Grant’s Interest Rate Observer penned a great piece on the CFA Institute’s blog: Exit of Argentina’s President Offers Value Opportunity.
Here is an excerpt:
Like Russia, Argentina is so bad that it almost can’t get worse. Notice: almost. In human affairs, there’s always room for deterioration. The speculator in Argentine debt and equities may possibly suffer a permanent loss of capital. However, we judge that — again, as with Russia — valuations favor the optimist. Grant’s is bullish on the Country that Ruined Itself.
In a sense, Cristina Fernández de Kirchner, the disastrous two-term Argentine president, stands to do the value-seeking investor not one good turn, but two. In misgoverning, she’s wrecked the economy. By stepping down, she’ll improve it. Her policies have destroyed asset values. Her leaving will crystallize the opportunity to participate in the recovery of those values.
When Vladimir Putin may choose to become the ex-czar of Russia is anybody’s guess. When Fernández leaves office is already on the calendar. Her constitutionally mandated departure corresponds to the next presidential election in October 2015. Bloomberg recently quoted an Argentine asset manager, Claudio Porcel, to the effect that her successor, whoever he or she might turn out to be, will be a person to be envied: “The next president will regain market access and be able to raise as much as $60 billion in sovereign, provincial, and corporate debt. I can’t imagine a better job.”
It can’t be said that the prospects for post-Fernández relief are entirely undiscounted. Since the run-up to the 2013 election in which the incumbent Peronist party suffered its mid-term shellacking, the 13-company Argentine Merval Index has returned 75% in dollar terms, according to Bloomberg. Nor is there much suspense about who the next president might be. Daniel Scioli, governor of Buenos Aires province; Sergio Massa, the former head of Fernández’s cabinet; and Mauricio Macri, mayor of the city of Buenos Aires, are the three acknowledged front-runners. Whatever else their differences, the contenders seem to agree that capital controls must be lifted, real rates of interest restored, and a Paul Singer settlement effected.
And — and — Argentina watchers concur, it would be nice if the government stepped aside long enough to permit development of the country’s immense Vaca Muerta shale oil and gas formation, one of the world’s richest energy deposits. Discovered by YPF in 2011, Vaca Muerta will cost between $140 billion to $200 billion to develop, according to figures cited by the Economist; just $3.7 billion has been ticketed to date (for comparison, the country is expected to spend up to $13 billion this year on foreign oil). “Argentina’s biggest problem is the lack of dollars,” an Argentine corporate executive — he asks to go nameless, as “it’s not good to be quoted in Argentina” — tells Grant. Foreign exchange reserves of the Argentine central bank stood at $52.6 billion as recently as 2011; they have subsequently dwindled to $28.8 billion.
For a case study in what ails Fernández’s Argentina — and for a hopeful glimpse at what might improve upon the incumbent’s long-awaited departure — we present the country’s No. 1 natural-gas delivery company, Transportadora de Gas del Sur SA (TGS); $440 million is the market cap.
There are three business segments: distribution and production of natural gas liquid; natural gas transport; and midstream services. Relatively thriving is the first-named, natural gas liquids unit. Demand is strong and volumes are growing; in the first half of 2014, they jumped by 10.6%. The business is unregulated and revenues are denominated in dollars.
A very different story is the transportation division. Tariffs are regulated — until recently, there had not been an increase since 1999. What with inflation and devaluation, the transportation unit takes in 75% less in dollar terms than it did in 2001. In that year, the parent earned $108.5 million in net income. In the 12 months ended June 30, it netted just $7.8 million.
As to valuation, TGS is quoted at a ratio of enterprise value to EBITDA of just under five times (enterprise value being defined as equity market cap plus debt minus cash). Observes Thompson, “The valuation may seem somewhat cheap when compared to other natural gas transportation/distribution companies in the region — they’re trading at six times enterprise value to EBITDA. However, when factoring in the potential profitability recovery that TGS could have, the valuation is extremely attractive and the investment proposition is very asymmetric.”