Are Argentinean Companies at Risk of Being Expropriated?
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The repercussions from the expropriation of YPF (NYSE: YPF) in Argentina are not over yet, as investors are still trying to find out what will happen to the new YPF under control of the Argentinean government. And, even worse, many are wondering of there could be more expropriations of listed companies in the future.
Those who are holing YPF shares are facing many problematic unanswered questions, some of which are:
- Will the listed shares of YPF be delisted? Will investors receive an offer? Is there risk of expropriation for these shares too?
- Is the new YPF going to operate in regards of economic efficiency criteria or purely based on political ideas?
- Where is the new company planning to obtain financing for exploration and production?
- Will there be any consideration for shareholder´s returns or are they simply considered non relevant now?
The expropriation of YPF from Repsol has turned out to be quite a problem for investors in the main Argentinean oil company. The shares are now trading at a 30% of what their price was a year ago, and there is not enough information to make an informed decision about the future of the company and the interest of shareholders. It wouldn´t like to be in the shoes of those investors facing so much uncertainty and sitting on a big loss in their YPF holdings.
Maybe for this reason, investors are running away from Argentinean companies at risk of being expropriated. When government officials announced the expropriation of YPF from Spanish Repsol, many statements about the energy sector being a “matter of public interest” were made. For this reason, there are genuine concerns about more expropriations in the energy sector.
EDENOR (NYSE: EDN) is one of the main electric utilities in the country, the company is in bad financial shape due to low tariffs and it has had some conflicts with the government regarding blackouts in the past. The company is trading at a very low price to book value below 0.4, which shows there would be some considerable upside potential if it were facing a more normal environment and there were no regulatory or even expropriation risks.
Even if EDENOR is never expropriated, analysts are wondering if the company will ever get better tariffs in order to recover profitability. It doesn´t sound very likely under the current administration, and many are considering the possibility of a decision by the Argentinean government to reduce the stock price as much as possible in order to take control of the company for a very low cost. If that is the plan, it seems to be working, shares of EDENOR were comfortably above $10 a year ago, and they are trading around $ 2.25 as I write this post.
Argentinean banks stocks are also suffering the pain from populist macroeconomic policies and fears about the regulatory environment. These stocks are tremendously cheap and profitable, and the expropriation risk doesn’t seem as high as it is in the energy sector.
Grupo Financiero Galicia (NASDAQ: GGAL) is trading at a P/E of 2.78 after losing more than half of its value in the last year, Banco Frances (NYSE: BFR) has a P/E ratio of 3.8 and is also more than 50% down for the last twelve months, while Banco Macro (NYSE: BMA) carries a P/E ratio of 3.5 after also losing more than 50% in price during the last twelve months.
Investors are concerned about government intervention in the financial sector too, there were “conversations” between government and bank officials on the subject of providing fresh funding for recently expropriated YPF. When financing decisions are not taken on economic merits and political necessities dominate the discussion, credit risk can become too high.
The Argentinean Central Bank, with strong ties to the presidency, raised reserve requirements for banks in Argentina lately. The move was clearly targeted at avoiding dividend payments since the financial system is quite solid because credit is still underpenetrated in the country.
There have been talks about providing cheap credit for low income families lately, and investors fear the possibility of government officials forcing banks to lend money at inconvenient rates, even below inflation. The government doesn´t need to expropriate investors in order to mess up with their assets.
Argentinean stocks are trading at a fraction of multiples assigned to comparable companies in the region, so gains could be very high if the political situation turns for the better. Unfortunately, at this stage there are no signs of rationality from Argentinean policymakers.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.