a field guide to African stock markets Mon, 08 Dec 2014 15:06:00 +0000 en-US hourly 1 Tanzania’s Top 5 Stocks of 2014 Mon, 08 Dec 2014 15:06:00 +0000

It appears that Tanzania’s Dar es Salaam Stock Exchange (DSE) will be Africa’s best-performing stock market in 2014.

Midway through the year, the market removed the 60% cap on foreign investors, making shares of some of the country’s largest, most profitable companies accessible to non-Tanzanians for the first time in years.

The resulting inflow of foreign cash propelled the DSE to new heights. As of this writing, the exchange’s Local Companies Index is up 27.2% in USD terms since the start of the year.

So, which Tanzanian stocks put the biggest smiles on investors’ faces in 2014? Let’s count down the top five performers.

Tanzania’s Best Stocks of 2014

(tie) 4. CRDB Bank (CRDB)
(Year-to-date USD Return: 58.5%)

Founded in 1996, CRDB is Tanzania’s largest bank. It boasts a network of 118 bank branches and 311 ATMs ranging from Dar es Salaam to Bujumbura in neighboring Burundi. It offers a wide range of banking services but has a special focus on lending to individuals and the agricultural sector.

In the first nine months of the year, the bank grew earnings 12.6% on the back of a big jump in fee income. A partnership with the Tanzanian Postal Corporation helped increase customer deposits by nearly 18%. And management’s goal of doubling in size by 2017 is well within reach. Total assets climbed 23% over the past 12 months.

(tie) 4. Tanzania Breweries (TBL)
(Year-to-date USD Return: 58.5%)

TBL, a subsidiary of global brewing giant SABMiller, overcame a weakened currency and a 20% increase in Tanzania’s beer tax to grow earnings 18% over the first six months of its 2015 fiscal year.

It accomplished this by selling a greater proportion of premium products (which command higher profit margins) and by cutting administration costs.

Tanzania's Best Stocks 2014

Photo by Andrew Moore

In fact, the company was so profitable that it raised its mid-year dividend 67% and even had a little left over to pay down some of its long-term debt load.

The share price shot through the roof, helped by an influx of foreign investors looking to tap into the growth of Tanzania’s consumer class.

3. Swissport Tanzania (SWISSPORT)
(Year-to-date USD Return: 70.0%)

Swissport provides cargo and baggage handling at Tanzania’s airports. It’s been a terrific business to operate in. As the nation’s economy grows, so do the number and size of aircraft flying in and out of places like Dar es Salaam and Kilimanjaro.

In the first half of 2014, the number of flights increased 15%, fueling a 17% increase in revenue. This growth plus aggressive cost management helped the company generate a 39% earnings increase. The company rewarded shareholders with an equivalent boost to its mid-year dividend.

Looking ahead, the company is preparing for the entry of competitors by constructing a state of the art cargo facility at Julius Nyerere International Airport.

2. Tanzania Cigarette Company (TCC)
(Year-to-date USD Return: 73.8%)

This one’s a head-scratcher.

TCC is Tanzania’s largest cigarette manufacturer and a subsidiary of Japan Tobacco International (JTI). In the first half of this year, sales increased just 2% and earnings dropped 20% after the government enacted a 25% excise tax on tobacco. In spite of this, the company’s share price surged well over 80%.

My best guess for what catalyzed the price appreciation was the removal of the cap on foreign investment in the company, and, apparently, foreign investors love them some sin stocks.

1. Tanga Cement Company (SIMBA)
(Year-to-date USD Return: 124.2%)

Also known as Simba Cement, Tanga Cement Company is Tanzania’s second-largest cement manufacturer. Thanks to an impressive effort to reduce expenses, the company’s operating profit jumped 38% during the first half of 2014.

And two recent developments indicate improved profitability for Simba in coming years. In July, it signed a new power supply agreement with the local utility which ensures it more reliable electricity. Management also recently announced that a second kiln line will come on line next year, effectively doubling production capacity.

Even after the huge price increase, the shares still trade at just 10.5x trailing earnings and a 2.3% dividend yield.

What Do You Think?

Did this list of top performers surprise you? Which Tanzanian stocks do you think will post the best returns in 2015? Let’s hear your thoughts in the comments!

Other Articles You Might Like

How to Invest on the Dar es Salaam Stock Exchange
Tanzania’s Stock Exchange is Opening to Foreign Investors (4 Shares to Know)
Here’s How to Profit From Tanzania’s Quiet Rise

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Botswana’s 5 Best Stocks of 2014 Wed, 03 Dec 2014 02:46:40 +0000

At first glance, it would appear that the Botswana Stock Exchange (BSE) had a lackluster year. Its main index is down 1.0% in USD terms.

If you look closely at the performances of individual stocks, however, you will see that the market was weighed down by just two companies – FNB Botswana and Barclays Botswana.

These two banks are among the BSE’s largest stocks and have dropped 15% and 41% respectively. They’re struggling to grow profits due to Botswana’s record low interest rates.

Most other stocks have enjoyed solid price gains. Here’s a countdown of the top five performers.

Botswana’s Best Stocks of 2014

5. Wilderness Holdings (WIL)
(Year-to-date USD Return: 18.3%)

With more than 60 safari camps spread across nine countries, Wilderness Holdings is an excellent play on Africa’s luxury tourism sector.

The company’s earnings increased 70% during the first half of its 2015 fiscal year thanks to higher occupancy rates and a stronger US dollar. Management succeeded in widening profit margins by packing guests’ itineraries full of company-owned activities and side trips. It also paid down a big chunk of its long-term debt.

Some customers have canceled reservations in the wake of West Africa’s Ebola outbreak, but the company expects this to be a temporary setback. It plans additional expansion in coming years.

4. G4S Botswana (G4S)
(Year-to-date USD Return: 21.3%)

G4S is one of Botswana’s leading security companies. It monitors thousands of alarms, vehicles, fences, and cameras and manages a large team of guards and incident response units.

The security business has been a good one in Botswana. G4S’s revenue grew nearly 7% during the first half of the year. But the main reason investors have been so enthusiastic is an ongoing restructuring exercise that saw the company’s administration expenses slashed by over 15%.

The cost-cutting helped the company post earnings growth of 129% and allowed management to more than double its dividend payout.

3. Sefalana Holding Company (SEFA)

Botswana's Best Stocks

Photo by Steve Jurvetson

(Year-to-date USD Return: 30.2%)

The first company to ever list on the Botswana Stock Exchange, Sefalana Holding Company is a wholesaler and retailer that operates 37 cash and carry stores and 21 large supermarkets across Botswana and Namibia.

Sefalana bought 12 Namibian cash and carry stores in July of this year. The company funded the deal through a rights offering, and management announced that it would make a significant contribution to both sales and profits. Look for the company to expand further into Namibia in coming years.

2. Chobe Holdings (CHO)
(Year-to-date USD Return: 32.9%)

An eco-tourism company, Chobe Holdings operates 11 lodges and camps in northern Botswana and Namibia.

The firm grew profits 19% during the first half of its 2015 fiscal year thanks to a big increase in occupancy rates. These results, plus an 18% dividend hike announced earlier in the year, sent shares soaring. Going forward, a newly modernized fleet of aircraft, which help ferry guests to and from the company’s lodges, should ease pressure on profit margins.

Like its competitor Wilderness Holdings, Chobe is seeing slackened bookings in response to the Ebola outbreak. In response, both companies are now offering no-penalty cancellations to all prospective customers should a case of Ebola be confirmed in Botswana.

1. Sechaba Brewery Holdings (SECH)
(Year-to-date USD Return: 40.9%)

Botswana’s largest brewer has managed to grow earnings at a modest pace  in spite of a 50% levy on alcoholic beverages mandated by the country’s teetotaler president, Ian Khama.

SABMiller owns a 16% stake in the holding company and a 40% stake in the breweries themselves. Thus, when Sechaba released a series of cautionary announcements hinting at potential changes to the ownership structure, rumors abounded that SABMiller was preparing a buyout offer. This speculation, not the company’s meager earnings growth, is what fueled the stock’s price rise.

On November 21, the company withdrew the cautionary, saying the company is no longer pursuing the “corporate changes.” This makes it tough to imagine that the company will appear in this countdown again next year.

What Do You Think?

Did any stocks on this list surprise you? Which shares do you believe will be among Botswana’s top performers in 2015? Let’s hear your thoughts in the comments!

Other Articles You Might Like

Botswana’s Best Stocks of 2013
How to Invest on the Botswana Stock Exchange


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Here’s Why Dangote Cement Is a Buy Thu, 13 Nov 2014 11:35:13 +0000

When Africa’s richest man, Aliko Dangote, announced a 40% price cut on bags of Dangote Cement last week, Nigerian consumers rejoiced.

The stock market’s reaction, on the other hand, was decidedly less enthusiastic. Shares of the company have plunged nearly 19% since the news broke.

So, will the stock weigh down a portfolio’s performance going forward or does it have a solid foundation for market-beating gains? Let’s take a closer look.

Digging into Dangote Cement

There’s no disputing it. A 40% price cut will take a big toll on profitability.

But it’s important to keep in mind that Dangote Cement (DANGCEM) boasts a 63% share of Nigeria’s cement market. Thus, because cement is essentially a commodity, Dangote’s competitors have little choice but to cut their prices, too. In fact, one has already announced that it will do so.

The competition, however, is ill-prepared for a price war.

Over the past few years, Dangote has invested heavily in efficiency improvements that allow it to produce and distribute cement cheaply. The kilns at its two largest plants are now fueled primarily by natural gas, which is five to seven times cheaper than the more commonly used fuel oil. And an extensive network of cement depots and a huge fleet of trucks allow for deliveries direct to the customer, cutting out the middle man.

The table below shows the net profit margin of Dangote and its listed competitors over the first three quarters of 2014.

CompanyNet Profit Margin (Jan-Sep 2014)
Ashaka Cement25.3%
Cement Company of Northern Nigeria14.1%
Dangote Cement45.3%
Lafarge Africa19.7%

So, with an average net margin of 19.7%, Dangote’s largest competitors can’t cut prices by 40% and remain profitable. They will be compelled to find ways to lower their cost of production or else cede their share of the market, giving a virtual monopoly to Dangote.

Meanwhile, Dangote is rapidly widening its geographic reach. By the end of the year it will complete construction on new cement plants in Nigeria, Senegal, Sierra Leone, Cameroon, Zambia, South Africa, and Ethiopia. The new facilities will double its production capacity to 40 million tons. And CEO Devakumar Edwin says additional expansion will increase this figure to 60 million tons by mid-2016.

Dangote Cement

Photo by Luke Blyth

Moreover, in spite of its huge capital investments, the company still generates gobs of free cash flow, helping to keep finance costs low.

But What’s It Worth?

Dangote shares currently trade at a price/book ratio of 5.1. That’s nearly the lowest level its ever traded at in its history as a public company. Meanwhile, one of its largest pan-African rivals, PPC Limited (PPC), enjoys a price/book multiple of 9.7 in spite of being far less profitable.

Over the past four years, Dangote has grown its book value at an average rate of 20.9% without any injections of additional capital. If the company manages to bring the additional production capacity on line as it plans, then I am reasonably confident that it will maintain this pace over the next five years.

If we assume that

  • net asset value grows at a rate of 20.9% over five years,
  • the shares continue to trade at a price/book ratio of 5.1 five years from now,
  • and that management freezes its dividend at 7.00 naira per share,

then investors at today’s price of N169.74 would realize a an annualized return of 22.8% between now and late 2019. Of course, if the multiple expands and the dividend rises, a much juicier return is possible.

So, at today’s price, I believe the stock makes for a rock solid addition to Africa investors’ portfolios.

Want More Stock Picks?

Then I think you’ll love the Stock Scout™ newsletter. Each monthly issue includes three of my best African stock picks plus tips and resources than can help you build a pan-African stock portfolio efficiently and profitably.

It launches November 19. Sign up here to receive pre-launch updates and to be eligible for an exclusive membership discount.


What Do You Think?

Will Dangote’s price cut ultimately lead to higher profits? Do you think the shares are attractively priced? Let’s hear your thoughts in the comments!

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Announcing the Stock Scout™ Newsletter Wed, 05 Nov 2014 21:32:58 +0000 Stock Scout™: your guide to profitable opportunities on African stock markets.]]>
I’m launching a new African stock advisory service on November 19, and I’d love for you to be a part of it.
Ryan Hoover Founder,

Ryan Hoover

It’s not easy to construct a profitable African stock portfolio.

Independent research is scanty. Fundamental data is tough to track down. And it’s difficult to get a sense of what makes a company tick, especially when separated by oceans and national borders.

That’s why I’m launching Stock Scout™: your guide to profitable opportunities on African stock markets.

In Stock Scout™, I’ll be sharing what I’ve learned in my ten years as an investor, portfolio manager, and investment analyst on the continent.

Features of the Service

Each month, I’ll reveal some of my favorite African investment ideas plus resources that will help you invest profitably in the world’s ultimate emerging market.

Every issue of Stock Scout™ will include:

  • Three of my best stock ideas, each one poised to generate market-beating returns
  • An industry-wide stock ranking, comparing the strengths and weaknesses of companies operating in key sectors of African economies
  • Tips and tricks that will allow you to become a better equipped, better informed Africa investor
  • Valuation alerts for highlighted companies, revealing which ones make the best buys now
  • A portfolio tracker that measures each investment idea against the market as a whole

Whether you’re completely new to investing on the continent or have been trading stocks there for years, I’d love to have you aboard. I can’t wait to explore Africa’s stock markets with you.

Stay Posted!

To get updates on the Stock Scout™ launch and to receive an exclusive discount when it goes live on November 19, just enter your email address below.

Your Turn

What are your biggest challenges to investing in African stock markets? Tell us how an African investment advisory service would help you most in the comments!

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What to Make of GSK Nigeria’s Big Profit Drop Wed, 29 Oct 2014 17:48:01 +0000

This week GSK Nigeria (GLAXOSMI) announced that its profits through the first nine months of 2014 dropped 23% compared to the same time period last year.

The news came as a bitter pill to investors. The stock has fallen nearly 16% over the past thirty days and now trades at its lowest price in 16 months.

Are the shares bad medicine? Just what the doctor ordered? Or something in between?

Let’s have a closer look at the numbers and see what they reveal.

GSK Nigeria: More Than Just Drugs

GlaxoSmithKline Consumer Nigeria markets and manufactures a wide range of pharmaceuticals and vaccines. Its line-up of wares includes everything from acetaminophen to cancer drugs, many of which it produces at a factory just west of Lagos. Most are distributed in Nigeria, but it has recently begun to export to Ghana, too.

Perhaps surprisingly, however, GSK Nigeria’s best-selling products are beverages – not medicines. In 2013, sales of Lucozade (an energy drink) and Ribena (a fruit concentrate beverage) accounted for over half of the company’s revenue and operating profit.

The Big Margin Squeeze
GSK Nigeria's most popular product

Photo by FHKE

The heavy dependence on these two brands helps explain GSK Nigeria’s lackluster performance of late.

The firm’s parent company, GlaxoSmithKline (GSK), sold Lucozade and Ribena to Japan-based Suntory Beverage and Food Group (STB) last year.

Alarmed at the prospect of losing its most lucrative products, GSK Nigeria’s management scrambled to negotiate a deal with Suntory which would allow it to continue to manufacture and distribute the drinks in West Africa. They worked out an agreement, but the terms included a licensing fee that dented GSK Nigeria’s profit margins.

The company’s first half results clearly show the deal’s impact on profitability. Licensing fees squeezed the gross margin from 14.6% in the first six months of 2013 to 7.5% a year later. With such a sharp spike in the cost of sales, it’s little wonder that the bottom line has slipped.

On the Mend?

But here’s the good news for GSK Nigeria shareholders. Management is doing an excellent job of containing costs apart from the new licensing fees. Administration costs have been slashed nearly 15%, and ongoing upgrades at its Agbara factory look to widen the product offering and improve efficiency.

The impact of this can be seen in the most recent results. Earnings in the third quarter of 2014 actually grew 22.5% compared to the same period last year.

How Nice is the Price?

GSK Nigeria currently trades at price equivalent to 4.2x its net asset value and at a dividend yield of 2.53%.

Over the past twelve months, the company’s book value increased 10.9%, considerably slower than its annualized rate of 14.6% over the past five years. Since 2009, the stock’s price/book ratio has ranged from a high of 5.8 to a low of 1.8.

Let’s assume that the company grows net asset value at a rate of 10.9% over the next five years and that management raises the dividend at a similar pace. Let’s further assume that the market values the stock at 3.8x book value five years hence – the midpoint of its range over the past five years.

Under these assumptions, the company’s share price five years from now would rise to NGN83.85 from its current level of NGN54.00. If we add five years of dividends to that price, investors would reap an annualized return of 11.4%.

That’s not a great return considering that the yield on a 10-year Nigerian government bond now hovers around 12.6%.

But if management can find a way to compensate for the reduced profitability of Lucozade and Ribena and grow book value at its 5-year average of 14.6%, then investors can expect a juicier annualized return of 15.0%.

As for me, I’m staying on the sidelines for the time being, but if the stock’s price drops further on no substantive news, I may be enticed to pick up a few shares.

What Do You Think?

Do shares of GSK Nigeria look like a good buy here? Tell us why you do (or don’t) like the stock in the comments!

Other Articles You Might Like

How to Invest on the Nigerian Stock Exchange
Is There Hidden Value in Stanbic IBTC?
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Is There Hidden Value in Stanbic IBTC? Thu, 23 Oct 2014 10:53:09 +0000

Stanbic IBTC is Nigeria’s best-performing bank stock. Its share price has climbed 40.5% this year and 55.4% over the past twelve months. Is it nearing the end of its run? Or is the market offering investors a discount to the bank’s real worth?

Here, Godfrey Mwanza, CFA shows us how he values the company.

Stanbic IBTC Holdings Plc (STANBIC) is a financial service holding company in Nigeria with subsidiaries in banking, stock brokerage, investment advisory, pension and trustee businesses. Its three main business areas are corporate and investment banking (CIB), wealth, and personal and business banking (PBB).

Stanbic is a member of the Standard Bank Group (SBK) of South Africa which has a 53.2% stake in the company. Stanbic operates 180 branches and serves over one million customers in Nigeria. Total assets were NGN 907bn (USD 5.6bn) as at 30 June 2014 making it the country’s 12th largest banking group.

Godfrey Mwanza, CFA

Godfrey Mwanza, CFA

Nigeria’s Banking Industry

Nigeria has a very low level of banking penetration compared to other frontier African countries, let alone global emerging markets. According to World Bank data, in 2013, Nigeria’s private credit to GDP was 11.8%. Much lower than South Africa (156%), Kenya (40%), Ivory Coast (18.5%), Uganda (15.5%), and Zambia (14.6%) to name but a few.

Over the next five years, the IMF expects the Nigerian economy to grow at 15% per year in nominal terms. Banking assets (primarily credit to the private sector) should in principle grow at a faster rate than that as penetration of banking services increases.

And what are you paying for that growth potential?

Well, the average forecast returns on equity for the nine Nigerian banks in our universe for 2014 is 18.7% and they trade on a price to book of roughly 1.20x 2014 forecast shareholders’ equity. Using the formula for justified price to book [PB= (roe-g)/(r – g)], assuming a conservative 5% terminal growth rate (g) and that the 18.7% ROE is sustainable over time, a 1.20x price to book implies a required rate of return of 16.4%, far higher than the 12.2% yield you will get from a 10 year Nigeria government bond.

The whole sector is cheap. You are paying little for potentially massive growth.

But when you look closer, what is most interesting about Nigerian banks is the extreme dispersion of valuations amongst individual stocks. For instance, Skye Bank trades at a 72% discount to that 1.20x average. And Stanbic IBTC trades at a 122% premium.

This has led to many analysts to recommend a sell on the stock on the basis that it is expensive. However, there is more to the Stanbic story than meets the eye and despite the stellar outperformance this year (price return of 45% year to date versus -6.5% for the Nigerian All Share Index  -11.7% for the Nigerian banking index) I think a closer inspection will reveal that there is still hidden value in the name.

Picking Stanbic IBTC Apart

To find this hidden value, it is necessary to break the group into its three main operating units (wealth, CIB, and PBB), value them separately and sum up the parts.

The Wealth Business

Stanbic’s wealth business comprises their market leading pension administration, trusteeship and asset management. The business has 1.3 million retirement savings accounts and assets under management (AUM) of NGN 1.4trn (USD 8.8bn). AUM has grown by 36% per year for the last five years and makes up 35% of national pension fund assets of UDS 25bn which are a paltry 4.8% of GDP (compared to 90% in South Africa, 41% in Botswana, 17% in Kenya or 7% in Zambia). In 2013, wealth contributed 50% to PBT in 2013 versus 17% in 2008.

There are two main methods used to value an asset management company. A price earnings ratio is suitable for stable annuity-type asset managers whereas market cap/AUM is more appropriate for hedge fund types of asset managers which can have volatile earnings.

I took a sample of 10 asset managers from developed and developing countries and found that over the last decade they have traded at a median price to earnings ratio of 17.43x. I personally do not see why a market leading asset management business in fast growing Nigeria should be any different. But, to be conservative, I apply a 15x earnings multiple on NGN 9.8bn, my forecast for 2014 wealth earnings. The business unit achieved roughly NGN 5bn already in the first half of 2014.

I am comfortable with a 15x earnings multiple because I expect earnings growth to be faster than 15% for the following reasons.

  • First, it is conservative compared to the 29% per year growth over the last four years and there is still much room for growth in the sector.
  • Second, unless you assume Stanbic loses market share or Nigerian pension fund assets as a proportion of GDP decline, AUM should grow at least in line with nominal GDP or 15%. Indeed it should grow faster. As with banking assets, increased penetration implies growth potential faster than the economy. Recent policy changes also lend credibility to this faster-than-GDP growth argument. In July this year, the Nigerian president signed the Pension Reform Act 2014 into law, which repeals the Pension Reform Act, no. 2, 2004. The Act increases the minimum rate of pension contribution to 18% of monthly emoluments from 15%, with 8% contributed by the employee from 7.5%, while the employer contributed 10% vs. 7.5% previously. This clearly increases the monthly pension accretion to the pension fund administrators.

When we put all this together by multiplying forecast earnings by 15 and dividing by the total number of Stanbic IBTC shares, we arrive at an estimated value for the wealth business of NGN 14,65 per share.

Valuation of Stanbic IBTC's Wealth Business
Forecast Profit After Tax (2014)NGN9.76 bn
Value of Business at 15x EarningsNGN146.5 bn
Shares in Issue10 billion
Value of Wealth Business per ShareNGN14.65
Corporate and Investment Banking (CIB)

Corporate and investment banking includes corporate lending, treasury (global markets), investment banking, stock broking and custody services.

Stanbic’s reporting is excellent and in the annual report you can see balance sheet and income statement segmentation per business unit. Based on this, one can calculate that CIB earned a 31.2% return on equity in 2013 and is in line to earn roughly the same in 2014 based on 12 month trailing CIB earnings.

To value CIB, I use a relative valuation methodology again but based on price to book rather than earnings. I ran a regression with the price to book as the dependent variable and return on equity as independent variable for a sample of twenty-three banking assets listed on the African continent in markets such as Nigeria, Kenya, Tanzania, Mauritius and Botswana. The result shows that a bank earning 30% return on equity should trade at 3.4x book.

But 30% ROE is an incredible feat and one can rightly argue that it is not likely to be sustainable. Further, on closer inspection, we find that Stanbic’s returns are accentuated by non-interest revenue particularly in foreign exchange trading, which most bankers will tell you is a choppy line item.

A DuPont profiling shows that if Stanbic’s CIB was a standalone bank, it would be a below average net interest income earner per unit of assets. However, on a transactions income basis, CIB is a market beater by some margin (5.8% versus 2.7% industry average).


3.4% of the 5.8% non-interest revenue profitability per unit of assets is derived from fixed income, money market and foreign exchange trading and while FY13 was particularly rewarding for Stanbic’s treasury desk, the average per asset profitability for that unit is 2.76% over three years and 3% over five years. This is remarkable when you compare it with an average of 0.38% and 0.41% average for Access (ACCESS), Guaranty Trust Bank (GUARANTY), Zenith (ZENITHBA) and First Bank (FBNH). Although the larger size of their balance sheets means there is a drag on that.

If CIB’s profitability in trading alone fell to the industry average of 0.41% then the CIB’s return on equity falls to 10%. I assume trading profitability falls to 1.6% (a mid-point between 3.4% 0.4%), bringing non-interest revenue / total assets to 3.9% which is still higher than the average. I assume the bank will maintain its competitive advantage in foreign exchange trading on the back of its track record and its associations with the international powerhouses of Standard Bank of South Africa (the ‘go-to’ bank for SA corporates expanding into the continent) and ICBC Bank of China.

Reducing non-interest revenue profitability to 3.9% lowers FY13 return on equity to 18.2% from 31.2% and, based on the regression, a bank earning 18% ROE in Africa should trade at a price to book of 2.30x. Applying this multiple to CIB’s net asset value as at 2013 results in a value per share of NGN 14.04.

Valuation of Stanbic IBTC's Corporate and Investment Banking
Net Asset Value (2013)NGN 70.18bn
Value of Business at 2.3x Book ValueNGN 161.4bn
Shares in Issue10 billion
Value of Corporate and Investment Banking per ShareNGN 16.14
Personal and Business Banking (PBB)

PBB is the retail arm of the group’s business. It provides services to customers in personal markets, high net worth individuals and commercial, small and medium scale enterprises. Products include mortgage lending, asset finance, card products, lending and bancassurance.

This is the newest business segment and it is only just breaking even (only 70% of branches are profitable up from 58% last year) due to substantial investment in branches, banking systems and staff. This makes it difficult to value. In cases like this I prefer to back out the valuation implied by the market price. The chart below illustrates my process.

Valuation of Stanbic IBTC's Personal and Business Banking
Current Market CapitalizationNGN 310bn
Fair Value of Wealth Business (from above)NGN 146.5bn
Fair Value of Corporate and Investment Banking (from above)NGN 161.4bn
Implied Value of Personal and Business BankingNGN 2.1bn

The market is thus valuing Stanbic’s PBB business at NGN 2.1bn (roughly USD 13m).

Now I don’t know exactly what the PBB is worth, but I think it’s a lot more than USD 13m. Especially when you recognise that the business has NGN 285bn (USD 1.7bn) in assets, NGN 198bn (1,207bn) in deposits and already earns NGN 25bn (USD 154.6m) in revenue which is growing at 32% a year (1H14 vs 1H13).

The Bottom Line

It’s difficult to say exactly what PBB is worth and any judgement about its value requires a view about management’s ability to scale up by growing their customer base and sweating their investments. But if market prices are any indicator, PBB should be worth 4 to 10 times this implied value, suggesting a 12% to 33% upside to Stanbic’s current price (NGN 31.00 at this writing). I would expect that earnings results showing continued improvement in PBB profitability will provide the catalyst for the stock to make its final run towards fair value.

The risks to this scenario are model risk, unsustainable CIB profitability and failure by management to execute on their PBB strategy.

What Do You Think?

Does Stanbic IBTC look like a bargain to you? Or would investors be better off with another one of Nigeria’s bank stocks? Let’s hear your thoughts in the comments!

Godfrey Mwanza, CFA is a Fund Manager with Barclays Africa Group. The views expressed here are his own and not necessarily those of his employer. As of this writing, he did not own shares of Stanbic IBTC.

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Does Britam Kenya Still Have Room to Run? Wed, 15 Oct 2014 21:59:43 +0000

British American Investments Company – Kenya (BRITAM) has made investors very happy this year. The stock is among the Nairobi Securities Exchange’s best performers, posting a dazzling 94.7% return.

Now the shares trade a shade below 2.5x their book value. Is that too rich a price? Or is there some upside left?

In order to answer that question let’s begin by taking a closer look at the business and how it makes money.

Insuring East Africa

While it does operate a small asset management business, Britam Kenya is, first and foremost, an insurance company. It sells everything from life insurance to fire, marine, and medical policies. Kenya is its primary market, but it also operates in Uganda, South Sudan, Rwanda, and Malawi. Over the past five years, the company has grown its net premium revenue at a 22.7% clip.

Like all insurance companies, it invests the cash that it receives from customers until it needs to pay it out in the form of claims or other expenses. This investment capital is known as float, and it’s where the real magic happens.

Britam invests its float in a combination of real estate, government securities, and stocks. It also owns a 21% stake in Housing Finance Company of Kenya (HFCK).

When these investments perform well, Britam becomes the virtual equivalent of a cash machine. Such has been the case over the past 12 months. After accounting for the change in fair value of all the company’s property and equity investments, the company generated comprehensive income of Ksh3.48 per share. That’s a 30.1% increase over the prior 12-month period.

Value Check on Britam Kenya

One way that I quickly assess the value of a stock is to imagine that the underlying company suddenly stops growing. Forever.

Britam Kenya: Room to Run?

Photo by Wayan Vota

What’s the most that I would be willing to pay for a stock if it continued to generate the same level of earnings per share in perpetuity?

In such a case, the stock’s earnings can be viewed very much like the interest payment on a long-term bond.

The stock’s earnings should “yield” as much as a long-term bond would. Otherwise, there’d be no point for me to buy the stock. Thus, the prevailing long-term bond rate is my required rate of return.

To illustrate, let’s assume that Britam’s growth stagnates. Year after year for the foreseeable future, it averages comprehensive income of Ksh3.48 per share.

To find out how much such performance would be worth, we can simply divide the annual earnings (Ksh3.48 per share) by Kenya’s 10-year bond rate, which currently hovers around 12%.

If we do so, we arrive at a value of Ksh29.00 per share.

Kshs3.48 / 0.12 = Ksh29.00

So, in the event that Britam’s earnings froze at current levels, investors who buy at a price of Ksh29.00 per share would realize a 12% annual return.

Priced for Stagnation

How does this calculated value compare to the current price of the shares on the Nairobi Securities Exchange?

Well, as of this writing, you can buy Britam for Ksh29.50 per stub. Interesting, huh? So, essentially, Britam is priced for zero earnings growth in perpetuity.

I’ll gladly take that bet.

Even if the company’s earnings were exceptionally high over the past 12 months, I’m guessing Britam, with its steadily rising premium income and a large investment portfolio (which it could simply invest at a 12% rate of return if it chose to), will find ways to grow earnings over the long-term.

Thus, for patient investors, the shares appear to offer value — even after nearly doubling in price over the past ten months.

What Do You Think?

I’d love to hear your thoughts on Britam Kenya. Am I too enthusiastic about its prospects? Or do you agree that it looks like a bargain? Share your take in the comments!

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Is Nigeria’s 7-Up Bottling Company a Bargain? Thu, 09 Oct 2014 10:42:13 +0000

You don’t have to spend much time in Africa to realize that Coke has the upper-hand in the continent’s cola war. The bright red signs with the cursive lettering seem to be everywhere.

But Coca-Cola’s (KO) African dominance is being challenged, and Nigeria’s 7-Up Bottling Company (7UP) is one of its fiercest competitors.

7UP bottles PepsiCola, Mountain Dew, Mirinda, and AquaFina in addition to its namesake brand. It operates nine bottling facilities and some 200 distribution centers across the country.

Founded (and still controlled) by the Lebanese El-Khalil family in 1959, the company’s profits surged 125.3% during its 2014 fiscal year. Sales increased 21.5% thanks in part to an innovative marketing strategy that included a giveaway of one minute of mobile airtime on every bottle cap. Efficiency gains helped widen the operating margin from 8.6% to 11.7%.

This outstanding performance made investors very thirsty for 7UP shares. The company’s stock price has risen 107% so far this year.

So, is the valuation too frothy here? Or is it time to gulp down some shares?

Let’s take a quick look.

7UP Valuation: Refreshing or Sickly Sweet?

7UP currently trades at a price-to-earnings ratio of 13.3 and offers a 1.7% dividend yield.

Is that a fair price?

To get a sense of a stock’s potential and downside risk, I often look at how well the underlying company has grown its book value (or shareholders equity) over time.

Over the past two years, 7-Up Bottling Company grew its book value at an annual rate of 24.5%. That’s fantastic. It means the net asset value of the company increased by well over half in just 24 months. It’s no wonder investors took note!

As long-term investors, however, the question for us is what sort of growth rate we can expect from the company over the next five years. A 24.5% rate would be excellent, but such rapid growth is exceedingly difficult to sustain for very long.

7 Up Bottling Company

Photo by Ben Freeman

So, let’s dig deeper into our financial statement archive and calculate how quickly 7UP’s book value grew since March 2004 — over ten years ago. When we do so, we find that shareholders equity grew at an annualized rate of 16.8% without any injections of new capital.

That sounds like a rate we can reasonably expect the company to match over the next five years.

If it should do so, 7UP’s present book value of N30.43 per share will grow to roughly N66.15 per share by October 2019.

N30.43 x (1 + 16.8%)^5 = N66.15

Many companies trade at a substantial premium to their book values in order to account for their growth potential.

As you can see, with a current share price of N147.73, 7UP is no exception. It’s price-to-book ratio is 4.85.

N147.73 / N30.43 = 4.85

But investors haven’t always been so optimistic about the stock’s prospects. In fact, just two years ago, 7UP’s price-to-book ratio was only 1.98.

A Pessimistic Scenario

So let’s put together a pessimistic set of assumptions.

What kind of return would we get five years from now if:

  1. 7UP’s growth slowed to 16.8%,
  2. management decided not to raise the dividend from its current N2.50 per share,
  3. and a market mood swing reduced the price-to-book ratio to 1.98?

To find out, we multiply our estimated future book value (N66.15) by 1.98, and add five years worth of dividends.

N66.15 x 1.98 + (N2.50 x 5) = N143.48

Now, compare this result to the current share price of N147.73.

Not much difference, is there? So, even if growth slows and the market falls out of love with the stock, we can be fairly confident that the stock will be at least as valuable five years from now as it is today. The biggest downside risk is missing out on a better opportunity. Not bad.

An Optimistic Scenario

And what if the market is more bullish five years hence?

Suppose 7UP’s price-to-book ratio is 6.0 – the same multiple currently sported by shares of PepsiCo (PEP) on the New York Stock Exchange. We end up with a total future value of N409.40

N66.15 x 6.0 + (N2.50 x 5) = N409.40

That’s an annualized return of 22.6%. Most investors would be delighted with a tall glass of that sort of performance.

So, in my view, based on the recent performance of the business, its growth prospects, and market valuation, 7UP Bottling Company offers significant upside potential with limited downside risk.

What Do You Think?

Where do you think shares of 7-Up Bottling Company will trade five years from now? Is the stock a bargain? Let’s hear your thoughts in the comments!

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Here’s Why Co-operative Bank of Kenya Stock Popped 12% Thu, 02 Oct 2014 10:41:37 +0000

When Co-operative Bank of Kenya (COOP) announced last week that they were hiring global consulting firm, McKinsey & Company, for advice on improving operational efficiency, investors took notice. The stock has jumped 12.4% since the news appeared.

So why are investors so excited? How much scope does COOP — Kenya’s fifth-largest bank in terms of market capitalization — have to streamline its operations? And how might such restructuring impact the bottom line?

First, it’s important to note that COOP isn’t the only Kenyan bank to call in “The Firm.” Less than a month ago, Equity Bank (EQTY) also revealed that it had asked McKinsey to advise it on strategy. And, in 2011, KCB Bank Group (KCB) brought them in to assist with a restructuring that eventually slashed the bank’s management payroll by 42%.

Quite simply, McKinsey is very good at what it does, and its growing roster of blue chip clients in East Africa is testament to this.

To get a sense of what they might be able to do for COOP, let’s take a look at how well Kenyan banks presently manage the cost of doing business.

The chart below shows each Kenyan bank’s cost-to-income ratio over the first six months of 2014. We calculate the cost-to-income ratio by dividing total operating expenses by total operating income.

Kenya’s Most Efficient Listed Banks
CompanyCost-to-Income Ratio
I&M Holdings39.1%
Standard Chartered Bank Kenya41.2%
NIC Bank46.1%
Diamond Trust Bank Kenya48.1%
Equity Bank52.0%
CFC Stanbic53.6%
Barclays Bank Kenya54.4%
KCB Bank Group57.6%
Co-operative Bank of Kenya58.4%
Housing Finance Company Kenya61.9%
National Bank of Kenya73.9%

Judging from the data above, it would seem that McKinsey’s consultants have lots of fat to trim at COOP.

The bank keeps less than 42 shillings as pre-tax income for every 100 shillings it generates in the form of net interest income and fees. Meanwhile, the lean, mean banking machine that is I&M Holdings (IMH) keeps nearly 61 shillings for each 100 shillings of operating income.

If COOP could cut its cost-to-income ratio to 50% (a level that remains well above its most efficient peers), it would result in a 20.1% boost to pre-tax profit. That’s nothing to sneeze at.

Co-operative Bank of Kenya

Photo by Meaduva

But how realistic is it to expect such a reduction in expenses?

Salary Costs at Kenyan Banks

Well, for most banks, the biggest cost of doing business (apart from interest expense) is staff compensation. Thus, this is what McKinsey will likely try to slash first.

The table below compares the proportion of operating income that each Kenyan bank spends on staff salaries and compensation.

CompanyStaff Cost-to-Income Ratio
I&M Holdings17.2%
Diamond Trust Bank Kenya17.4%
Standard Chartered Bank Kenya18.8%
Equity Bank21.2%
NIC Bank21.3%
CFC Stanbic23.3%
KCB Bank Group25.0%
Co-operative Bank of Kenya25.0%
Barclays Bank Kenya28.0%
Housing Finance Company Kenya29.3%
National Bank of Kenya39.7%

As you can see, COOP’s wage bill isn’t nearly as bloated as that of National Bank of Kenya (NBK), but it’s not exactly svelte either.  The leanest banks on the list reap more than five shillings of operating income for every one shilling they pay out in the form of salaries. COOP gets just four shillings.

Look for this gap to narrow over the next year or two. If McKinsey can help COOP bring staff costs down to 20% of operating income, downsizing alone could boost pre-tax earnings by nearly 12%.

This will doubtless mean hardship for some of Cooperative Bank of Kenya’s 4,177 employees, but it will also give the bank more flexibility to lower its lending rates, putting growth capital within reach of more Kenyan households and businesses.

What Do You Think?

Did it surprise you that Co-operative Bank of Kenya ranks as one of Kenya’s least efficient banks? COOP shares now trade at a price-to-book ratio of 2.7. Considering the potential impact of cost-cutting, does the stock look like a good buy to you at today’s prices? Let’s hear your thoughts in the comments.

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Are Ecobank Shares a Bargain? Tue, 23 Sep 2014 14:04:15 +0000

Shares of Pan-African lender, Ecobank Transnational (ETI), have surged 7.1% in the month of September, blowing away the Nigerian Stock Exchange’s All Share Index.

Qatar National Bank’s purchase of a 23.5% stake in the firm triggered the big price move.

Now the stock trades at its highest point in over four years. Is there still value left on the table? Or would investors be better off looking elsewhere? Let’s take a closer look to find out.

A Very Big Footprint … and Growing

Ecobank boasts an unmatched pan-African presence. It operates in 36 countries across the continent and is expanding rapidly. Recent expansion activity includes a launch of operations in Mozambique and the procurement of a banking license in  Angola.

Note that the Togo-based bank’s operations are spread pretty thin outside West Africa, and Nigeria in particular. Of Ecobank’s 1253 branches, 1022 are in West Africa and nearly half are in Nigeria. Operations outside of West Africa account for less than 17% of group revenue.

But the mere fact that Ecobank has established a toehold in so many African economies, puts it well ahead of much larger competitors with pan-African aspirations.

Emerging From a Leadership Crisis

It wasn’t long ago that investors were clambering over each other to exit this stock. An executive director of the bank accused the former CEO, Thierry Tanoh, of pressuring her to mis-state the bank’s 2012 earnings and was subsequently fired. This led to a leadership struggle that lasted many months until the board finally voted to remove Tanoh in March of this year. He was replaced by deputy CEO, Albert Essien, a Ghanaian with nearly 25 years of employment at Ecobank.

The allegations of poor governance shown a global spotlight on how the bank does business. While this was a deeply disturbing development for shareholders, I take the view that the bank has emerged a stronger institution as a result of the turmoil and increased scrutiny.

Are Ecobank shares a bargain?

Photo by Gabriel Millaire

Powerful Partnerships

Now, with the entry of Qatar National Bank (QNB), Ecobank benefits from three important alliances.

QNB could prove to be a conduit to loan deals originating from the Middle East. And some analysts suspect that it will eventually make a bid to acquire the bank in its entirety.

Johannesburg-based Nedbank (NED) is looking to build its sub-Saharan footprint to keep up with its South African peers. Toward that end, it loaned Ecobank $235 million in 2011 which the bank can opt to convert into a 20% equity stake up until November 25. If it should do so, the partnership would likely accelerate Ecobank’s expansion in Southern Africa.

Finally, South Africa’s Public Investment Corporation, the government workers’ pension fund, controls an 18% stake in the bank. They’ve proved to be very involved in governance issues, calling for Tanoh’s ouster. I see them as an important watchdog of minority shareholders’ interests.

Improving Efficiency

It’s not cheap to launch banking operations in 36 countries in less than 30 years. And Ecobank’s shareholders have felt the pinch of expansion costs. The bank’s return on equity over the past 12 months is a measly 5.3% and the board opted not to pay out a dividend last year.

As the bank has scales up, however, expansion costs will like begin to take a smaller bite out of earnings. The cost to income ratio improved from 78.7% in the first half of 2013 to 76.2% in the most recent six months. Management hopes that its increased promotion of online and mobile banking platforms will drive further efficiency improvements in coming years.

Valuing Ecobank Shares

Ecobank has grown its net asset value at a 16.5% pace over the past five years, and its shares currently sport a price/book ratio of 1.2. If management is able to grow the bank’s net asset value at a rate of 15% over the next five years, long-term shareholders would realize an 11% annualized local currency return even if the price/book multiple drops to 1.0 and the board decides not to reinstate the dividend.

Given its roster of powerful shareholders and the groundwork it has laid — securing banking licenses across the continent — I think the above assumptions are on the conservative side. Are there bigger bargains out there? Yes. But I believe patient investors at today’s price of NGN18.10 will be well-rewarded over the next five years – assuming a larger bank doesn’t gobble it up before then.

Investors can purchase Ecobank shares on three different African exchanges, namely the Nigerian Stock Exchange, the BRVM, and the Ghana Stock Exchange.

What Do You Think?

Do Ecobank shares look like a good long-term buy? Let’s hear your thoughts in the comments!

Disclosure: Ryan holds a beneficial interest in shares of Nedbank through his work with Africa Capital Group.

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