefited from the anticipation of a recovery in demand from the B40 group of Malaysian households (B40 refers to the bottom 40% income group) and the entry of the company in a 49% joint venture with Chinese retailer KKV, as well as a supportive equity market environment in Malaysia last year.
We took decisive action to reduce exposure to this sector in the second half of last year, emboldened by what we deemed to be full valuations following the rally in our core holdings above, and better opportunities emerging inside and outside the sector.
We also saw some pressure on consumer wallets and increased competitive intensity in some areas of the retail portfolio including in the home improvement and grocery categories which we deemed to be persistent and as such triggered selling of underperformers in the portfolio. One such example is Wilcon Depot Inc. (WLCON), the Philippine’s largest home improvement retailer, which is experiencing significant pressure on sales densities as demand for home renovations appear to have stalled after the post-Covid demand pull.
We also exited our long-held investment in Moroccan grocery retailer Label Vie S.A. (LBV) on a combination of slowing growth and concerns on capital allocation decisions that we deemed would be dilutive to minority shareholders.
While we end the year with exposure that is well below the average exposure in the year for the sector, we are bullish on some of the additions we made to the portfolio in the year in UAE grocery retailing and Indonesian variety retail which we hope we can share more information on in 2025.
Fast moving consumer goods portfolio
Consumer goods were the third largest contributor to returns this year, driven by long-term holdings Philippines’ Century Pacific Food Inc. (CNPF) and Indonesia’s Industri Jamu dan Farmasi Sido Muncul Tbk PT (SIDO), or Sido Muncul. Century Pacific’s consistency in delivering on their guidance of low- to mid-teens yearly growth proved to be extremely valuable this year as most other Philippine consumer companies experienced significant headwinds from lower disposable incomes and commodity price pressures. The consistency in delivering is the result of a diversified portfolio of consumer products (mainly canned seafood and meat, and dairy), an exposure to institutional demand from developed markets (mainly canned marine and coconut water) and the large consumer market in the Philippines. This creates natural hedges in the company’s cost structure and foreign currency exposure.
Sido, the herbal medicine company that we have discussed extensively in the past, emerged from a difficult 2023 with operating income growth of ~29% in the nine months ending September. Sentiment on the shares also benefited from a transaction in which the controlling shareholder Irwan family bought out the full 17% stake of Affinity Equity Partners, a private equity investor that had come to the end of its investment cycle in the company. The transaction was done at a 30% premium to the three-month average price, signalling confidence from the family in the prospects of the business, and removing the overhang on the shares that typically arises with late-stage private equity ownership of public companies in our markets.
We remain highly selective in this sector and continue to see pressure on profit pools due to increasing competitive pressures, changing consumer behaviour, and the rise of new distribution channels that are disrupting the competitive advantage that many leading companies have historically enjoyed.
Healthcare portfolio
Healthcare was the fourth largest contributor to returns in the year driven mainly by Morocco’s Aktidal S.A. (AKT) and Turkey’s Medical Parks – MLP Care (MPARK).
Aktidal listed its shares on the Casablanca stock exchange at the end of 2022 and came back to the market for a follow-on offering (USD100 million) last year as growth exceeded the company’s initial expectations. Management at Aktidal expects its bed capacity to increase 2.5x between 2023 and 2026 as it capitalises on the structural undercapacity in the market and a supportive regulatory environment for private healthcare investments that is leading to quick utilisation ramp-ups and strong unit economics.
We invested in MLP early in 2024 as we started seeing encouraging signals from the Turkish government on its intent to reverse course and pursue market-friendly economic policies. MLP benefited from improving sentiment toward Turkish assets as the country received its first credit rating upgrade in over a decade from Moody’s in July. Fundamentally, MLP has established itself as the market leader with a 40% share in the lucrative top-up insurance segment which is the fastest growing payor group in the Turkish healthcare market. MLP has also been making sensible single-site acquisitions which it is successfully integrating into the network.
We experienced some drag in returns from the sector from investments in Indonesia and Thailand where weak equity market sentiment and pressure on payors (insurers and medical tourists in the case of Thailand) led to a de-rating of our stocks at the end of the year. That being said, our position size in that region is relatively small and we are oriented to be buyers of this weakness as growth drivers around demographics and regulations remain intact.
Outlook
We are constructive on the strategy’s positioning in 2025. While the global market environment is uncertain, we believe earnings visibility from our portfolio companies is relatively high in the next two years. As in every year, we reduced valuation risk when appropriate (reducing exposure to areas where share prices ran ahead of fundamentals), and exited underperforming positions where fundamentals are likely to worsen. Positively, we found many areas to invest in and, as a result, find ourselves with low levels of cash relative to the history of the strategy.
We look forward to updating you on the strategy over the rest of the year.