It doesn’t take much to make you happy when you’re a kid.
When I was growing up in Rwanda and the Democratic Republic of Congo, I remember every day after school, mum used to treat us to a good, cold lemonade called Fanta. It was enough to make us forget our long, hot day in the classroom.
My dad was the other “big kid” in the house. He couldn’t wait to get home for a cold beverage either. Only his was called Primus and slighly more alcoholic. And that’s how our evenings began. Everyone enjoying a drink and telling each other about the happenings of the day.
Fast forward 20 years. I was in Kigali, Rwanda’s capital, in December 2010, and I heard that Bralirwa (Brasserie et Limonaderie du Rwanda), the purveyor of our beloved Fanta and Primus, was preparing its IPO.
The prospectus was available in every big bank in town, including Bank of Kigali, where I got my copy. It was quite interesting to go over the financials of a company that I remembered so well from my childhood.
And as a big believer in Warren Buffett’s style of value investing, I almost jumped out of my shoes when I saw the company’s performance figures. I quickly concluded that the stock was a great buy.
Today, the company is public, and things have changed a bit. Bralirwa shares, of which Heineken owns a controlling stake, have risen six-fold and the stock has yielded dividends in the 10% range at times in the past two years. Yet, I still believe the biggest gains are yet to come.
Tapping an Under-served Market
The low level of beer consumption in East Africa with its emerging middle income population (many of whom are in the 19-34 year range) gives a lot of room to grow provided management can effectively market to this increasingly demanding clientele.
On the flip side, the Rwandan market is hugely coveted by all the major brewers. Until now, most of these heavyweights’ energy has been on bigger countries like Kenya and Uganda, but eventually Bralirwa will start seeing more competition on its home turf. Management should start preparing for this.
Bralirwa has a good management team with a lot experience in the industry. Their distribution network and pricing elasticity give them a huge advantage. The latter has been used lately to hike their prices by 10% – you can’t do that if you had serious competition and only when you’re in a situation of a quasi-monopoly with almost 80 % market share.
The company grew revenues by nearly 18.5% in 2012 and earnings per share by 29.8%. It generates a lot of cash and has relatively little long-term debt.
Management often seems to rely heavily on the company’s market dominance and is perhaps complacent about investing for the future. I’d like to see them focus on ways to reduce costs and invest in a lean, effective distribution system instead of raising prices. That’s the way it will stave off new competitors and continue to provide investors with a return on equity above 75% — as it did in 2012. Profitability is the name of the game.
How Much Is This Brewer Worth?
Now, I must note that Bralirwa currently trades at a P/E ratio of 23.2. So, the big question is whether its shares are a bargain in spite of this relatively high earnings multiple. To answer this, I used a two-stage discounted cash flow (DCF) model with a discount rate of 13% (which is 95 basis points higher than the average Rwandan treasury bill rate).
Bralirwa has been growing its earnings at an average rate of 50% over the last five years with almost no debt. But, to be conservative, I assumed a growth rate of 15% over the next 10 years and then lowered to a long-term rate of 3% from there on. I also used “owner earnings” (earnings plus depreciation, depletion, amortization and capital expenditures for new plant and equipment) instead of free cash flow because Bralirwa is still in an expansionary growth phase.
The results look very enticing to this value investor. Bralirwa currently trades at RWF857.00 per share. The DCF model gives me a value of RWF1308.00 per share. So, I see unrealized value of greater than 50% waiting to be snagged by a long-term, focused investor who can enjoy the 2.3% dividend yield while he or she waits for the market to recognize the stock’s intrinsic worth.
To conclude, as John Maynard Keynes once said, “I would rather be vaguely right than completely wrong.” I think that I’m at least “vaguely right” that Bralirwa shares still have a lot of value left.
Christian Sirikali is a chartered accountant, investor, and entrepreneur based in Ottawa, Canada. He has a beneficial interest in Bralirwa shares and plans to buy more in the near future.