Gems of the Kalahari: Two Botswana Small-Caps Poised for Big 2012 Returns

A few small-cap African stocks posted big returns in 2011. That’s all fine and good. But investing is all about predicting future gains – not admiring past ones.

Where should investors be looking for stellar performance in 2012? I’ve been strolling through the Sub-Saharan markets and am putting together a few ideas. Here are a couple intriguing opportunities on the Botswana Stock Exchange.

A few small-cap African stocks posted big returns in 2011. That’s all fine and good. But investing is all about predicting future gains – not admiring past ones.

Where should investors be looking for stellar performance in 2012? I’ve been strolling through the Sub-Saharan markets and am putting together a few ideas. Here are a couple intriguing opportunities on the Botswana Stock Exchange.

Funeral Services Group (FSG:BG) PE Ratio: 8.8, Div Yield 5.7%

Founded in 1993 as a casket factory, Funeral Services Group (FSG) has grown into Botswana’s largest funeral service company. In addition to manufacturing coffins, the company now operates funeral parlors, sells funeral insurance, and even owns a private cemetery. It currently operates in Botswana and Zambia, and it plans to roll out its services in Ghana in 2012.

While the industry may be a morbid one, just try to imagine a world without it. As prosperity increases, families spend more to memorialize their loved ones. This helps to explain FSG’s 15.2% annualized revenue growth since 2004. Sales have grown 25% during the first six months of 2011.

Photo by Seb Lafont

And being the market leader has its advantages. FSG’s return on equity is a respectable 19% and the net profit margin is a robust 32.1% over the past 12 months. Margins like that generate a lot of cash which can in turn be invested into opening new funeral parlors and paying generous dividends.

Speaking of dividends, FSG pays out about half of its earnings, which gives it a yield of 5.7% on the current share price.

Moreover, the balance sheet is nearly pristine. The total debt to equity ratio is just 15.7%.

In spite of all these solid numbers, FSG trades at a bargain price of 8.8x trailing earnings. Could the price be depressed simply because of investor aversion to the industry in which it operates? A sort of discomfort discount? I’m not sure, but the stock looks like it possesses the stuff to be a strong performer in 2012.

Furnmart Limited (FURN:BGPE Ratio: 9.4, Div Yield 3.4%

A family-run furniture retailer, Furnmart operates stores in Botswana, South Africa, Namibia, and (most recently) Zambia that cater to the middle and low-income market segments.

And it does it very well.

The company increased its sales by 19.8% during its 2011 fiscal year in spite of wage pressures on civil servants in its home market of Botswana. Management has grown sales at a 23.7% clip over the past five years.

Like most retailers, its margins are on the thin side. After adjusting for a one-off tax credit, the net margin stood at 10.8% for 2011. But it remains quite profitable, with a ROE of 27.1% as of 31 January 2011.

The company has borrowed significant sums in recent years in order to fund an aggressive geographic expansion plan, so debt figures prominently on the balance sheet, but this should normalize over the next couple years as its new stores begin to pull their own weight.

Furnmart present trades at just 9.4x trailing earnings and boasts a dividend yield of 3.4%. Worth noting, too, is that management has increased its dividend payout each year for the past nine years.

Tailor-made for retail investors

Both of these stocks trade in very limited volumes. FSG averages about $21,500 in total volume per week, while Furnmart trades roughly $16,000. That’s liquid enough for most small retail investors, but it keeps the big institutions at bay. That’s fine by me. I’d be content to lock in a juicy dividend yield and let management continue to create value.

Disclosure: I do not own shares in either of the above companies.

Disclaimer: This is not intended to be investment advice for any fact-specific situation. Please exercise your own independent judgement before making an investment decision.

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