Good to see some comments on FDV.I think there’s a couple of...

Good to see some comments on FDV.

I think there’s a couple of reasons its price has been down in recent months – (1) capital raising in June and its dilutive effect on share value & saturating the supply of shares for anyone who already held FDV and (2) Zameen quarter on quarter revenue growth being negative in June ’18, and zero in December ’18.

Nonetheless I bought a small holding on the thesis below.

Positives:

-        Management that has succeeded before and has large amount of their own capital invested in this.

-         The businesses generally have high quality characteristics. They are capital light, dominant in their market and benefit from “network effects”.

-         The businesses all have vast opportunity for future growth, and across the portfolio this has already been astounding. I consider Infocasas the standout for its relentless consistency – other than a static March 2018, its quarterly revenue growth has varied between +7% and +52% over the last two years. Hoppler and Propzy are also promising given the demographic and economic tailwinds in those markets.

Negatives:

-         The general “sovereign risk” of being an overseas minority shareholder in these countries. There’s a good reason Pakistani Generals and Angolan dictators salt their money away to Switzerland, rather than investing it in online businesses in their own countries.

-         Zameen growth appears to be levelling off

-         A few of the businesses look wobbly - Pakwheels and Lanka Property Web went backwards last year. Encuentra24 (after Zameen, the next largest by revenue) has grown relatively slowly over the last 2 years – although in most businesses 4% quarterly CAGR would be pretty good.

-         FDV’s ownrate of cash burn will continue to stay high even as some of its holdings turn cashflow positive. As a minority shareholder, FDV can’t redirect excess cash from one company into the others - for example there’s no reason to assume Zameen would necessarily favour paying a dividend if it has a good 2019; the co-owners don’t care that FDV has 13 other fledgling businesses to fund.   

This may force FDV into raising more capital, or having to sell off particular stakes sooner than they’d like. We rely on management to be clever at holding onto the winners and ruthlessly culling the losers.

 

My projection is for the gap between revenues and costs continuing to close in the first half of this year, with the holdings cumulatively profitable in Q3. Failure in this regard would be a red flag. Others would be:

-         Another capital raise

-         Sustained drop in listings on Zameen. I’ve started tracking this periodically as a leading indicator of revenue