AfricaPress-Tanzania: SOMETIMES you come across a market situation that makes NO SENSE…where companies are reporting significant increases in profits, yet their shares prices are low, and investors continue to sell them.
It’s at these rare times, when you can buy GROWTH assets at give-away VALUE prices that the seeds of vast future fortunes are sown.
In my 25-year career, I’ve only seen two such opportunities that were as glaringly obvious as the opportunity I see in Tanzanian stocks today.
The first was in 1998 in Asia. In the wake of the Asian Financial crisis, stock markets had hit rock bottom.
Yet the decks had been cleared, with wide-ranging reforms introduced in many Asian financial markets.
Governments from Indonesia to South Korea floated their exchange rates, restructured debts and opened and liberalised their economies.
This set the foundation for a strong rebound in growth and profitability in the 10 years that followed…right up until the Global Financial Crisis (GFC).
Today, I think that golden opportunity is in African stocks. Admittedly, I’ve only done a deep enough dive thus far to be 100 percent confident in one country–Tanzania–but my preliminary research in other countries shows that I’m barely scratching the surface.
As my African Lions Fund gets up and running, I intend to complete my deep dive research in other markets, such as Kenya, Uganda, Malawi, Rwanda, Zambia, Ghana and Nigeria, among others.
For now, my preliminary research has me chomping at the bit to buy a brewing company in Rwanda, a pharmaceutical company in Uganda, a forestry company in Zambia, and a telecom company in Malawi, provided my “boots on the ground” research checks out and the valuations are attractive enough.
And there are plenty more opportunities in West Africa as well. But, to focus again on Tanzania for now, I see a country where…
1. The economy is well diversified and much more robust than in many African countries. It is not like many other African economies where a single, outsized sector often completely dominates the economy: Oil in Angola for example (96.8 percent of export earnings), or diamonds and gemstones in Botswana (90.6 percent of exports).
This leaves those countries vulnerable to downturns in their major export industries, which are cyclical.
In Tanzania, export earnings come relatively evenly from three sectors, gold and other minerals, tourism, and agriculture.
Usually two or more of these three cylinders are firing at once. Right now, due to the Covid-19 pandemic tourism is struggling.
But it’ll be back soon enough. According to many surveys, five of the Top 10 tourist destinations in Africa are in Tanzania: a) Mount Kilimanjaro b) Serengeti National Park c) Ngorongoro Crater d) Olduvai Gorge e) Zanzibar.
The country’s natural beauty and rich endowment of natural resources is truly stunning.
If nothing else, they’ll always have those. But the growing population of young able-bodied workers is also propelling the economy forward. The country has nearly 60 million people. The median age is under 20.
2. The macro environment is relatively stable. It could always be better, and there are many who are concerned about the current government’s authoritarian bent.
But I’d argue that this applies equally to many other countries around the world right now, and it’s instructive to note that Tanzania is one of, if not the only country in Africa where all living former Presidents still live peacefully, in the country, in their retirement.
No one has been assassinated, exiled, or thrown in jail. Tanzania has always been a beacon of stability in the African context.
Some people are currently concerned that might be changing. But, there’s a long way to go down a slippery slope before it turns into The Congo.
Differences of political opinion and some occasionally repressive behaviour and law-making by the incumbent regime is one thing; Ethnic conflict and outright civil war are something quite different, and that has never looked remotely likely in modern-day Tanzania.
3. Politics is one thing. The economy is another. The publicly listed businesses that I have analysed in Tanzania look to be in rude health. The financial system is healthy. The banking system is sound. And the currency is stable.
As I have written about before, I own shares in Twiga Cement (TPCC). Since bottoming at 198 Tanzanian shillings, its earnings per share have increased by 67.7 percent in the past two years, to 332 in 2019. It’s not an isolated example.
Here’s the net profits (in billions of shillings), track-record over the past five years for CRDB Bank (CRDB), the country’s biggest bank.
The trend is clear. Profits have been going UP since 2017, and not just by a little bit. So, why did Twiga’s shares fall from more than 4,000 shillings to just over 2,000 shillings?
Why did CRDB’s shares fall from over 400 to a low of just 90, before rebounding to being offered at 140 today?
And why did NMBs shares trade on June 18, in a pre-arranged off-market block sale at just 1,000 Tanzanian shillings per share– just 7 times last year’s earnings, when their high was over 4,700?
I keep looking for flaws in my own analysis to indicate it’s me that’s wrong and the market that’s right. But that’s just not what the data tells me.
The only reason I can think of for these deep share price declines, in the face of much better earnings and bigger dividend payments from Tanzanian blue-chip stocks, is that liquidity keeps draining out of the market.
Foreign funds are selling indiscriminately for whatever reason. More recently there have been a bunch of pre-arranged block trades in Tanzania Breweries Limited (TBL), the biggest blue chip stock in Tanzania, at 5,000 Tanzanian shillings per share–less than half what the stock is quoted for on the Dar es Salaam Stock Exchange and down from an all-time high above 18,000.
Now, I want to stress something. Just because these stocks are cheap, it doesn’t mean they will rebound any time soon.
As I have just demonstrated, the share prices can move in the opposite direction from earnings. But…we’re buying these stocks so low, and the earnings picture looks so good, it’s hard to see the share prices heading down more from here.
In the meantime, we’ll collect handsome dividends and make a decent return while we wait. NMB just paid out a dividend of 96 Tanzanian shillings per share yesterday.
That’s a 9.6 percent yield based on the last price at which a significant number of shares traded (1,000 per share on June 18).
CRDB is paying out a dividend of 17 Tanzanian shillings per share after it is approved by the annual general meeting due to be held on June 27 (the AGM was delayed due to Covid-19).
That’s a 12.1 percent yield based on the 140 latest “ask” price on the Dar es Salaam Stock Exchange. And Twiga is paying out 290 shillings a share on June 30, representing a 13.8 percent yield on the current “ask” price of 2,100 per share.
The way I figure it, as a patient, long-term value investor, with yields like that, I don’t even need the stock prices to go up to be making way more money, more safely than I can in most other stock markets around the world.
As I say, this is one of the three best risk/reward setups I have seen in my entire career. The one drawback is these shares are not very easy to trade–and, for now, while they are unpopular and overlooked, they are not very liquid.
But I can live with that. Plus, after the fund is set up, we’ll hopefully also be able to participate in the big, discounted block sales that seem to be going on.
It’s my firm belief, based on prior experience throughout my career that this market will come back into fashion.
Money will flow in. Liquidity will spike. When that happens, we’ll be ready to sell these stocks at many multiples of what we pay for them now…to eager Johnnycome- lately’s, just like my clients did with Nongshim, WMC, Jubilee Mines and Mincor.
