Stock Ideas Archives - Investing in Africa

Is It Time to Buy Zimbabwean Stocks?

After 37 years that saw the southern African nation deteriorate from one of the continent’s most prosperous to one of its most destitute, President Robert Mugabe has resigned from office. The dramatic turn of events has understandably raised hopes of much-needed political and economic reforms. And many investors are now keen to get a handle on the local stock market. Here are a few things to consider if you are of similar mind.

It’s been a remarkable month in Zimbabwe.

After 37 years that saw the southern African nation deteriorate from one of the continent’s most prosperous to one of its most destitute, President Robert Mugabe resigned from office on November 21 following a military takeover precipitated by his sacking of Vice President Emmerson Mnangagwa.

The dramatic turn of events has understandably raised hopes of much-needed political and economic reforms. And I’m already getting questions from readers who are keen to figure out how best to invest in the country.

So, is it time to buy Zimbabwean stocks?

In my view, the answer is no. But it’s most certainly time to familiarize yourself with the market.

Here’s why investors should stay on the sidelines for now.

The new administration is not certain to implement needed political and economic reforms.
After a huge run-up this year, the Zimbabwe Stock Exchange (ZSE) isn’t exactly cheap.

Risky Business

True, it’s hard to imagine that Zimbabweans will be any worse off after Mugabe’s departure. The past two decades have been nothing short of ruinous.

But it’s important to remember that Mnangagwa, his likely successor, has a deeply checkered past. Thousands of civilians were massacred in Matebeleland during his tenure as security minister in the 1980s. He was also implicated in the invasions of white-owned farms and in the brutal crackdown on supporters of the Movement for Democratic Change (MDC).

Even if Mnangagwa, while not a saint, proves to be a pragmatist and steers Zimbabwe toward economic recovery, Zimbabwean stocks are still tremendously overpriced.

The ZSE’s main index has posted a 128% gain since the start of this year. But the surge isn’t a result of improved earnings or a newly bullish outlook. Quite the contrary. With dollars increasingly scarce, local investors were worried about the potential for a return to the bad old days of hyperinflation and raced to invest in stocks as a way to protect the value of their savings.

When the military took over the government on November 14, inflation fears began to subside. And stock prices plunged. The ZSE’s Industrial Index has plummeted 38% since that date. And, as I write, it remains in near free-fall. Yet the market’s average price-to-earnings ratio remains at an exceedingly high 30.0. Thus, the prudent course is to wait for the market to find a floor.

This could take a matter of days, weeks, or months. It’s impossible to say with certainty.

What to Watch For

There are two things that would indicate that Zimbabwe’s stock valuations are migrating from highly speculative to long-term value territory:

The ZSE Industrial Index falling from its current level of 329.6 to somewhere in the low 200s (ideally lower); and
An official announcement that elections will proceed next year as scheduled. If this doesn’t happen, the new administration’s legitimacy will remain in question, as will its capacity to put the country on the track to economic recovery.

Three Stocks for Your Watchlist

If both of the above conditions are met, I believe there are a few companies that stand a good chance of yielding market-beating returns over the long-term.

Axia Corporation
(Current Price: $0.20; P/E Ratio: 14.3; Dividend Yield: 2.5%)
Axia operates Zimbabwe’s popular TV Sales & Home stores, which sell a wide range of furniture, electronics, and appliances. It also runs a trucking and warehousing business, and Transerv, which distributes spare auto parts.

The company’s earnings have been remarkably resilient in recent years thanks to inflation-wary consumers spending cash on tangible goods. The business will likely find it easier to import inventory in a post-Mugabe Zimbabwe.

OK Zimbabwe
(Current Price: $0.20; P/E Ratio: 27.0; Dividend Yield: 2.3%)
OK Zimbabwe operates one of the nation’s largest grocery chains. Similar to Axia, it should find it much easier to restock its warehouses with imported goods under the new regime and should also benefit from what is forecast to be a good agricultural harvest this year, which should put a bit more spending money in consumers’ pockets.

Econet Wireless
(Current Price: $0.86; P/E Ratio: 23.2; Dividend Yield: 1.7%)
Zimbabwe’s dominant telecommunications provider, Econet boasts a 49.4% share of the nation’s mobile telephone market. Similar to Kenya’s Safaricom, it is a pioneer in the field mobile payments and insurance. Mugabe’s departure raises the prospect of increased availability of foreign exchange, which should allow companies like Econet to more rapidly expand and enhance their services.

How to Invest in Zimbabwe

If you don’t already have a stockbroker in Zimbabwe, the good folks at IH Securities will be happy to help you open a trading account and to register with the Central Securities Depository.

You might also find the following article helpful:

How to Invest on the Zimbabwe Stock Exchange

Your Turn

Do you think Zimbabwean stocks are a bargain in these early post-Mugabe days? Let’s hear your thoughts in the comments.

This Growing Nigerian Insurance Stock Now Offers an 11% Dividend Yield

Insurance companies don’t make for great conversation fodder at parties, but few other businesses can match their potential for creating wealth. The Nigerian Stock Exchange is home to one particularly interesting opportunity in the space that now trades at a P/E ratio of 12.1 and a juicy 11.3% dividend yield.

Continental Re shares look like a buy — Photo by Clara Sanchiz/RNW

Insurance companies don’t make for great conversation fodder at parties. Trust me on this.

But few other businesses can match their potential for creating wealth.

Done correctly, the insurance business generates a steady stream of premium income that it may or may not be required to pay back to claimants at some future date.

In the meantime, it invests the cash and keeps the returns.

Reinsurers operate on the same model, but instead of insuring individuals and small businesses, they provide coverage to other insurance companies – helping to reduce their risk from major catastrophes or otherwise high levels of claims.

In Africa, where insurance penetration rates are the lowest in the world, such a business offers substantial upside potential to investors.

The Nigerian Stock Exchange is home to one particularly interesting opportunity that trades at a P/E ratio of 12.1 and a juicy 11.3% dividend yield.

An unassuming, under-appreciated Nigerian stock

Lagos-based Continental Reinsurance (CONTINSU:NL) is one of Africa’s largest reinsurers. It boasts 200 customers across the region, serving them from offices in Lagos, Douala, Abidjan, Tunis, Nairobi, and Gaborone.

The firm covers all sorts of risks, but its bread and butter is reinsuring non-life policies, primarily in Nigeria and Cameroon.

While the underlying business has been consistently profitable, its recent share performance hasn’t been anything to write home about. The stock is down 4.9% since the start of the year.

But Continental Re’s third quarter results suggest the shares might be worth a second look. Net premium revenue surged 25% in the first nine months of 2015 and underwriting profit (the cash the company pockets after covering claims and expenses) jumped 26%.

Unfortunately, substantially higher administrative expenses and receivables write-offs conspired to keep earnings growth to a modest 7.5%.

Still, the result translated into a healthy addition to investable float. Unearned premiums, which represent much of the capital the company can deploy, have nearly doubled over the past five years.

To buy, sell, or hold Continental Re

So, do the shares look like a bargain at their current price of NGN0.97 per stub?

I believe so. Here’s why.

Regulators in the company’s largest market, Nigeria, have made property insurance compulsory and now require that businesses provide life insurance to their workers if they employ more than four people.

With a population of some 170 million, these moves should translate into accelerated premium growth in the next few years.

Continental Re has grown its book value at annualized rate of 4.0% since the end of 2009.

That’s not at all exciting until you consider how much cash the company distributes to shareholders in the form of dividends. It paid NGN0.11 per share in 2014, an amount that appears well within reach again this year. This translates into a dividend yield of 11.3%.

If this payout is maintained at the same level over the next five years and the stock’s price/book ratio expands to 1.0 from its present level of 0.7, investors at today’s price stand a good chance of netting an annualized return in the neighborhood of 17-18%.

Performance like that may not enthrall your friends at parties, but it’ll do wonders for your nest egg.

7 Reasons to Be Bullish on MTN Group

MTN Group, Africa’s wireless telecommunications giant, had a rough start to the year.

Stiff competition, regulatory action, weakening currencies, and a labor strike in its home base, South Africa, conspired to slash the company’s first half earnings by 24.2%, and its shares have dropped 21% since their September high.

But don’t push the “sell” button quite yet.

Reasons to Own MTN Shares — Photo by Michael Pollak

MTN Group (MTN:SJ), Africa’s wireless telecommunications giant, had a rough start to the year.

But don’t push the “sell” button quite yet.

I believe the stock is positioned to deliver solid returns over the next three to five years.

Here are seven reasons why.

1. Africa’s coming data boom

While the market for voice calls is all but tapped, Africa’s demand for wireless data services remains in its nascent stages.

Just 3% of the continent’s rural communities are connected to a fixed telephone network, and relatively few urban residents can afford the cost of a DSL or broadband cable connection in their home. Thus, for the vast majority of Africans, the easiest, most efficient way to use the Internet is with their mobile device.

And demand for internet access has thus far been limited only by wireless operators’ capacity to expand their 3G and 4G coverage areas. In 2006, MTN’s largest market, Nigeria, was home to 7.9 million internet users. Today, that figure stands at well over 79 million. Remarkably, this is still less than half of the nation’s total population.

As a result, MTN’s data revenue has soared, surging 33.2% in 2014 and 21.2% in the first half of 2015.

And it looks like this trend’s got legs.

Cisco Systems estimates that mobile data usage in the Middle East and Africa will expand at a 72% clip between now and 2019 – faster than anywhere else on the globe.

As the region’s largest wireless data provider with operations in 21 countries, MTN will be facilitating this growth.

2. Mobile Money

MTN launched its Mobile Money service in 2009. It allows MTN customers to send and receive cash via their mobile device – a huge deal in under-banked Africa.

Over the past 12 months, it looks like the venture is beginning to reach scale. Subscribers to the service have grown 46% to a total of 32.4 million users.

This presents the company with enormous potential to grow income from transaction fees and numerous other financial services ranging from small loans to insurance.

3. The Iran nuclear deal

MTN owns a 49% stake in Iran’s second largest wireless operator, MTN-Irancell.

The operation accounts for nearly 10% of MTN’s operating profit, but, due to sanctions imposed by the international community, the company hasn’t been able to repatriate the ZAR1.1 billion worth of dividends it accumulated over the past several years.

Now, with an agreement to limit Iran’s ability to produce a nuclear weapon nearly finalized, it appears that the sanctions will soon be lifted. MTN will thus be able to make more efficient use of its Irancell earnings.

4. Improving cash flow

Erecting a network of cellular masts and towers is a costly undertaking. Fortunately for MTN, much of this work is now complete. Existing 2G sites can be upgraded to 3G technology by simply switching out components.

This has resulted in a steady reduction in capital expenditure as a percentage of operating cash flow. MTN’s free cash flow has nearly tripled over the past five years, giving it the flexibility to pay down debt and create value for shareholders.

5. Regular share buybacks

One way MTN management creates value for shareholders is by repurchasing company shares. The company has reduced its total share count in each of the past five years, resulting in a cumulative decrease of roughly 3%.

That may not sound like much, but it effectively added 60 tax-free basis points to MTN’s dividend yield each year. A nice bonus.

6. A generous dividend

Speaking of dividends, MTN sports one of the juiciest payouts on the Johannesburg Stock Exchange (JSE). As of this writing, the shares yield 6.1%.

Management has boosted the total dividend 15% over the past 12 months and aims to increase it by 5-15% every year. This is a feat it’s managed to achieve every year since 2006 – nine consecutive years.

7. A nice price

Most importantly, MTN shares appear priced for a solid, long-term return.

Over the past six years, the company has grown its book value per share at an annualized rate of 11.5%. If it maintains this pace over the next five years (and I believe it can), its book value per share will end up in the neighborhood of R115.70.

MTN’s currently trades at a 3.1x multiple to book value. That’s near the low end of its historic range. In the past five years, the shares have never been priced lower than 2.7x book value.

If we assume that MTN’s price-to-book ratio drops to 2.7 five years hence, investors at today’s price stand to reap an annualized return of 14-15% including dividends. That’s a rate that I believe will comfortably outperform the JSE as a whole.

Dial up a decent return

MTN’s a big company, and the law of large numbers suggests that it won’t post your portfolio’s gaudiest performance figures between now and 2020. It should, however, provide a steady stream of dividend income coupled with a market-beating return.

Here’s a Quick Way to Invest in the JSE’s Dividend Aristocrats

Sometimes it’s fun to pore over balance sheets and cash flow statements in search of that 10-bagger stock — the one that transforms your meager nest egg into a comfy cash cushion.

But let’s face it.

You usually have more enjoyable things to do on a weekday evening or Saturday afternoon.

That’s why exchange traded funds (ETFs) are one of the most useful tools in an investor’s toolkit.

South African coins — Photo by Paul Saad

Sometimes it’s fun to pore over balance sheets and cash flow statements in search of that 10-bagger stock — the one that transforms your meager nest egg into a comfy cash cushion.

But let’s face it.

You usually have more enjoyable things to do on a weekday evening or Saturday afternoon.

That’s why exchange traded funds (ETFs) are one of the most useful tools in an investor’s toolkit. ETFs collect dozens, sometimes even hundreds, of different stocks into one tidy, trade-able, low-risk package.

An ETF for South African income investors

And if you love dividends and if you invest in South Africa, you need to know about the Coreshares Divtrax ETF (DIVTRX:SJ).

Launched in April 2014, the Divtrax ETF mirrors the performance of the S&P South Africa Dividend Aristocrats Index.

What’s a dividend aristocrat? Well, definitions vary, but for the purposes of this index, it is any South African stock that has increased or maintained a stable dividend for the past five years.

If a company reduces or suspends its dividend payment, the S&P boots it from the index.

Market-beating returns

This simple screen generates impressive performance.

Over the past five years the SA Dividend Aristocrats Index posted a gross annualized return of 22.5%. That figure far exceeds the market as a whole, which notched a 17.4% return over the same span. Year to date, the Divtrax ETF is up 11.8%.

At present, 26 South African shares call the index home. Roughly a third of them operate in the financial sector, another third are consumer goods companies, and the remainder is a mishmash of industrials, telecommunications, health care, and IT companies.

It tends to be very light on mining stocks due to their inconsistent dividend payouts, and it specifically excludes companies whose main business activity is to invest in real estate.

The ETF holds each constituent of the index in equal weights and re-balances them in July each year.

Here’s a list of the top ten holdings with their current weight in the portfolio:

Capitec Bank (CPI:SJ) – 6.37%
Foschini Group (TFG:SJ) – 4.98%
EOH Holdings (EOH:SJ) – 4.89%
Sanlam (SLM:SJ) – 4.89%
Standard Bank Group (SBK:SJ) – 4.81%
Truworths International (TRU:SJ) – 4.76%
Naspers (NPN:SJ) – 4.68%
Netcare (NTC:SJ) – 4.52%
The Spar Group (SPP:SJ) – 4.52%
Discovery Holdings (DSY:SJ) – 4.45%

One of the most attractive features of the ETF, of course is the quarterly dividend. As of this writing, it sported an annual dividend yield of 2.86%.

And with a maximum annual management fee of 0.46%, investors get to keep the lion’s share of those dividends. South Africa’s other dividend ETF, the Satrix Divi Plus (STXDIV), charges a 0.71% management fee.

So, if you:

prefer not to spend your time slogging through a valuation spreadsheet,
like a quarterly dividend,
and love the prospect of a steady market-beating gain from a basket of blue chip South African stocks, take a look at the Coreshares Divtrax ETF and then get back to enjoying your life.

If you’re new to South African ETFs, I highly recommend that you pay a visit to etfSA.co.za. They’ve got comprehensive coverage of all ETFs and exchange traded notes available to JSE investors and a host of educational articles to get you up to speed on how they work.

It’s your turn

Do you invest in ETFs? If so, let us know your favorite in the comments!

Profits Take Flight at Nigeria’s Airline Services and Logistics Plc

Airlines generally make for lousy investments.

But the support companies that keep the planes flying and their customers comfortable are a very different story.

Here’s an introduction to one that looks set to deliver promising returns to Nigeria investors.

Airlines generally make for lousy investments.

But the support companies that keep the planes flying and their customers comfortable are a very different story.

Due to long-term contracts, reduced exposure to variable costs like fuel, and less intense competition, the performance of such companies is relatively easy to forecast.

If people are flying, profits soar. If they’re staying home, earnings take a nosedive.

A high-flying caterer

Founded in 1996, Nigeria’s Airline Services and Logistics Plc (AIRSERVI) runs in-flight catering, restaurants and duty free shops at Nigeria’s two largest international airports – Murtala Muhammed in Lagos and Nnamdi Azikwe in Abuja. It bills itself as Africa’s largest independently owned airport logistics firm.

After listing on the Nigerian Stock Exchange in 2007, the company enjoyed a strong economic tailwind for several years, growing profits 444% between 2008 and 2012.

But the company encountered turbulence in 2013, when a new competitor, French multinational Servair, squeezed margins tighter than a Boeing 737’s middle seat.

Since then, however, growth appears to have returned to its previous trajectory. Earnings rose 24% last year and have nearly quadrupled in the first quarter of 2015.

Rwanda propels growth

A savvy deal struck by CEO Richard Akerele in faraway Rwanda appears to be propelling the uplifted performance.

Akerele, who happens to be Nigeria’s Honorary Consul to Rwanda, secured a 15-year exclusive concession to run in-flight catering at Rwanda’s increasingly busy Kigali Airport. The deal includes an optional 15-year extension.

The key word here is “exclusive.” No other in-flight caterer can operate out of Kigali during the agreement.

Terms of the deal also grant the company export processing zone status, which essentially means its operations in the country can be conducted tax-free.

The company is reportedly pursuing a similar deal in Sierra Leone, although I’m guessing the Ebola outbreak may have delayed finalization of the agreement.

Other expansion plans include catering deals with oil and gas companies working out of Port Harcourt, Nigeria, an upgraded processing facility in Abuja, and a new cold-storage operation in Lagos.

This growth doesn’t come cheap. Evidence of this comes in the form of an increased debt load, which has risen to 28% of total assets from a level of 12% one year ago. Finance charges in the first quarter of the year skyrocketed more than 500%.

But the company’s operations have been consistently cash-generative, so I expect the bank will take less of a bite from earnings in future quarters.

Lofty performance, down-to-earth valuation

The stock presently trades at a P/E ratio of just 5.6 and sports a dividend yield of 5.7%. Adding to the appeal, is a price to book multiple of just 0.58.

Note, however, that this is strictly a share for smaller investors. With a market capitalization of just north of $6 million and trade volumes that rarely exceed $10,000 per day, institutional investors will find it exceedingly difficult to build a meaningful stake.

But for smaller pockets, the stock’s potential is sky-high. If CEO Akerele continues to pilot this company as deftly as he has done in recent years, I expect investors will be delighted with their returns from the shares five years from now.

Category: Stock Ideas