Strategy Note /

Tellimer's top picks: March 2022

  • We present five of our best current calls across economies, sectors, stocks and bonds for March 2022

  • This month's picks: Buy Brazil equities, GTCO, and Pakistan bonds; accumulate EM e-commerce companies

  • We also have high conviction on EM fintechs: tech sell-off presents an attractive entry point for Kazak fintech Kaspi

Tellimer's top picks: March 2022
Tellimer Research
28 February 2022
Published byTellimer Research

1. Brazil: EM's top performer

Brazil equities have outperformed large emerging market peers year-to-date.

A range of factors are behind this:

  • High commodity prices;

  • Interest rate policy hikes and the return of foreign investor inflows;

  • Fading disruption from Covid;

  • Public efforts by leading, leftist Presidential candidate Lula to court the centrist voter base; and

  • Cheaper valuation relative to history than its large EM peers of both equities and the currency.

Still much cheaper than large EM peers

There should be much more to go for as Brazil more closely matches valuation versus history visible in its large EM peers, particularly on the currency side.

Brazil equities among cheapest versus history in large EM

Brazil currency cheapest in large EM

Report: Brazil – Much more to go for in EM's top performer despite low prospect of reform

2. Buy Guaranty Trust Holding Company

GTCO had a rough year in 2021, both in terms of its share price performance and its profitability. The group’s huge exposure to lower-yielding special bills (c42% of total investment securities) weighed significantly on interest income, despite a 17% drop in funding costs.

But, we expect GTCO's earnings to rebound in 2022, on the back of improved loan growth and a moderate improvement in investment yields. GTCO has one of the most attractive funding mixes in our coverage, (CASA at 85%), which should limit the expected pressure on funding costs from the CBN's CRR debits.

CASA Ratio %

We also like the group’s operating efficiency, long FCY position and exposure to oil and gas upstream dollar loans, as well as its strong capital ratios.

And although there has been little traction since it became a holding company, we expect the group to announce an acquisition in 2022 (talks are ongoing to buy a PFA and asset management business).

We have a Buy recommendation with a target price of NGN35 (ETR: 41%).

GTCO: Investment Summary

Report: Nigeria Banks in 2022: Neither the best nor worst of times

3. Buy Pakistan's eurobonds

We wrote exactly a month ago that Pakistan’s underperformance early in the year was unjustified, and that the successful resumption of its IMF programme would cause its eurobonds to outperform in the months ahead. Indeed, Pakistan had reversed its underperformance, and is now outperforming the broader EMBI index year-to-date after last week's sell-off.

EMBI total return index (31 Dec 2021 = 100)

As expected, the IMF approved its sixth EFF review earlier this month after the completion of prior actions (namely passage of a supplementary budget and the SBP Act), unleashing another US$1bn disbursement. The IMF granted some leeway on fiscal targets after some slippage this year, which were due in part to one-off factors but will require a heavier fiscal lift next year. But despite the slippage, debt reduction targets have been exceeded and Pakistan is one of the few countries to have a lower debt/GDP ratio now than before the pandemic.  

While massive structural reforms are still required to set Pakistan on a sustainable trajectory – most urgently to reform Pakistan’s struggling SOEs and power sector – and Pakistan's checkered history with the IMF suggests further slippage is likely in the years ahead, we still think that Pakistan has one of the more ambitious reform agendas in the frontier space and that the government will be able to keep things headed in broadly the right direction.

Against this backdrop, we think its eurobonds will continue to outperform, and reiterate our Buy recommendation at a mid-YTM of 9.55% for the PKSTAN 7 ⅜ 04/08/2031s (as of 25 February 2022).

Report: Pakistan: Underperformance unjustified, but risks remain high

4. Accumulate EM e-commerce companies

The Baby Amazons – as the EM e-commerce companies are known – have suffered in the recent tech sell-off, falling 10% ytd.

Performance: Baby Amazon Index

But several of them proactively raised cash at the top of the market.

And while the metric loved by e-commerce investor relations teams – GMV (gross merchandise value) growth – has peaked, cash flow is improving and net profitability is on the horizon.

We expect net profitability by FY 23 for Jumia and Coupang. Meanwhile, MercadoLibre is already CFO and FCF positive and should generate a healthy net profit in FY 22. Amazon itself took seven years to become CFO and FCF positive, and eight years to become profitable.

The Nasdaq crash in 2000 was a golden opportunity to invest in Amazon. Investors now have a similar opportunity to invest in the Baby Amazons – our top picks are Jumia (Buy, TP: US$12), Coupang (Buy; TP: US$28) and MercadoLibre (Buy; TP: US$1,563).

Valuation table: Baby Amazons

Report: Nasdaq rout has created a golden opportunity for accumulation in EM e-commerce

5. Kaspi (Kazakhstan): Super app that has been severely punished by the global tech sell-off

Kaspi is the leading financial technology platform in Kazakhstan. It listed on the London Stock Exchange in October 2020. Kaspi started off as a payments platform, but has since transformed itself into a super app offering payments (both mobile wallet and infrastructure services), digital banking, e-commerce, BNPL, travelling, mapping and messaging and other services. Payments contribute about 30% of revenues while e-commerce accounts for another 20%, with the remainder spread across other products. Kaspi has 10.8mn monthly active users on its platform, who perform an average of 45 transactions per month; the transaction rate has almost doubled in the past year.

Kaspi performed strongly in 2021 with a share price gain of 86%, but is down 32% YTD (as of 31 January 2022). One of the major reason behind share price decline, apart from general tech sell-off, was the recent unrest in Kazakhstan. That said, Kaspi has strong growth potential and is benefitting from network effects as its product portfolio expands. Kaspi's userbase and activity are growing across all verticals; the experience of Alipay in China suggests that these network effects could represent a strong entry barrier to competitors. In addition to delivering strong growth, the company is also highly profitable, with 9M 21 ROE at 70%. Kaspi could bounce back strongly once the domestic security situation stabilises.

For investors looking to tap into the emerging markets financial inclusion growth story via names with strong market positioning, this sell-off opens up a more attractive entry point.

Kaspi is outperforming its growth targets across all segments

Source: Company presentation

Report: Global tech sell-off: 5 battered fintech stocks that have strong prospects