 KWR Special Report Alert:
Thirsting For a Cuba Libre
By Keith W. Rabin and Mark
Turner
KWR International, Inc.
Aug 4, 2006
NEW YORK (KWR) August 3, 2006
-- As the world contemplates news regarding Fidel Castro's surgery
and the changes that might accompany a transition in Cuba, many
investors are looking to position themselves for the gains that
might be achieved.
Although news today from La
Havana seems to suggest Fidel is on the mend, whether he bounces
back and regains control in Cuba has yet to be seen. However
the deterioration of his health is plain to see; his voice is
but a harsh whisper, he missed the annual parade for the first
time since the revolution this year, and clearly has trouble
walking more than a short distance. Rumors that the surgery undertaken
was to remove a malignant cancer tumor are unconfirmed (even
denied by Cuba itself) but strong. His brother, Raul, 75, will
have a tough act to follow and it is also believed by many that
he too is not in the best of health. The USA has made their stance
on Cuba plain for decades, and will have huge political and financial
support from the wealthy Cuban ex-pats of the Miami area. We
believe if the change in Cuba doesn't happen today, it is only
a matter of time before those in favor of the "transition
to democracy and free markets" make their move, be it before
or most likely -- after the funeral of the venerable statesman,
now just days away from his 80th birthday.
Whatever the future holds and
whatever government assumes power, we see Cuba as primed for
an injection of foreign capital and economic expansion. With
this in mind, it seems an opportune moment to look at possible
investment opportunities with Cuban exposure.
Cuba's main export is sugar,
and with pure sugar plays hard to find, most eyes on Wall St
would turn to Imperial Sugar (IPSU) to take advantage of the
low production and transport costs to the US market that Cuban
sugar would enjoy. Add the excellent earnings reported this week
by IPSU, and the double figure jump seen on Wednesday is understandable.
We see further upside in this company.
Sherritt International (S.TO)
is Cuba's biggest foreign investor and involved in the lucrative
business of oil production off the Northern coast of the island.
The profits from this business account for 23% of current quarterly
revenues. However there may be a big problem for Sherritt in
an open market scenario. They also currently run the country's
largest nickel/cobalt mine in a joint venture with the Cuban
government. This mine accounts for 20% of their earnings. Nickel
alone accounts for 20% of export revenues for Cuba. The rub is
that before the Revolution of 1958, this mine was wholly owned
by Freeport McMoran (FCX), who would almost certainly try to
claim it back if political changes brought in a free market government.
That claim may or may not succeed, but would certainly cast a
cloud over Sherritt and future earnings. Thus we would avoid
S.TO for the moment even though it is well positioned in Cuban
industry, with a wide array of assets on the island, including
hotels, tourism and agribusiness. On the other hand, while one
should not consider FCX as a Cuba play per se, we do believe
it otherwise offers good value given its other properties, with
this being a potential plus should this issue be resolved in
its favor.
The tourism industry is also
enjoying strong growth in Cuba, with 7% YoY expansion reported
for the last 5 years. If US sanctions are lifted, however, given
its proximity 90 miles off the Florida coast that should expand
dramatically. Any tourist related company that has existing ties
with Cuba might come up on the radar of investors. We believe
that Copa Airlines (CPA), even without any extra Cuban business,
is one of the most undervalued airlines out there today. Add
the expansion of its existing flight schedule into Havana airport
and they become doubly attractive. It is, of course, sensitive
to the price of oil, but still retains a PE of 10x and 43% YoY
earnings growth. Carnival Corp (CCL), running their Caribbean
luxury cruise ships, would be another company to consider. Hoteliers
already established include Cuban market leader Sol Melia (SOL.mc),
quoted on the Madrid bourse, enjoying robust growth internationally
and with a stock price close to all time highs.
Cuban cigars are famed throughout
the world as being of the highest quality. Although the large
conglomerates like Imperial Tobacco and Phillip Morris would
swallow up the production volumes with hardly a ripple on their
balance sheets, we would be on the lookout for new enterprises
willing to import Cuban cigars to niche markets in the USA.
A final play to consider would
be mutual funds. Herzfeld Caribbean, a fund with the evocative
ticker of CUBA, has enjoyed a fine week, with volumes 40 times
average and a 30% spike in its price. The company has investment
in Cuban exposed companies that would benefit from expansion
under the current and more liberal governments, to quote their
spokesman. On August 1st, it traded at a 5.44% premium to net
asset value, and its five largest shareholdings included Florida
East Coast Industries (FLA), Watsco Inc. (WSO) and Consolidated
Water (CWCO), Florida Rock Industries (FRK) and Seaboard Corporation
(SEB).
All this said, the present
socialist government in Cuba is not yet out of power and the
gold rush longed for by many Cuban-Americans and others may not
arrive as quickly as expected. It's also worth noting that Raul
Castro, as the head of the Cuban military, will continue to benefit
from the loyalty of these forces. However there would be little
chance of seeing Cuban soldiers shooting at Cuban civilians live
on CNN as the socialist government in Cuba has consistently been
sympathetic to the views of the populace. As a result this support
is more likely to be institutional in nature. If there is any
groundswell of opinion from the street level in a post-Fidel
scenario, Raul is not likely to oppose it. Although believed
to be more pragmatic than his older brother, he does lack his
political legitimacy and charisma, and no doubt recognizes the
"revolution" is in for tough days ahead. Therefore
he will seek to draw upon his base in the military to make the
adjustments necessary to ensure survival.
In conclusion, we see plenty
of opportunity to benefit from any change to the current government
regime in Cuba. However, one should take into account that political
changes are often painful experiences (we are reminded of the
Former Soviet states). Buying into any fly-by-night stock may
soon end in tears, but there is undoubtedly chance for the wise
investor to get in early to one of the most promising areas of
potential macroeconomic expansion on the planet.
Keith Rabin
President: KWR International,
Inc.
email: kwrintl@kwrintl.com
website:
http://www.kwrintl.com
And Mark Turner
Latin American equities analyst for Hallgarten and Company
Keith W. Rabin serves as president of KWR International,
Inc. (KWR) and publisher of the KWR International Advisor newsletter.
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and opinions contained within have been compiled from sources
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or complete and it should be relied on as such. Accordingly,
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© 2006 KWR International,
Inc.
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