TAU.L Regulatory News (TAU)

31 Jan 2008 12:05

Tau Capital PLC31 January 2008 Tau Capital Plc Trading Update Tau Capital plc ("Tau" or the "Company") is pleased to provide a trading updateon its activities for the period from 9 May 2007, the date of the admission ofits ordinary shares on AIM, to 31 December 2007. Tau floated at an initial NAV of $1.00. Upfront costs relating to the admissionof the Company's ordinary shares to AIM, corresponding to approximately $0.04per share, were deducted in calculating the monthly and end of year NAV. With this in mind, the NAV of $0.96 as at 31 December 2007 represents a soundperformance by the Company over the period. During the same period and amidst aturbulent investment environment, the MSCI World index gained 0.63% while the Kazakh stock index, KASE, fell 1.05%. The table below outlines the monthly NAV (net of fees and expenses) andperformance of the Company since admission: Monthly Net Asset Value (NAV) NAV 1 Month perf %-------------- -------- -------------31 May 2007 $0.95 -4.53%*-------------- -------- -------------30 June 2007 $0.97 1.19%-------------- -------- -------------31 July 2007 $0.93 -3.25%-------------- -------- -------------31 August 2007 $0.92 -2.06%-------------- -------- -------------30 September 2007 $0.94 2.24%-------------- -------- -------------31 October 2007 $0.99 6.08%-------------- -------- -------------30 November 2007 $0.94 -5.15%-------------- -------- -------------31 December 2007 $0.96 2.45%-------------- -------- ------------- *Admission date: 9 May 2007 Public equity Investment Manager's view of the Kazakhstan public equity market The first few months following admission were focused on deploying the capitalraised into public equities. Tau's public equity portfolio (the "Portfolio")can be characterised by two distinct segments: stocks listed on the Kazakh stock exchange, KASE, and stocks listed on international markets. The Kazakhlisted stocks are dominated by banks in terms of liquidity and marketcapitalisation while the internationally listed stocks consist primarily ofresource based companies. Over this initial period, we maintained a largeexposure to metals and oil and gas companies while having a relatively lowexposure to Kazakh banks. Performance of the Portfolio was primarily hampered byits exposure to Uranium stocks, whereby the spot Uranium price fell to $85 perpound by late August 2007 after reaching $135 per pound in June 2007. By the end of August 2007, the Portfolio was 80% invested. While bank stocksconstitute close to 60% of the KASE index, the Portfolio held only around 14%of such stocks due to our concerns about the rapid loan growth of the banks andthe extent of dependence on foreign borrowing. The sub prime scare in Augustcrystallised our concerns. The Portfolio's large cash exposure also dampenedthe impact of August's market correction. September and October 2007 both proved to be good months as financial marketswere buoyed by the response of the monetary authorities to the sub primeproblem. However, Kazakh banks took a knock in October as the credit ratingagencies cut the sovereign rating. The stocks fell sharply but staged a dramaticrecovery once the central bank assured the market that it would take anynecessary action to support the Kazakh financial system. The rating agencies hadalso put the banks on a watch list and downgraded the major banks' debt ratingsat the end of October causing bank stocks to retreat to their earlier lows.Moreover, on 1 October 2007, the KASE introduced a new total return index. Theprevious measure was based on market capitalisation, resulting in new issuesaffecting index performance. The index is represented by twelve issues, mostlybanks with representation from KazmunaiGas and Kazakhtelecom. Global financial markets experienced another turbulent month in November 2007.Concerns over the impact of the sub prime crisis worsened as the major US banksannounced significant write downs of their asset base. These worries hurt globalmarkets and at one point the markets experienced significant declines, with theS&P 500 index down over 9% on the month, while the MSCI Emerging Markets indexfell by 11% over the same period. There was some respite in the markets however,as investors were encouraged by the expectation that the US Federal Reservewould cut interest rates at its next meeting. The Kazakh market was unable toescape worries over sub prime, especially as it is dominated by financials. TheKASE finished the month down 5.2% in US dollar terms, while Tau's NAV fell by anequal amount. December proved to be a turbulent end to 2007. The markets remained concernedabout the extent of the prospective slowdown in the US economy, coupled withrising inflationary pressures. The US Federal Reserve's 25bp rate cut on 11 December 2007 injected liquidity into the markets in a coordinated action withthe European Central Bank; however, this did little to stem the decline in theequity markets. The MSCI World index fell 1.3% while the MSCI Emerging Markets index managed a small positive return of 0.4%. The Kazakhstan stock market had abetter month in December, largely due to increased trading at the end of themonth which pushed the index up 2.9% in US dollar terms. Notable performers wereKazmunaiGas (+8.8%) and Kazcommertsbank (+12.6%). Of the KASE index's twelveconstituents, six were negative. The Portfolio performed well in the midst ofthe market turbulence, gaining 2.5% in the month. Gold stocks contributed strongly, as did oil stocks. The Uranium exposure was slightly negative afterrecovering from significant falls earlier in the month. Additionally, althoughthe Portfolio has had a limited exposure to financials relative to the local market exposure, it has not been immune to their poor performance. In commoditymarkets, oil and gas stocks benefited from the stronger oil price. Althoughmost metals, especially copper, were weaker on the back of concerns of a weaker demand environment, gold was seen as a safe haven and climbed from $783.50 troyoz on 1 December 2007 finish the year at $833.75 troy oz. The Kazakh metals producer ENRC, one of the biggest producers of ferrochrome inthe world, made its debut on the UK main market in December 2007. The IPO, oneof the largest on the UK exchange in 2007, raised over US$3 billion which implied a market capitalisation of over US$15 billion for ENRC. The stock pricerose 16% on the first day, giving a genuine endorsement to the value ofresource based assets in Kazakhstan. Our concerns of market volatility led us to reduce the market exposure of thePortfolio in the fourth quarter of 2007, leaving it exposed to stock specificrisk. We introduced short positions in sector indices and some major stockindices at the end of November, and continued to increase these in the earlypart of December, giving us some comfort going into the normally thin Christmastrading period. The Portfolio was around 20% hedged and held 20% in cash at theend of December 2007. 2007 was a year in which the Kazakhstan financial markets hit their first realhurdle after some very good years. We anticipated some degree of correctionwith the Kazakh banks, as we felt they had over extended their borrowings and valuations were unsustainable. The change in recent fortunes will be positiveoverall for the development of the Kazakh equity market. Firstly, Kazakh bankswill need to adjust their business models and be more inventive with sourcing offunds locally. Secondly, Kazakh domestic companies are favouring debt financingand a much tighter financing environment should encourage them to raise equityinstead. Financial markets have begun 2008 on a rather depressed note. Fears of arecession in the US and the consequences of global economic growth had anegative impact on the markets and at one stage during January 2008 majormarkets across the globe were down between 15-20%. The US Federal Reservereacted with a sharp rate cut to stem the market turmoil and markets respondedpositively, retracing about half of the drop. In January, the Portfolio has beeninsulated to a degree with its short and cash positions as noted above.Additionally, individual stock positions have held up reasonably well under thecircumstances and portfolio volatility has been limited. Outlook In terms of the Kazakhstan economy for 2008, we expect GDP growth of between 7%and 9%. This should be supported by the strong oil price and demand for basicmaterials - there is no indication that demand from China and India willabruptly decline. Inflation however, is a concern as PPI has been rising inrecent months. The government has recently announced a special working groupwith a mandate to introduce measures to stabilise the price of food andvegetable oil, which represents 38% of CPI. There is no indication that theCentral Bank will raise interest rates further from current levels. Withapproximately a combined $40 billion in National Bank FX reserves and theNational Fund (Future Generations fund), there is also strong support for anyfurther fallout in the banking sector. On a risk-reward basis we believe Kazakhstan is well placed amongst otheremerging markets. It has a strong resource base with a stable politicalenvironment and increasingly market-friendly regulation. Asset prices remainvery favourable compared to other resource-based markets and there is stillfurther potential for significant discoveries in the region. In the short term we remain cautious about the overall market as major gyrationsin global markets will impact Kazakh stocks. However, we will act onopportunities to build positions in companies at attractive prices. Our positivelong term view on the potential of the Kazakhstan and Central Asia investmentenvironment remains unchanged.Private equity Investment Manager's view of the private equity market in Kazakhstan Since admission, we have seen significant positive changes in the market forprivate equity deals in Kazakhstan driven by macroeconomic developments. In thesecond and third quarters of 2007, vendors demanded relatively high prices as wefaced strong competition from the private equity funds sponsored by the Kazakhbanks. In the fourth quarter of 2007, the deteriorating global creditenvironment put significant pressure on Kazakh banks, resulting in theirwithdrawal from private equity activities. Instead, Kazakh banks were forced tofocus on the active management of their credit portfolios. Interest ratescharged on loans to local private businesses increased from 10-12% in the firsthalf of 2007 to 15-20% in the fourth quarter of the year. There is ongoingpressure from the lenders to accelerate loan repayments by borrowers and as aresult, we have seen an increase in more attractively priced investmentopportunities. In October 2007, Tau made its first private equity investment. We acquired aminority interest in DTV, an Almaty-based cable TV operator. We believe thatthe cable TV market in Kazakhstan is poised for strong growth and consolidationas consumers migrate from analogue to digital service offerings and take up ofbroadband internet accelerates. DTV has a strong management team and a depth ofservice offering enabling them to be one of the market leaders. Since our investment in October, we further strengthened the management team and assistedin the acquisition of an incumbent telecom operator in Western Kazakhstan. Weare actively looking at other acquisition opportunities. Tau is well positioned to take advantage of the attractive private equityenvironment in Kazakhstan and we are actively pursuing a number of privateequity opportunities in the pharmaceutical, food and drink, and media andentertainment sectors. In the latter part of 2007, our efforts were focused onspecific investment opportunities in Kazakhstan with due diligence exercises inadvanced stages. Commenting on the trading update, Philip Lambert, the Company's Chairman, said: "I would like to commend our Investment Managers for the performance deliveredsince inception of the Company in challenging market circumstances. A net assetvalue of $0.96 at the end of 2007, having absorbed the upfront costs normal tothe launch of an AIM-listed Company, may therefore be qualified as verysatisfactory to investors". Further information, please contact: Andrew Dawson Tel: +44 (0) 1624 681271 IOMA Fund & Investment Management Ltd Nick Westlake / Alex Ham Tel: +44 (0) 20 7260 1000 Numis Securities Ltd --ENDS-- This information is provided by RNS The company news service from the London Stock Exchange