Global Value Hunter

African Frontier Markets zig,
while the rest of the world zags

African Frontier Markets vs S&P 500. Background byNature Vectors by Vecteezy

For the first two months of calendar 2022 the S&P 500 was down 8.2%. The US bond market, as measured by the iShares 20+ Year Treasury Bond ETF (TLT), was also down by 5.5%. Most investors are nursing significant losses.

But, in the part of the investment world I focus on, African frontier markets, the story has been very different. As measured by the S&P Africa Frontier BMI (Total Return) Index, African frontier stock markets rose by 1% over the same period.

Said another way, the African frontier stock markets’ performance has been largely uncorrelated with that of the biggest global investment markets. They outperformed the S&P 500 by 9.2%, and the US Treasuries market by 6.5%, over the first two months of 2022.

In a world where many asset classes are now moving in lockstep with each other much of the time, including stocks, bonds, gold, and Bitcoin, African frontier market equities seem to offer some zig, when other markets are zagging.

I can’t be 100% sure why that is. But I suspect one reason is that, regardless of what may be going on in the world, profit and dividend growth for most high-quality companies in African frontier markets is currently very strong.

In the fund that I manage capital for, African Lions Fund, we endeavour to own the 20 best investments among them. And the results are impressive.

Of those twenty-odd stocks we hold in African Lions Fund, seven have so far reported full-year 2021 earnings. I left out one (Zambia Breweries) from the table below, as it skews the data, having gone from just over breakeven in 2020 to making decent profits in 2021.

CountryFY'21 vs '20
Net Profit Growth
FY'21 vs '20
Dividend Growth
Company 1Tanzania37.30%39.00%4.77.00%
Company 2Kenya17.50%18.90%7.610.90%
Company 3Ghana4.20%27.30%2.416.50%
Company 4Ghana43.50%43.80%6.510.80%
Company 5Senegal25.40%14.30%6.110.00%
Company 6Kenya98.00%100%55.80%

Compared to 2020, the mean increase in net profits across this sample has been 37.7%, while the mean increase in dividends was 40.6%.

So, it should not surprise you to learn that African Lions Fund, has done even better than African frontier markets as a whole, outperforming the S&P Africa Frontier BMI Total Return) Index by 6.6% for January and February, and outperforming global markets even more strongly.

For the first two months of calendar 2022 African Lions Fund, is up by 7.6% in US Dollar terms, net of all fees and expenses. It thus outperformed the S&P 500 by 15.8% and US treasuries by 13.1%, clearly zigging while global markets zagged.

In all, the Fund is now up 41.8% since inception in October 2020. And yet, valuations on the stocks it owns are still incredible bargains.

P/Es averaging 5.4x and dividend yields averaging 11.1%

The valuations on the six stocks in the table above range from a P/E of 2.4x to 7.6x, with an average of just 5.4x. The dividend yields range from 5.8% to 16.5%, with an average of 11.1%.

Keep in mind, this is on a group of stocks that saw earnings climb 37.7% and dividends grow 40.6% on average for 2021 over 2020.

I put it to you that African Frontier markets are the only place in the world where you can buy growth stocks on deep value multiples.

That’s part of the reason why I uprooted my young family from Bali, and made the commitment to move here, at least for a time, to invest my own capital and that of my 100+ strong client base in the African Lions Fund.

When results for Twiga Cement (TPCC on the Dar es Salaam Stock Exchange), my biggest personal holding, which also represents over 12% of the African Lions Fund’s portfolio, come out soon, I expect more of the same great growth momentum seen from the other six companies featured in the table above.

Given the strong growth, mid-single digit P/E multiples, double-digit dividend yields, and added diversification benefits for your overall portfolio, perhaps you too should consider an investment in African frontier market stocks. They won’t be “on sale” forever.

The opportunity is STILL THERE to buy cheaply. You have not missed the boat.

Until next time,

Good Investing!

Tim Staermose
Founder, Global Value Hunter
& African Lions Fund Ltd.

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