A few weeks ago, Swen Lorenz from Undervalued Shares gave me a ring as he was organizing an investor’s field trip to Budapest to meet with some of the largest companies there to get a feel for the market.

Having lived in Hungary in the past, being active in real estate there, and never missing out on a excuse to spend time in one of my favourite cities, I was quick to accept.

Over two days we met with some largest players including OTP Group, MOL, ANY, Magyar Telekom, Erste Bank, Raiffeisen, etc.

It was a truly fascinating trip, and key themes emerged from it. Some of these companies are outright cheap, but what are the catalysts? What are some of the key issues faced by Hungary as a whole and companies operating locally?

In this video, we summarized some of the learnings.

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The Wandering Investor.

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Transcript of “Investing in the Stock Market in HUNGARY, good value or value trap?”

LADISLAS MAURICE: Hello, Ladislas Maurice from thewanderinginvestor.com. So today, I’m with Swen Lorenz. And we just came back from a two-day trip to Budapest where we visited some of the biggest listed Hungarian companies. So for two days of meeting their investor relations teams. So Swen, why did you organize this trip?

Why consider investing in the stock market in Hungary?

SWEN: I like bringing likeminded people together, but you need to have a reason to bring them together. And my readers of undervalued-shares.com very much like looking at undervalued opportunities and overlooked market, undiscovered market, or market that have just been neglected by other investors. Within Europe, there are probably few other countries that are currently as, I’m not sure if I should say neglected or as frowned upon as Hungary because of the political polarization that is going on in Europe. And Eastern Europe, as a whole, the stock markets are quite undervalued, they’re among the cheapest markets in the world. And within that group, Hungary is particularly cheap. So it’s cheaper even than some of the nearby countries.

And I’m a big believer that going to a place and speaking to experts, to decision makers changes your perspective, and brings a new perspective to the table, and makes sure that you can pick up on some facts that, otherwise, you would never come across, because, for example, mainstream media won’t tell you about it. So I thought, what better thing to do than to invite a few readers quite spontaneously, we did it with three weeks lead time, to travel to Budapest, meet Hungarian companies. And that’s what we did the last couple of days.

LADISLAS MAURICE: Yeah, it was really, really interesting. I mean we could really question the team’s, really deep drill down their thinking. So, we learned a lot from all the people we met. 

What are the key issues that Hungary is facing?

LADISLAS MAURICE: So, what according to you, were some of the key challenges that Hungary faces, or Hungarian companies?

SWEN: So, Hungary has just been known for having the highest inflation rate in all of Europe, which is quite an achievement given that inflation is not exactly low in other countries. I think there is also very much the challenge of Hungary doesn’t have a capital market culture, there’s no equity culture. The locals don’t buy equities and foreigners don’t want to buy Hungarian equities because they think the country is on the wrong path. There’s, obviously, very much the contentious relationship with the European Union, which is creating a lot of headlines, that then feeds into the interest of investors. So it’s all sort of like one set of connected issues. And yeah, last but not least, I think, Hungary definitely has an issue with, and this is typical for Eastern Europe, a decreasing population, overall, a brain drain, young people leaving. The industries that are there are not always exactly 21st century innovative growth industry. There’s a lot of old economy.

And all of that comes together to an investment case that doesn’t look all that attractive on the outside. But I’m a big believer that Budapest, the Budapest Stock Exchange has 130 stocks listed. I thought, if we go and have a closer look, we would definitely find something that’s interesting. And possibly, we’d find a few surprises when it comes to the more well-known companies as well, and maybe also the old economy companies. But yeah, these are some of the challenges that we had to investigate in more detail.

LADISLAS MAURICE: So essentially, a lot of these businesses are cheap, but things can remain cheap for a long time. 

What are some potential catalysts for stocks in Hungary to re-rate?

LADISLAS MAURICE: So, what are the catalysts for valuations to change in Hungary?

SWEN: This is where it gets very interesting. And I have to admit, I had missed that. You know, there’s often some development that would appear on page 17 of the newspaper, if they even report it at all. And probably the number one issue that has made negative headlines with Hungary the last couple of years is the relationship with the European Union, and the European Union cutting funding or freezing funding for Hungary. Hungary is one of the net beneficiaries of the European Union. So just as much as the Germans put in more than they get out, the Hungarians get out more than they put in. And in the small economy like Hungary, this funding, whatever you think of the European Union, this funding, the net balance of it does make a significant difference. That funding was frozen. But as ever, in politics, things don’t stay the same forever, there’s backdoor deals going on and negotiations.

And right now, the European Union has this issue that next year, they want to increase their budget tremendously, also to fund Ukraine. And for that, they want buy-in of all 27 European Union nations. And Hungary just basically said, “If you want our agreement to that, something’s got to give.” And the Financial Times just reported that, according to their sources, Hungary and the European Union are in the final stretches of negotiating a deal that will be announced possibly as early as the end of November, and which will lead to funding for Hungary restarting. It’s not the only interesting catalyst for the country, but €40 billion of funding across a number of years coming back into Hungary will certainly have an effect. The headlines will have an effect in public perception of the market. And I think that’s possibly the most interesting short-term catalyst that we’re looking at.

Hungary’s energy independence

LADISLAS MAURICE: Interesting. What about the energy situation in the country? Because this came up a few times in our meetings.

SWEN: Yes. So Hungary is in the somewhat unusual situation that they’re still very much connected to Russian pipeline oil. Hungary just basically refused to say, “We’re playing along with EU sanctions against Russia, and we’ll just continue to buy this oil through the Druzhba pipeline,” or whatever it’s called. And as a result, Hungary has been buying Russian oil at a tremendous discount through its publicly-listed oil and gas company called MOL, M-O-L. And that has, in a way, benefited the country tremendously, benefitted the shareholders of that company as well. Some of these windfall profits then were taxed by the government and ended up in the government’s coffers. Is that sustainable? I don’t know.

Hungary itself says, “We want to make changes to our energy supply.” And they’ve actually been working, they say, on changes since 2014, since the first conflict in Crimea. Can these things be done overnight? They can’t. I’m a big believer that energy transitions are something you should plan over one or two decades, at least. And to me, it seems that the Hungarians have been doing the right thing. The Germans might have rushed a little bit too much with it, which they’ve recently realized. So yeah, energy supply is an issue like everywhere else. Energy prices are way up, companies are complaining about that, it hits their earnings. But they’re tackling it from a slightly different perspective and starting point, which is quite interesting.

LADISLAS MAURICE: It was. And one of the partners at a law firm that we visited was mentioning that one of the biggest risks in terms of energy supply was the potential for sabotage of one of their pipelines. So it was pretty interesting to see that it was really top of mind, that sabotage, in this day and age, is now top of mind for oil companies.

SWEN: It is. I also have dug out research about exactly that point. Even if that particular pipeline was sabotaged, the refineries of MOL could still continue to operate. They’d have some extra operational risks, because running a refinery at below capacity brings certain operational issues with it. But they believe they’d be fine. But yeah, these are the realities we’re living with now in Europe after Nord Stream.

Interesting companies to invest in – ANY in Hungary

LADISLAS MAURICE: So, what about the companies that we went to see, were there any companies that you found more interesting than others, or general statements that you can make about businesses in Hungary?

SWEN: So my personal favorite, I have to say, and one of the surprise finds was a company called ANY, A-N-Y. And that name doesn’t tell you anything. And if you then look at the Hungarian name, it doesn’t tell you anything, either. If you then dig a bit into the history, you find that it was called the State Printing Company of Hungary. They used to print secure documents like passports. But after the Berlin Wall came down, they were privatized, they’re listed on the stock market now. They’ve been innovating and expanding into new markets. And they’re a specialist for all sorts of secure documents, whether paper, or plastic, or just purely digital. They produce not just passports, but vaccine passports, vouchers, election forms, tax and customs documents, ministerial letters, ID documents, and also bank cards. It’s an endless, endless amount.

And it’s become very, very successful at becoming a company that exports these products to foreign markets. Over the last 20 years, their revenue is up 4 times and their exports are up 25 times.

LADISLAS MAURICE: That’s impressive.

SWEN: Exports now account for half of the company’s revenue, which is €110 million, they’re very profitable. And we’ve been told to think of Hungary as this insular country, where only old economies companies exist. And then you’ve got a company like ANY where you say they’re very innovative, it’s high tech, they are internationally successful. Their number one, the guiding motto for their future growth is that, worldwide, there are still 1.1 billion people who do not have any identity document at all. Never mind the fact that, with the ongoing digitization of government, healthcare, finance, more and more secure documents are needed. So they’re definitely in the growth market. And they’re tackling this especially through growing presence in Africa. They filed patents in 30 countries across Africa. So this is a growth company.

It’s currently got a dividend yield of 10% based on the dividend of the last few years. The market cap is only €70 million compared to sales of €110 million a year, so it’s not even one times sales. I haven’t looked at it in great detail yet, but this stock is also traded on the German OTC market. So anyone who can trade stocks in Germany, which is just about any broker in the world, could actually buy this company. So you don’t tell me that there’s nothing interesting to be discovered in Hungary.

LADISLAS MAURICE: Yeah, I was not expecting to see a Hungarian business with that big of a business, essentially, in Africa cutting deals with all these African countries. And what was interesting is that they have zero issues with receivables, in the sense that, somehow, they get paid by all their African suppliers. [laughs] And doing business in Africa, having lived there for seven years, that’s quite the feat. So they’re good at operating locally, which is really impressive for a central European business. Any other companies that you found interesting?

Investing in OTP Bank Group

SWEN: I think OTP Bank is something worth looking at. And it’s sort of it’s not something that’s hiding in any way. It’s the country’s largest bank, and one of the top two blue chips besides MOL. What I liked about OTP is that I didn’t know that it’s actually the world’s leading frontier market bank. There is no other bank that is as active in frontier markets as OTP. So at home, they’re the market-leading bank, and then they’re also in countries all across the region and extending into places, for example, like Uzbekistan, which you spoke about in the past.

Uzbekistan is a country where banking is still, in some ways, sort of stuck in the past, like going back 30 years. Some people still keep dollar notes in the mattress, or they save by buying gold. So it’s a very underserved market where consumers have to catch up with even just basic banking services. It’s fragmented, they’ve bought a bank in Uzbekistan, they want to buy more banks as they become available for sale. And one of the common features of markets like this, and OTP is very good at exploiting this, is that these underserved markets usually have a duopoly of banks, or maybe they’re three large operators, and they usually compete not through price. They all have very stable margins, often well above average, as well. And the penetration of banking services is way below that of Western Europe.

So what used to be known as the Central and Eastern European transition story, which is just the region catching up with the standards and the market penetration of Western European countries, that is still very much going on, and that has probably another decade or two to run. So these are growth markets with very high margins. In banking, you have very high barriers to entry as well. And then you’ve got an organization like OTP, who have a great track record in utilizing that to their benefit and also being quite safe. I had no idea, I have to admit, that in a recent stress test that was carried out by the European Banking Authority, out of 70 banks that they tested, seven-zero, OTP came out fourth when it comes to having their act together, balance sheet being in order, and the company just being a fundamentally strong company.

Admittedly, bank stocks are hated almost the world over. Certainly, in Europe, bank stocks are trading at low multiples. OTP is trading at just under five times earnings. You could go to France, Spain, Italy, the UK, and find banks trading at similar valuations. However, if you believe that the Central European and Eastern European transition story is intact, and you might want to diversify away from certain other markets for whatever reason, then OTP is definitely something to look at. And if this whole EU funding story plays out the way that we think it now could play out, then foreigners are going to buy the leading blue chips of the country, and OTP is the most liquid stock on the Hungarian Stock Exchange. So there would be probably an automatic uplift. The stock is actually up 88% over the last 12 months. Speak of there not being anything interesting in Hungary. [laughs]

LADISLAS MAURICE: Yeah, the largest stock on the stock market of 88%. That’s impressive. 

Heavy involvement of government and EU

LADISLAS MAURICE: One thing that I found quite interesting is, and I’m not going to pick on any specific company, but generally speaking, I would say that over half of the meetings that we were having with the people concentrated around government, taxes, EU, and energy issues, and almost no discussion revolved around delighting consumers, an interesting new product that they launched, that they were trying to gain market share, etc., etc. You just didn’t sense that they were being very aggressive companies.

SWEN: Yes. And sadly, not only is that true, but I think it summarizes much of Europe in a way. I think if we went to company meetings in many other countries in Europe, we’d probably see something quite similar. It struck me as well. There were exceptions, like ANY, the Security Printing Company. We overstayed our visit because they showed us their products.


SWEN: And they were so proud and so delighted that we were this group really interested in details. But sadly, in a way, this is what Europe has come to, to a large extent. I mean, the share of government in GDP in most of Europe is what it’s like, 40% or 50%, it’s half of the economy’s government nowadays. And there’s also a certain mindset, and that makes us, over here, very different from the States, for example. Does that mean there are no interesting investments to be found in Europe? Actually, quite the opposite, I think Europe offers tremendous opportunity because markets are so fragmented and intransparent. In the States, you’ve got much more dynamism and it’s all about delighting the consumer. But it’s also a unified market, everyone, all the documents are in the same language, everyone has access to the same kind of information. That’s why these markets are quite efficient and you don’t find so many mispriced opportunities.

Say of Europe what you want, one thing we’re really good at is being fragmented, having lots of languages, lots of legal systems, [laughs] lots of local cultural quirks. And that’s what makes it so interesting for equity investors, because there you can go in and find companies like, to stick to the example, ANY, the security company, and find something that has just simply been overlooked, and which has tremendous potential for the next couple of years. So it’s a sad and somewhat sobering observation, but it doesn’t need to stand in the way of making good investments over here.

LADISLAS MAURICE: You liked one of the, or I’m not sure if you liked the company, but you found a company so interesting, that we met, that you decided to write a report on it, right?

SWEN: Absolutely, yeah. So I mean, to give myself a bit of a sales plug, if I may, I have a website where I publish a weekly article that is for free. And the next article will be about the trip to Hungary. So I have this, I love inviting readers to come along. But obviously, only like 0.01% of your readers can actually come along to a trip like that, and the other 99.9% can’t. So I publish summaries of these trips so that everyone can benefit from them. I did find one company where I thought this is so interesting that I will publish one of my in-depth research reports about it, which is the service that I provide, which is paid for. I publish 10 to 15 reports a year. And that’s going to be announced on the website sometime soon as well.

LADISLAS MAURICE: Fantastic. Swen, thank you very much. So you have absolutely nothing to lose by signing up to the free newsletter. The link is below. Swen, thank you very much.

SWEN: Thanks.

LADISLAS MAURICE: Really appreciate it.

SWEN: Come along next time. [laughs]