The Financial Times
Published: Mar 29, 2008
Imagine all those welleducated Cubans standing in front of the gates marked "Capitalist Goldrush Starts Here".
Outside sits an army of hot money investors ready to stampede the world's 17th largest island. Fidel Castro has stepped down in favour of brother Raul, with the unstated promise of "liberalisation" at some future point. But there appears to be a hitch or two. The first is that Cuba was, and still is, socialist and does not boast an evil stock market. As hitches go, that is a big one.
The second bigger hitch is that there is not a convincing way of capturing that investment story in a direct way. There is an American mutual fund called the Herzfeld Caribbean Basin Fund, (Cuba) which is a closed-end fund trying to play the Cuban story by investing in stocks of the Caribbean Basin Countries. It is a nice idea but in reality 65 per cent of the fund is invested in US stocks, Florida-based stocks in particular - real estate, infrastructure, media, transport. The problem, apart from the yo-yoing share price, is that the fund does not invest in Cuba as that is against the law in the US. There is also a Canadian company called Leisure Canada, which is active in the hotels and property sector, but information on trading is a bit thin (www.leisurecanada.com).
Sherritt International looks more interesting. It is another Canadian outfit, but boasts a successful mining operation in Cuba and owns a third of Cuban electric utility Energas. It is an impressive outfit but it is not a pure Cuba play as it also boasts big assets in Canada, Madagascar and Spain.
The rest of the very short list of usual suspects includes huge Spanish and Brazilian outfits that do well out of Cuba (Sol Melia, Repsol, Altadis and particularly Petrobas) and some unlikely potentials in the shape of Carnival Corp and Royal Caribbean Cruises, which may apparently benefit from more cruises to Florida.
With the exception of Sherritt, I cannot say that any of these shares strike me as an appealing direct play on Cuba, which is a pity because Cuba is no basket case. It has a "sort of" functioning economy that has the real potential to turn into an authoritarian social democratic market state.
Depending on who you talk to, economic growth in Cuba has been chugging along at between 8 and 12 per cent per annum and private sector employment has almost tripled since 1981. There is also a fair bit of resources potential - 59 oil exploration blocks in Cuba's Gulf of Mexico have been made available to foreign partners and there could be as much as 5bn barrels of oil in the zone, although no significant discoveries have been made so far. Cuba also holds vast nickel reserves.
All this should not blind investors to the reality that tourist revenues have been declining and the economy has been running a trade deficit that hit $1.1bn in 2005. Cuba also has lots of debt - there is at least $7.8bn (£3.9bn) active debt (the stuff it is willing to pay) plus a whole load of non-performing debt it has defaulted on.
Great potential, halfdecent economy, but lots of over-powerful socialists, keen to keep a tight control on foreign currency earnings. These bureaucrats can easily ruin an investment overnight, although Cuba's Foreign Investment Act does guarantee the repatriation of profits in freely convertible currency.
So how do we access this promising but risky story? Step forward my latest small discovery in wonderful world of adventurous investing, Ceiba Investments, a Channel Islands-listed offshore fund that has been flying under the radar for the past few years.
As one investor put it "this is the only credible play if you want to invest in this space . . . there's simply no other real choice". It is Barcelona-based but has offices in Cuba, has real, tangible investments on the ground and boasts investment trust SVM Global and hedge fund Value Catalyst as investors. It also takes a novel but risky approach - focusing on large-scale property projects in the business and tourist sector. Investments include a $36m beach hotel about to start construction plus Inmobiliaria Monte Barreto. This joint venture owns the Miramar Trade Centre in Havana, 16 buildings owned in partnership with the Cuban government. This centre is growing and is expected to hit 150,000 m2 although current book value (at cost) is already $135m. There is also a ragbag of other interests that include a new office and apartment block, loan notes to the Cuban Tourist ministry, plus plans for a hotel in Havana, a beach resort on Cayo Largo and a trendy magazine titled H.
You are essentially making a three-to-five year bet on Ceiba's investments - the shares' net-asset value has not moved much in the past few years primarily because the managers have been in development mode.
These projects have potential (the company already pays out a yield of just over 6 per cent per annum) but they could be undone overnight by administrative fiat.
I am also more than a little worried about the relative lack of diversification - I would be happier seeing maybe five or seven big investments including housing projects as well as some service companies with real turnover. Also, there are rumoured to be some global investment banks readying Cuban investment funds and they could snaffle up Ceiba's managers, leaving the fund in the lurch.
But the mismatch between the share price (about€1.15) and the flat NAV (about €0.67) tells you the market believes these property assets are hugely under-valued. Add the possibility that a future US Democratic president could start lifting the embargo in 2009 and the certainty that Ceiba will hit Aim in the not too distant future, and you have a potentially interesting but risky medium-term bet.
Copyright The Financial Times Limited 2008
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