Hub Power: A Compelling Micro Cap Opportunity in Pakistan's Frontier Market

Management Summary / Key Takeaways Hub Power

Hub Power (Hubco), Pakistan's largest Independent Power Producer, presents an intriguing investment opportunity in the Frontier Markets space. With a current stock price of PKR 106.90 and a Fair Value Estimate of PKR 165.02, there's potential for significant upside.

However, investors should consider several crucial factors:

1) Hubco's status as a micro-cap by global standards (MV of USD 572m). Small- and micro-caps are more risky than larger caps. And that is especially true for (smaller) Emerging and Frontier Markets. Even when such stocks may not be relatively small by local standards;

2) The company's 3,581 MW installed capacity makes it a larger independent power provider in Pakistan. But recent local analytical reports point to some tensions with the government on the one hand and performance issues with part of the facilities on the other. Is the potential pain that this may cause already fully absorbed in the stock price?;

3) Recent political turmoil in Baluchistan province is adding complexity to the investment case;

4) The Pakistani Rupee's unexpected stability, gaining 1% against the USD over the past year. An improved (or relatively less bad) Forex situation is part of the LT story for us; keep that in mind!

5) Hubco's strong performance in our "Company of the Month/Year" rankings, particularly in 2023. We held it and realized a notable total return of 145.3% during our holding period from February 2023 to August 2024. We sold when our Trailing Stop-Loss/Take-Profit mechanisms were triggered. After that the price fell further and the stock re-entered our watchlist. LT Investors in volatile investment opportunities should always work with proper Stop-Loss and Take-Profit prices. And definitely so in Frontier Markets!

6) The stock's high volatility (36% annually already in local currency) compared to global large caps. With currency volatility added this is in a range between 'normal' large cap stocks and crypto currencies. Are you and your portfolio strategy ready for that? and

7) The broader context of Pakistan's growing international ties and increasing worker remittances is a macro component of the story. Hubco is definitely involved: through its partnerships with Chinese giants BYD and China Power, it is within Pakistan a link to China's Belt Road Initiative. We see this as an important 'hidden reserve' that is not directly visible in the firm's historical financial figures or even in short-term future-oriented quarterly estimates.

These factors combine to make Hubco a compelling yet complex investment opportunity, typical of Frontier Market stocks that balance high potential returns with significant risks.

Below is our full story in more detail.

Introduction:

Hub Power aka Hubco (https://hubpower.com) , Pakistan's largest Independent Power Producer (IPP), stands out as a compelling investment opportunity for those interested in Micro Caps and Frontier Markets. With a current stock price of PKR 106.90 and a Fair Value Estimate by Simply Wall Street of PKR 168.11 at the time of writing (Oct 11, 2024), our comprehensive analysis reveals the intricate balance of potential gains and challenges inherent in such investments. Our own Fair Value calculation – presented in this article – is slightly lower at PKR 165.02 for our weighted average of an optimistic, average and pessimistic scenario. But in both cases there is a nice gap between actual market price and FV estimate. But that doesn’t immediately translate into euphoria in the short term.

The price has come down tremendously recently from a 12-month maximum of PKR 166.69. Add to that political turmoil in Baluchistan (see for instance this recent article by Al Jazeera: https://www.aljazeera.com/news/2024/10/11/armed-attackers-kill-20-coal-miners-in-southwest-pakistan ) and it is clear that this is a complicated case. What scenario is more likely? A rebound to levels similar to the maximum for the year or even way higher (EVD: the Fair Value estimate for our Optimistic Scenario stands at a staggering PKR 629.50!), or total panic with today’s price even being too high. This case is typical for what investors in Frontier Markets have to deal with every day.

We have been invested in the company earlier this year and last year, with our Take Profit and Trailing Stop-Loss triggers translating into us parting with the share. But we decided that it did qualify for continued incorporation into our watchlist. This is a scenario not uncommon in volatile markets, like Micro Caps or Frontier Markets.

While Hub Power is considered a Micro Cap by our standards (it has a market value of PKR 146.2 billion, or approximately USD 527 million) , it is important to note that this designation does not imply it is a very small company by Frontier or Emerging Market standards. In fact, companies like Hub Power are often leading, prestigious stocks within these markets. This distinction highlights the adjustments international investors from larger, more developed markets must often make when analyzing such companies. This narrative provides a detailed examination of Hub Power's strategic positioning and the broader macroeconomic and geopolitical landscape of Pakistan, inviting investors to take a closer look at this dynamic utility company.

Hub Power operates with a combined installed capacity of 3,581 MW, positioning itself as a pivotal player in Pakistan's utility sector. It offers a unique investment opportunity akin to private equity or venture capital. "In frontier markets, the line between risk and reward is razor-thin," a sentiment echoed by many seasoned investors. But just like in private equity or venture capital, you should therefore focus on those Frontier Market stocks that represent interesting long-term opportunities, while at the same time being disciplined enough to use the fact that the available daily liquidity of listed stocks will provide you with opportunities to reduce risk via earlier selling due to the integration of a Stop-Loss and Take-Profit mechanism.

Recent political turmoil has tested the resilience of the Pakistani Rupee, yet it has shown unexpected stability, gaining 1% against the USD over the past year albeit that it was a hectic and wild Forex ride. But compared to the currency devaluations that we got used to in Pakistan over the last 10 years, this is all indicative of newfound strength or at least: reduced currency weakness. This resilience, coupled with Pakistan's growing international ties and increasing worker remittances, suggests a potential shift towards greater integration with more advanced Emerging and Frontier Markets.

Hubco's Performance in Our Company of the Month Rankings and Portfolio: 2023-2024

Hub Power's journey through our "Company of the Month/Year" rankings (co-developed by my UAE-based advisory company One4All - business setup advice and coaching/mentoring for SME entrepreneurs and startups/early stage companies - and our family office) highlights its dynamic role within our investment strategy. Initially classified as a Micro Cap based on market value, Hubco was upgraded to the Small Size segment to ensure balanced representation from Pakistan and other Frontier Markets in our indices. This adjustment reflects our commitment to avoiding significant country tilts across our 18 sector-size categories (6 sectors, with for each sector 3 size categories: Large, Small and Micro).

In 2023, Hubco excelled in the Infrastructure-Small category, scoring points in 13 out of 24 bi-weekly rankings, ultimately winning the category for the year. This success was driven by strong performance across key factors, including Total Return/Momentum (7-day and 12-month focus) and Simply Wall Street's snowflake scores: Total Score, Value Score, Future Score, and Dividend Score. Despite a quieter 2024, with only two nominations, Hubco's overall performance during our holding period from February 2023 to August 2024 was impressive. The stock price increased from PKR 70.40 to PKR 146.72, alongside a substantial dividend yield of PKR 26 (in 6 installments), resulting in a total return of 145.3%. In August 2024 we parted with the stock because the trailing stop loss and take profit mechanisms were triggered. However, in September 2024 – after the drop in share price – the company entered another ranking list and found itself back on our radar screen.

Our scoring mechanism emphasizes consistent momentum and sector leadership, awarding points to top performers every two weeks in comparison to their sector peers. Hubco's recognition as the 2023 category winner grants it a head start in the following year's rankings, ensuring a smooth transition for our watchlists and indices when moving from one year to another. This is because we do at the end of the year give 8, 7, 6, 5, 4, 3, 2 and 1 bonus point respectively to the top-8 companies of the previous year in each of the three size categories. This structured approach not only guides our due diligence but also enriches our watchlists, which we keep track of as legacy portfolios on Simply Wall Street. Interested readers are welcome to contact us for further insights into these curated lists. As you know, SWS enables users to share such lists.

The appendix to this article gives you a bit more background information about our bi-weekly Company of the Month/Year ranking system.

 Hubco: Market Context and Strategic Importance

• Volatility Insights: The stock's weekly volatility of 5% translates to an annual volatility of 36%, significantly higher than typical global large caps. Especially when taking into account that this is ‘just’ the volatility in Pakistani Rupee. When adding the currency translation to hard currencies like the USD, things get even more hectic. This suggests that global investors should maintain a long-term perspective, avoiding impulsive reactions to short-term price movements.
• Exchange Rate Dynamics: For foreign investors in countries with hard or harder currencies, currency risk is therefore a significant factor. Over the last decade, the PKR has depreciated from approximately 1:100 to 1:277 against the USD, with a peak of 1:308 in September 2024. Despite recent political turmoil, the Rupee has shown signs of stabilization, gaining 1% against the USD over the past year (as we already indicated in the Introduction).
• Lack of Analyst Coverage / Neglect: Limited analyst coverage, especially from foreign, recognized brokers and asset managers, leads to estimation risk but also presents opportunities for disciplined informed investors to achieve above-average returns. But investors who successfully deal with ‘Neglect’ and ‘Estimation Risk’ need to be fully aware of the fact that everything is in the end ‘relative’. What counts is your relative information gap vis-à-vis the ‘average investor’ buying and selling a certain stock. Of course you will probably always know far more about let’s say Nvidia than you do about Hubco, but it is perfectly possible that you are ‘just’ an uninformed investor in the giant, US-based ICT moloch with 5 times more information than you have about the Pakistani utility, with you being an informed investor with above-average information in the latter case!
• Momentum / Technical Analysis: In as much as technical information has its value next to fundamental analysis, this type of markets are so hectic and transaction and information costs of such level, that a disciplined longer-term approach is a must. So don’t try to outsmart the market with daily or even intra-day buying and selling. Whatever added value you may have in the short term, will mostly be eaten away by transaction costs. And if not, then you can never ignore the possibility that you will be surprised by negative or positive unexpected events that seem to come totally out of the blue. They could be either company-related, country-related, (geo-)political or of another dimension (natural disasters, foreign sanction policies etc.).
• Diversification: Anything you do in Emerging and Frontier Markets should be an integrated part of a well-diversified portfolio in which you diversify over countries, sectors, industries and size categories. This way, whenever hit by one or the other calamity in an individual stock, its impact won’t totally destroy your overall risk-adjusted returns. With the long-term performance working in your advantage when your disciplined and structured approach locks in the fact that you have a hit ratio above just doing things as a pure gamble.

After these general reflections, we are now ready to turn to Hub Power and the case it represents today. Simply Wall Street’s coverage of the company is – like it is for hundreds if not thousands of Frontier and Emerging Markets companies – of excellent quality. All the information for a good comparison with other companies is there. And you can also find sufficient information about the firm online, with its own website also giving good information. And not just that. Wikipedia (https://en.wikipedia.org/wiki/Pakistan ) and the CIA Factbook (https://www.cia.gov/the-world-factbook/countries/pakistan/ ) provide you with additional information about the country. With its 252 million inhabitants and a GDP on purchasing power parity basis of USD 1.35 trillion, Pakistan is one of the largest Frontier Markets in the world, and according to the CIA Factbook the 25th economy globally.

HUBCO: Its 5-year Track Record, Strategic Partnerships and Initiatives

Simply Wall Street’s Company Page for Hubco reveals that the company has done quite well over the last 5 years. Stock price performance was good and the company expanded fundamentally. However, we also see that financial analysts – although coverage is relatively small – expect a discontinuation of that track record in the near future. And that is not a total surprise when taking into account that hectic state-of-the-country, as described in the earlier mentioned Al Jazeera article. But never forget that such stories are almost business as usual as far as Frontier Markets companies are concerned. It is because of these things that discount rates are (very)high and Price-Earnings Ratios often low (the current PE of 2.1 for the company is indicative). But combined, things translate for instance also into an expected dividend yield of 20 percent or even more. And based on our own investment experience during the Feb 2023-Aug 2024 period, we can confirm that these estimates aren't outrageous. Welcome in Frontier Market space!

It is therefore not unlikely that recent events have paralyzed both investors and analysts into a relative overweighting of the (ultra)short term vis-à-vis the long term. And in as much that it is true to never ever extrapolate your vision too far away into the future when estimation risk is high, the opposite is also true: never overweigh the short term.

In the case of Hubco there are positive long-term developments going on both at the company and economy level. Let’s start with taking a closer look at the company itself.

Hubco's collaboration with China Power (utilities, China) and BYD (automotive, China) through the Belt and Road Initiative (BRI) underscores its strategic importance. China’s Belt and Road Initiative (https://en.wikipedia.org/wiki/Belt_and_Road_Initiative ) is an important long-term economic, strategic and political plan by the Chinese state to expand its influence via tightened partnerships with countries that don’t mind a kind of core-satellite relationship with the world’s largest Emerging Market country. Not even when this may translate into those countries suffering therefore a bit as far as their business with Western Europe and North America is concerned. Now, obviously this almost automatically makes the BRI interesting for those countries – like Pakistan – who didn’t have great relationships with the West to start with.

The China Power Hub Generation Company, a joint venture utilizing imported coal, exemplifies Hubco's commitment to tightening the knot with China. Additionally, the involvement of Mega Group (the largest shareholder in Hubco with a stake of close to 20 percent), led by influential businessman Habibullah Khan who has been called the Howard Hughes of Pakistan (see: https://profit.pakistantoday.com.pk/2018/04/02/pakistans-mystery-billionaire/), enhances Hubco's strategic positioning within the regional energy landscape as well as its links with China via other channels. Hubco affiliate Mega Motor Company links it directly to its main shareholder and Chinese giant BYD. At first glance this may look like a strange activity in the company’s portfolio, but Pakistan is not exactly an energy giant. So it could be interesting – because of its internal market size – to link with Chinese EV and other type of car makers. BYD is then a great, cash-rich partner to have.   These partnerships highlight Hubco's ability to leverage international alliances to bolster its domestic operations.

Hubco's Shorter-Term Challenges: What Local Analysts Say

Recent analysis from Karachi-based Alpha Capital (October 10, 2024) highlights significant short-term challenges for Hub Power, reflecting a cautious outlook amid ongoing uncertainties. With a current price-to-earnings (P/E) ratio of just 2.1, local analysts and investors have expressed concerns regarding the company’s immediate financial stability, particularly in light of potential early terminations of power purchase agreements (PPAs).

While we remain mildly optimistic in our five-year forward-looking analysis, it may be prudent to wait for further share price reductions, ideally below PKR 100, before considering an entry point.

However, for daring investors with a long-term horizon, the current valuation could present an attractive opportunity. We acknowledge the validity of Alpha Capital’s concerns regarding capital expenditures but are confident that Hub Power's strategic partnerships with much bigger and stronger Chinese firms, particularly through its joint venture with BYD, will mitigate reliance on local banks during critical periods. This perspective underscores the differing weight we place on short-term challenges compared to local analysts, particularly as the broader Karachi KSE 100 index has remained relatively stable.

But Pakistan remains a challenging country for investors, notwithstanding the relatively good performance of the KSE 100 index over the last 12 months.

Pakistan: Macroeconomic and Geopolitical Landscape

Pakistan's geopolitical landscape is complex, characterized by evolving relationships with key regional players such as China, India, Iran, and Afghanistan. The country's strategic location as a nexus between South Asia, Central Asia, and the Middle East positions it as a critical player in regional dynamics. However, internal unrest in regions like Baluchistan presents significant political risks. As one analyst put it, "In Pakistan, stability is a rare commodity, but so is opportunity." We believe that this is true. But rare is not the same as non-existent. And that is exactly why we have structured out selection and watchlist system the way we have described earlier.

The country's potential inclusion in the BRICS group of nations (although old enemy India is still playing hard to get as far as its approval is concerned) and its growing middle class underscore its potential for economic growth. Worker remittances from abroad, particularly from the Middle East, contribute significantly to Pakistan's foreign exchange reserves, providing a buffer against external economic shocks. However, the Pakistani Rupee's volatility remains a concern, reflecting broader macroeconomic uncertainties. And lately, the government has clearly had some issues to keep its budgets under control. But we have seen such periods in the past, while also knowing that the least thing global powers will like to see at the moment is growing instability in the country. And especially the Chinese seem ready to cement the relationship with the important neighbor. But when extrapolating things further into the future, the USA and India, Iran and Russia have also no interest in negative escalations in a neighboring country of Taliban-led Afghanistan. So in as much as these factors do explain suppressed valuation levels at the moment (of both the country and Hubco), they are also most as likely signaling that we are reaching the bottom these days.

Economic Growth and Market Potential

Pakistan's economy, as highlighted in sources like the Al Jazeera article, the CIA Factbook, and Wikipedia, is characterized by a young and growing population, offering a substantial consumer base for future growth. The rise of the middle class in Emerging Markets, including Pakistan, presents opportunities for companies like Hub Power to expand their market reach. This demographic shift, coupled with government initiatives to improve infrastructure and energy access, creates a conducive environment for long-term growth.

Hub Power: Our Fair Value Estimation Approach

Our fair value estimate for Hub Power incorporates three scenarios: Negative, Average, and Optimistic, weighted at 20%, 50%, and 30%, respectively. This is indicative of the fact that we are ‘mildly’ positive, in line with our beliefs for the global market climate indicator. However, the latter is based on data for the G20 nations, so we should definitely also make sure that our assumptions capture the fact that Pakistan is definitely a country with far-above-average risks.

Input / Assumption 1 - FUTURE ESTIMATION: HOW MANY YEARS?

Simply Wall Street's Fair Value Calculator provides us with the possibility to calculate using a 3, 5 or 10 year estimation window. Frontier Markets are according to us way too volatile and uncertain to use the 10 year analytical window. We would prefer to use that window for developed market stocks or giant companies from more developed and diversified emerging markets. A Micro Cap company from Pakistan doesn’t qualify.

We actually also feel that today’s powder keg situation makes it already risky in itself to look beyond the shorter term. So we would normally prefer to either do a 3-year estimate calculation, or a 5-year one in which we will then add an additional ‘uncertainty-related’ risk premium to our discount rate.

Since we do feel that the strategic factors as a result of which we look at this stock are more long-term oriented than ‘technical’ or short term, we have opted for:

"5 year analysis; but with an additional risk premium of 2% per annum added to our best estimate for the discount rate (to capture the fact that 5 years is already ‘long term’ in volatile Frontier Markets)"

Input / Assumption 2 - REVENUE GROWTH RATE ESTIMATES

Analysts were predicting a negative -4.61% revenue growth rate. In as much as we believe in hiccups related to political or other factors, we cannot see 5 years with negative growth for this company after a good development during the last 5 years and the various relatively positive trends that we have seen for Pakistan as a whole within its region and the positive developments for Emerging Markets and Frontier Markets countries in general with initiatives like the BRICS Group, growth in nearby India and growing worker remittances from the Gulf which will feed into the wealth of the local family of these Gulf expats in Pakistan, with the latter than having more to spend on energy and other products/services. We will therefore use a value of 0% for our Negative Scenario.

Over the last years the average inflation in the country was 20 percent on average. Actually, to the extent that utilities will be able to charge their consumers those higher prices at least to some extent – although companies are often faced with pressure from governments to minimize the negative effect on the majority of the population – we do believe that a negative scenario of 0 percent is already very negative. In the average scenario we assume that there will be some slack and downward pressure by the government, albeit that we do believe that inflation levels in Pakistan will most likely remain high. The percentage can drop from 20% recently to 15% for the next 5 years. The average real GDP growth rate was around 4 percent in recent years, although last year was bad with hardly any real growth. We will therefore assume that in our Average Scenario Hubco will do slightly better than our expectations for the Pakistani economy as a whole. If we extrapolate the 4 percent real growth on average into the next 5 years and add an average of 15 percent inflation per annum, this is 19 percent per annum nominal growth for average performance in PKR terms. We believe that Hubco will continue to perform as above average company in similar fashion as it used to in the past with its embedding into the China story via BYD and China Power giving that some strong support. We will add 5% for that in the average scenario, so that we will work with 24% per annum growth there.

For the Optimistic Scenario, we see three potential sources for that: 1) Pakistani macro factors; 2) foreign demand push factors (e.g. international investors or corporates coming into the country to do more because of the huge market in terms of population numbers; or the demand push caused by worker remittances from the Gulf and elsewhere where we see large numbers of Pakistani migrants); and 3) Hubco-specific success factors. If we would allow each of those to translate into a maximum positive surprise of 10% per annum during the next 5 years, we also have to be fair that we do not believe all the optimistic scenarios to happen to the max together. We will therefore allow in our optimistic scenario for 5% per factor x 3 = 15% positive surprise. That would then translate into a 39% revenue growth expectation for the Optimistic Scenario.

This translates into a weighted average expected revenue growth rate for our three scenarios of 23.7% per annum (or 24% rounded).

Input / Assumption 3 - PROFIT MARGIN

The scenario used for Simply Wall Street’s FV calculation was based on a 53.64 percent profit margin. In as much as this is a token of the firm’s profitability in the past – and therefore also of the fact that the current PE of 2.1 is probably way too negative -, we do believe that in a growing and improving market with relatively high inflation -  and as a result of that (not the least because of the political turmoil!) pressure on governments to mitigate this - labor costs may substantially increase. And with the company being an independent company with good profitability, we do on top of that believe that governments will one way or another amidst turmoil be forced to generate higher taxes from the stronger shoulders in society. And even to the extent that the latter may be able to avoid part of that via their government ties, we like to stress that Hubco is an Independent Provider and not the one with the strongest government ties. That will translate into downward pressure on the profit margins. In the most optimistic scenario we feel that it would already be great to keep the profit margin at 50 percent. But we believe that a drop to 40 percent (Average Scenario) or even 30 percent (Negative Scenario) are also not at all impossible.

This translates into a weighted average profit margin of 41% for our 3 scenarios.

Input / Assumption 4 - FUTURE PE

The current PE of 2.09 is extremely low. We will allocate that to our Negative Scenario and not to the most likely one. PE ratios are never ridiculously high in Emerging Markets and most certainly not for Utilities. And Frontier Markets are in terms of PE more suppressed than bigger Emerging Markets. We will therefore be happy to see the PE double to 4 in the Average Scenario and grow to 6 in the Optimistic Scenario. And remain at 2 for the negative scenario.

For our weighted average scenario we do therefore expect the PE to increase to 4.2 and round that to 4 when using the Fair Value estimator in Simply Wall Street.

Input / Assumption 5 - DISCOUNT RATE

The discount rate used in the Simply Wall Street's own FV scenario is 27.75% and that is certainly not too low. However, as we indicated earlier, this is a Frontier Markets Micro Cap in a complicated country. And we also indicated that we treat such stocks as a kind of Private Equity. Not just is the company volatile, so is the country and its currency. Positive surprises can be great, but disappointments are also always around the corner.

Based on our models, we will calculate with an 18% required rate of return in the most optimistic scenario; a rate of 23% in the average scenario and a rate of 28% in the pessimistic scenario.

Note: in ‘true’ Private Equity or Venture Capital focusing on Emerging and Frontier Markets we would not even contemplate investment below an expected risk-adjusted return of 40% , but we subtract 10 percent because of the fact that the firm’s listing helps to mitigate risks so that we can step in while immediately providing our brokers with a trailing stop loss and a take profit order.

The discount rate that we will be using for our weighted average scenario is therefore 22.5% per annum or 22 percent rounded. However as indicated above we will be adding 2 percent to the various scenarios because of the fact that we work with 5 years future as opposed to 3. The additional 2 percent is an extra estimation risk premium for the fact that things are even more uncertain in Frontier Markets than they are in the average Emerging Markets. Meaning that our adjusted estimates in the three scenarios are 20, 25 and 30 percent respectively. With a weighted average of 24% rounded for the three combined.

WRAPPING THINGS UP

This concludes our input story as far as the Fair Value calculation is concerned. We can now proceed by deriving our FV estimates.

The weighted average scenario results in a fair value estimate of PKR 165.02, closely aligning with Simply Wall Street's estimate of PKR 168.11. This slight deviation underscores our cautious optimism, acknowledging both the potential and challenges of investing in Hubco.

Our Optimistic Scenario (FV PKR 629.50) and Pessimistic Scenario (FV PKR 16.26) indicate how incredibly volatile Frontier Markets can be. This is why we are reluctant with forward-looking analyses that are too far away in the future. It also explains why we use high discount rates in general. And also why incorporation of both stop loss and take profit mechanisms are essential.

Look for instance at this year: within a few months the price went down from a top of PKR 166.69 – actually remarkable close to our FV LT estimate (and that explains why our take profit and trailing stop-loss mechanisms were triggered earlier when we held the stock) – to PKR 106.90 on Friday Oct 11, 2024. And the minimum price of PKR 87.70 for this year also shows how erratic things can be: first up almost 100 percent and then losing some 30-40 percent of that, so that on a net base the whole year wasn’t that bad in PKR and also not – at least for those holding the stock for a year – in hard currencies like the USD. But one has to be incredibly on the alert.

That is why we keep the stock on our watchlist for now, without re-entering immediately. But as soon as there are positive indications regarding our future-related FV inputs (good company quarterly reports; profit margins remaining high; good market sentiment of the Karachi Stock Exchange etc) we may at prices close to the yearly minimum (let’s say below PKR 100 using today’s input) step in again. Daring investors with an interest in Pakistan or Frontier Markets or Emerging Markets Micro Caps may contemplate to put the stock on their long or short lists. And those who – unlike us – believe in holding periods that reach out further than 5 years for this market, can contemplate stepping in now (conditional on them being also at least mildly-positive of course!).

Conclusion

Hub Power presents a fascinating case for investors accustomed to stable Western markets. Its strategic positioning, coupled with the volatility of Frontier Markets, offers both exciting opportunities and substantial risks. We recommend maintaining this stock on your watchlist, ready to capitalize on positive developments and strategic alignments. Investors are encouraged to conduct further due diligence and consider their own assumptions to enhance their investment decisions.

The fact that this is a kind of listed Private Equity / Venture Capital case translates into erratic volatility. But you cannot simply conclude that this makes it more risky than 'real' PEVC investments. Don’t forget that it also has certain positive qualities when daily trading is possible. It allows you to enjoy a couple of interesting rides during the time that you hold such stock on your watch list. In-Out; In-Out; In-Out etc. Investors who held the Nvidia share during the last 2-3 years while working with disciplined stop loss and take profit mechanisms know what I am referring to.

In case you have questions regarding our due diligence of the stock or analysis of the Pakistani macro case, do not hesitate to contact us. You can of course also contemplate to contact the firm’s Investor Relations department.

A fascinating case! It clearly shows that an often somewhat boring industry like Utilities is not at all one that cannot translate into exciting returns (and risks!) in an Emerging or Frontier Markets setting.

Appendix: Bi-Weekly Ranking System and Scoring Mechanism

Bi-Weekly Ranking System

 Our "Company of the Month/Year" competition/ranking system is designed to identify top-performing companies within our investment universe, segmented by size and sector. The ranking process occurs bi-weekly, with a total of 24 ranking moments each year. Here’s how it works:

 1. Selection Criteria:

 Companies are evaluated based on their performance on five key factors:

• Total Return/Momentum: Assessed over 7 days and 12 months.
• 4 Simply Wall Street Snowflake Scores: Total Score, Value Score, Future Score, and Dividend Score.

To qualify for consideration, both momentum variables (7-day and 12-month) must be positive.

2. Sector and Size Categories:

Companies are categorized into six sectors:

•      CON: Consumer Goods
•      EMI: Energy, Metals & Mining, and Industrials
•      FIN: Financials
•      HEA: Healthcare, Biotech, and Pharma
•      ICT: Tech, Media, Telecom, and Entertainment
•      INF: Infrastructure, Construction, Transportation, and Utilities

Each sector is further divided into three size categories:

•      Large Cap: Market value > USD 10 billion
•      Small Cap: Market value between USD 1-10 billion
•      Micro Cap: Market value < USD 1 billion

Adjustments are made for country-specific average stock sizes to ensure balanced representation.

3. Scoring and Rankings:

Each bi-weekly ranking identifies one winner per sector and size category, totaling 18 winners.

Sector winners compete within their size category:

•      Gold Medal: 4 points
•      Silver Medal: 3 points
•      Bronze Medal: 2 points
•      Remaining sector winners receive 1 point each.

The cumulative points from 24 bi-weekly updates determine the "Company of the Year" within each category.

4. Rolling Advantage for Previous Winners:

Top performers from the previous year receive bonus points (8 for 1st place, 7 for 2nd, etc.) in the new year's rankings, ensuring continuity and recognition of consistent excellence.

Purpose and Benefits

This structured ranking system not only highlights outstanding companies but also guides our portfolio decisions and due diligence processes. By maintaining a dynamic watchlist, we identify potential investment opportunities while managing volatility inherent in Frontier and Emerging markets in general, and in Developed Markets during periods of rational or irrational negative or positive exuberance when prices and underlying Fair Values start to deviate strongly.

About Me

I am Erik L van Dijk (http://www.linkedin.com/in/evd101), a former CEO/CIO in institutional asset management who retired from managing money for others. Now, I focus solely on my own family office. My career began as a professor of finance in Amsterdam, specializing in quantitative models for equity investing with a focus on Emerging Markets. After transitioning to a professional investor career, my academic interests remained a core part of my approach. Currently based in the UAE, I am not associated with any asset management firms or financial institutions. As an ambassador for a local free trade zone in Dubai and mentor for startups, I share my investment narratives to aid others in their due diligence processes. These narratives stem from our long-term portfolio analyses, independent of any firms we invest in, and they are not buy, sell, or hold recommendations. We just aim to provide you with useful input for your investment decisions. Feel free to contact me in case you require additional information or have questions related to our narratives.