Thursday, January 26, 2017

Performance review of Ukrainian Agriculture investments

Back in August of last year I traveled to Ukraine to visit family and look at the investment climate in the country. Because of the war in the Eastern part of the country there was quite a bit of negative sentiment about Ukraine as an investment destination.

The currency was down massively against the dollar and all of the news about the country was negative. After traveling there and seeing for myself what was going on I knew that sentiment did not match reality. I began to look around for investments that would benefit once sentiment began to become more positive.

Ukraine has a huge agricultural industry and has tremendous potential for further growth. I began looking at publicly traded Ukrainian agricultural companies and found two that I ended up investing in. Astarta is one of the largest agricultural enterprises in Ukraine and is based in Kiev which is not affected at all by the war. The company is publicly traded in Poland and can be bought through Fidelity's international brokerage.

The company is up around 8% since I bought it. I look at Astarta as a long term investment in the continued development of Ukrainian agriculture. Here is a snippet of their most recent operational highlights:

  • Sugar production increased to 505 thousand tonnes (+42% y-o-y)
  • ASTARTA harvested over 2.6 million tonnes of sugar beet (+37% y-o-y) and 910 thousand tonnes of grains and oilseeds (+15% y-o-y)
  • Milk production reached 106 thousand tonnes (+3% y-o-y)
  • Globyno soybean processing plant produced 158 thousand tonnes of high-protein soybean meal (+8% y-o-y), 38.8 thousand tonnes of soybean oil (+14% y-o-y) and 11.7 thousand tonnes of husk (+17 y-o-y).
  • Bioenergy complex generated over 15 million cubic meters of biogas (+43%)
That is some impressive growth. On another positive note Fairfax Financial which is the investment vehicle for Canadian billionaire Prem Watsa took a minority position in the company last year. 

The other company I invested in is Agroton which is an agricultural enterprise in the Donbass region which is involved in the ongoing civil war. Fortunately the companies operations are not on the front line but the mere fact that a war is going on in the general area where you have your operations does not bode well for positive investment sentiment. Nevertheless, the company operations continue and the company is cashflow positive and profitable. 

Sentiment has changed as hostilities are much lower than in the past. The election of Donald Trump and his less aggressive stance towards Russia will force the Ukrainian government to have to deal with the separatists as I suspect Trump will be less inclined to send support to Ukraine which is a major factor as to why they are able to maintain a war footing. 

These positive changes at the margin were enough to propel Agroton to a 208% gain since August 2016. Even after these gains the company is significantly undervalued.

The purpose of this review is not brag about results it is to illustrate that my contrarian investment methodology can and does work. However in order for it to work one is required to swim against the conventional thoughts of the masses and secondly have the patience to hold the position as the thesis plays out. I consider Agroton a speculation but for an aggressive investor like me the risk is manageable as I keep the position within my 3% portfolio limit and I watch my stops religiously.  

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