My View of Nigeria After my 3rd Trip in 2 years
Plus: my Investment Approach for the African Lions Fund
Nigeria has been going through a dramatic economic transformation since my first trip there two years ago. From a dysfunctional fixed exchange rate system, where the level of the Naira was artificially held strong by the former central bank leadership, the currency is now floating freely. It has found a level some 70% lower than where it used to trade – falling from 450 to 1498 to the dollar. It is a dramatic shift.
The removal of long-standing government subsidies on petrol has also seen petrol prices quadruple. 
Even so, they remain less than half the price of diesel, and clearly some level of government support is still there. I am told that taking Nigerian petrol to the borders and smuggling it into neighbouring countries where it sells for more than twice as much is still common.
As you’d expect, these two things — a much weaker exchange rate, and much higher petrol prices — have caused a huge inflationary shock in the economy. Official Nigerian inflation numbers for May were nearly 34%. The prices of many basic goods and services, including staple foods have risen even faster. The average Nigerian is doing it very tough and has little or no disposable income over and above the very basics.
But Nigerians are generally an enterprising people. So, innovative new solutions are materializing.
“Data is the new oil”
Interestingly, in this day and age, cellular phone airtime and data are very much a part of the “basic” consumption bundle. This was corroborated by MTN Nigeria’s management during our meeting with the leading mobile phone company. Indeed, their take is that a lot of people who can work remotely have substituted spending money on transport fares to the office for spending on data bundles.
Despite greater data traffic, we are not keen on owning MTN Nigeria shares at this juncture. The company desperately needs a price hike, to recover the increased cost of its tower leases, imported capital equipment and other foreign exchange denominated costs. But the regulator isn’t granting them one.
Of course, for those who must commute to work, data airtime is not a possible alternative and times are extremely tough. Increasingly, the people are turning to the government for help. But it hasn’t really been forthcoming.
President Bola Tinubu has now been in office for over a year. His political honeymoon is over. Many people are angry. Labour unions demanding a significant hike in the minimum wage have held strikes. Power sector workers recently crippled the economy briefly by walking off the job and shutting down the power grid.
Meanwhile, Nigerian oil production has failed to materially increase, and the essential foreign exchange earnings, and taxes that this key sector contribute to the economy and government coffers are still running well below their potential. The departure of international oil companies from shallow-water and onshore oil and gas production and the indigenization of the oil industry, however, offers hope of a turnaround.
Seplat: the new, indigenous face of the Nigerian oil industry
One of the more upbeat company meetings my team and I had in Lagos last week, for example, was with oil and gas producer, Seplat Energy (SEPL on the London Stock Exchange) which operates in the Niger Delta. The company has been making great strides ensuring it has several pipeline routes to evacuate its oil and gas production, giving it the necessary redundancies, in case there are security issues or mechanical breakdowns on one or more of the routes.
Seplat is also getting close to the finish line on its transformative acquisition of Exxon Mobil’s former Nigerian onshore and shallow-water assets. A court case challenging the acquisition has been dropped and regulatory approvals are now all that remain pending, for the transaction to close. On completion, this will essentially triple Seplat’s production and revenue, at a very attractive acquisition price of just US$2.90 per proven and probable barrel of oil equivalent.
Seplat is funding the transaction with debt, and financing costs will rise sharply for a time, until the liabilities can be paid down with cash flow from the expanded oil sales. But in the medium to long term, Seplat looks to be in a very strong position. Its key competitive advantage is the ability to maintain amicable relationships with all stakeholders in Nigeria, especially those living on, and around, its producing assets. Moreover, Seplat’s Nigerian assets are its sole focus. By contrast, for the super majors like Exxon Mobil, Shell, and Total, their Nigerian assets are more of an afterthought.
All this said, Seplat’s stock, which is listed both in Lagos and London (chart below) has been on a tear lately and does not attract us at this price point. It remains on our watchlist.
Other companies we met with in Lagos, which we already own, were Nestle Nigeria and UAC Nigeria. Both operate in the consumer staples space. In particular, Nestle sells condiments, food and beverages, while UAC mainly sells snack food and bottled water. It also has a leading paint business, with the Nigerian rights to the Dulux brand of Akzo Nobel. Paints and coatings businesses can be a gold mine for investors, as long-term shareholders of Sherwin Williams and Nippon Paints, which made Singaporean Goh Cheng Liang a billionaire, can attest to.
Both Nestle and UAC face headwinds at present as the purchasing power of Nigeria’s consumers has taken a severe beating from the naira devaluation, and rapidly rising prices for transportation and staple food stuffs. Nonetheless, UAC is producing at full capacity and selling all its output from its food and Swan Mineral Water divisions. It is currently undertaking a capacity expansion and has added a new bottled water production line among other things.
Nestle, too, is adding to its production lines, and demand for its iconic brands remains robust. Importantly, Nestle has been able to fully pass on cost increases by hiking its prices correspondingly. Both its top-line and gross profit growth remain strong. Where there are challenges for Nestle Nigeria is with foreign exchange losses and financing costs.
Due to the lack of availability of foreign exchange to source imported raw materials and equipment in recent years, Nestle Nigeria became dependent on FX loans from its Swiss parent to maintain its operations.
As a result, the collapse of the value of the Nigerian currency saw the company’s liabilities rise so much in naira terms that it went into a position of capital deficit / negative equity.
A revaluation of assets from a historical cost basis to “fair market value” helped alleviate this, but with a further leg down in the naira, we think the balance sheet will still be in negative equity come the second quarter results. The CFO would not be drawn on whether the Nigerian subsidiary would seek to pay back loans to the parent (none are due to be paid down until 2027), and skip dividends, but he made clear that he is very focused on not raising any more debt.
UAC on the other hand had no such problems in the first quarter and reported significant FX gains and finance income. UAC remains our preferred exposure in the Nigerian consumer space at this juncture, despite its recent share price rally.
Evaluating UAC According to Our Proprietary “8 Ms” Framework
Multiple: UAC shares are still priced at a tiny fraction of their 10-year high in USD terms. (US$0.01 now vs. 10-year highs of US$0.24), and on our projections the company trades on just 3.8 indicative 2024 earnings.
The company easily meets the mandate for African Lions Fund, which requires that companies we invest in be able to double sales and earnings on a 5- to 10-year horizon and trade at a valuation we also think can double, in the same timeframe.
The company is run by Management that has significant skin in the game, owning a combined 30% or so of the company. So, the My Fellow Shareholders screen also checks out. Our interests are aligned with theirs. Their track record over the past 5 years also shows that management is competent. And we have no reason to believe they are not ethical.
The company’s target Market meets our criteria for having significant expansion potential and a long runway for growth in both packaged foods and paints, which are UAC’s core earnings drivers. The company has solid competitive Moats with highly visible and well-regarded brands in both key businesses, “Gala Sausage Roll,” “Swan Mineral Water,” and “Dulux Paints,” are all famous. Moreover, in paints, UAC’s Chemical & Allied Products Division (CAP PLC) is the sole licensee of Akzo Nobel’s brands.
Regarding its Marketing, UAC’s products are generally household names marketed based on their brand and reputation for quality. The company’s business Model is also simple and effective. No red flags there either.
On Money, UAC is well funded for expansion with both organic growth in cash flow, and proceeds from sales of some non-core assets in recent years. The balance sheet has almost no long-term debt, and the only debt funding the Group relies on are short-term working capital facilities. There is also a significant amount of cash on hand. The dividend payout is low (between 6% and 7%), and the major holders of the stock are far more interested in growth.
The final, and perhaps most important “M” to consider, however, is Nigeria’s Macro conditions…
Where next for Nigeria?
Do we know what the future holds for the key economic variables propelling the Nigerian economy — inflation, interest rates, the exchange rate, oil production and oil prices? No; no one can be certain.
But I will say this; at around 1,500 to the US dollar, the Naira feels cheap. As my colleague Peter Tan exclaimed, “Only $2.80 to dry clean a suit?! That’s the cheapest I’ve ever found in all my travels.” Approximately $15 for 5-star hotel buffet lunches and chauffer driven airport transfers also rank among the cheapest I have ever seen.
Just US$0.34 for a copy of Business Day, the Nigerian equivalent of The Wall Street Journal, and $35 for a huge, high-end Lebanese restaurant meal for three people showed me that, at least on a purchasing power basis, the Naira is extremely cheap.
Lagos and Abuja suddenly rank among the very lowest on cost-of-living surveys for international companies’ expatriate employees, as well. According to the 2024 Mercer Cost of Living Survey, Abuja ranks cheapest at number 226 with Lagos second cheapest at 225.
Interestingly, with only one or two exceptions, most people we met on our trip said they expect the naira to weaken even more. They base this assessment largely on the fact that inflation is running about 6% points ahead of interest rates (34% vs. 28%) and that you can make 5% p.a. in USD. So, some foreign exchange prediction models will say the naira has to depreciate by another 11% at least, inside a year.
I find such theoretical pricing models to be pretty useless and tend to go by purchasing power. That is why I think the naira may well strengthen on a 12- to 18-month horizon. But it could also just be that prices will increase some more to bring things back into balance.
I am not in the business of predicting exchange rates. But on the balance of probabilities, I would say that a rate of 1,200 for the Naira is more likely than a rate of 1,800. And on that basis, I am relatively comfortable deploying capital in Nigeria at an exchange rate of 1,500.
No CFO would be drawn on their exchange rate assumptions, and all are prepared to hunker down and take whatever rate the market dishes up. This is also quite positive. It signals to me they’ve capitulated.
While the future still looks clouded in plenty of uncertainty, it is hard for me to believe that things in Nigeria are going to get materially worse. Business conditions are extremely tough. Cost of living escalations and the food security situation is dire. But, as more than one of us commented during our trip, if Nigeria doesn’t make it over this, and gets tipped into the abyss, we will have much bigger problems to worry about than the earnings potential of listed companies. It will be a humanitarian crisis of world class proportions. My assumption is that Nigeria will muddle through and that things will go from terrible to less terrible.
There is undoubtedly great wealth in the country. It is just extremely unequally distributed. Corrective measures on that front, both government-led, and market-driven, I believe, are inevitable. That remains my base case view, rather than total economic collapse.
It is on this basis I am willing to deploy further investment capital in Nigeria, to high-quality companies run by excellent management teams who are no strangers to running their operations amid economic adversity. The strong are getting stronger. It’s economic Darwinism.
Unlike many, I remain cautiously optimistic on Nigeria. It is a complex place. But the key is, most Nigerians are street-smart, driven, and always optimistic that tomorrow can be better than today.
If ever there were a place where capitalism could truly flourish given the right conditions, Nigeria is it.
Until next time,
Good Investing!
Tim Staermose
Founder, Global Value Hunter
& African Lions Fund Ltd.