Description

Bolsa de Valores de Colombia (BVC)

This is a fairly straightforward story and I assume most readers are familiar with the business model.

The two second pitch is this: Bolsa de Valores Colombia is the dominant financial exchange company in Colombia. It’s a good business (though with growth tied to Colombian macro which hasn’t been great). There are some very interesting changes taking place, which will likely culminate in the company being sold to B3 (the Brazilian major). Meanwhile, you are being paid a 6%+ dividend yield to wait. The valuation is really low.

BVC is the monopoly vertically integrated financial exchange in Colombia. It dominates equities and fixed income listing, trading, custody. They also have a 50% stake in SET ICAP which is essentially the FX and derivatives exchange. In Feb 2020 they bought a controlling stake in CRCC which is the derivatives clearing house. The history of financial infrastructure in Colombia is rather weird, where a lot of these things were balkanized. BVC has been slowly rolling up the various pieces of the basic financial infrastructure and now either controls everything or have very significant minority interests. This is a pretty vanilla business model with many comps globally.

The only different thing here is that they bought a company called Sophos (40% of rev) a few years ago. Sophos is a tech outsourcing company, sort of like Accenture or Infosys, servicing mostly financial companies in Colombia and Latam. This is a decent asset and has grown steadily in recent years with decent, albeit much lower margins, than the exchange. Thus, this contributes a significantly less than 40% of profits.

Colombia macro has not been doing that well. The core financials business has experienced a modest amount of rather choppy organic growth in recent years. The Sophos business has grown quite a bit.

The stock is cheap. The P/L is a little bit opaque. But if I add together the consolidated subsidiaries, pro forma for the consolidation of CRCC, plus the equity income for the important non-consolidated subsidiaries (mostly ICAP), I calculate a P/E to 2019 earnings of about 10x.

The company pays a big dividend with payout ratio of about 85%. They’ve been raising the dividend steadily and the payout ratio has gone from 70% to 85% in the last 4 years. I’d guess the forward yield is more than 6%.

If that was the end of the story I don’t think this stock would be that interesting. EM microcaps (even of good businesses) at low P/Es and high yields aren’t uncommon. There are a couple of additional things to consider here.

First, the company did a de-mutualization last November. This allowed the stock brokers that owned about 9% of the equity to sell. Interestingly enough there has been significant selling pressure on the stock since December.

More importantly, the demutualization removes a prior limit of 10% holdings by any individual stockholder. This essentially frees the company for strategic alternatives.

B3, the major Brazilian exchange, has held a 6% equity interest in BVC. B3 has not been shy about their interest in regional exchange assets. There aren’t many decent ones to be had. This is a rare example. Honestly given B3’s size, this thing would be a no brainer. I think B3 will be looking to increase their holdings, and quite possibly could take over the company. It makes too much logical sense.

But if that doesn’t happen, you have a pretty good company paying a fat dividend yield at a low valuation.

Catalyst

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