Global Value Hunter

Given the current exchange rate controls, we don’t invest here much yet; But, Nigeria may just be the cheapest stock market on the planet

Arriving at Lagos, Nigeria

Here’s a quick note from Lagos, where I’ve just set foot for the first time to search for some great value investments. I’ve scheduled a week of meetings with listed company managements and boots on the ground research.

It’s hardly a secret that this country is a HUGE potential market. Nigeria is a country of nearly 220 million people. Just under 1 in 7 Africans, and 3 in 100 people in the world live in Nigeria. The commercial capital Lagos alone, where domestic migrants flock seeking opportunity, has a population of around 17 million. 

The population is also young. The median age in Nigeria is just 18.6. That compares to 38.5 in the United States, 38.4 in China, and 28.7 in India. 

As a result, like most of Africa, between now and mid-century, Nigeria is going to see a huge spurt in the growth of its productive, working-age population. 

Listen to the pessimists and they’ll tell you it is a failed state and that ethnic and religious divisions between Christians in the south and Muslims in the North will lead to strife and even civil war. According to them, this will mean mass unemployment and poverty. 

For those, like me, who see a glass half full, Nigeria presents a land of opportunities, as a vast, consumer class gradually emerges. Indeed, my first meetings this week are with food and fast-moving consumer goods firms Nestle and Unilever. I imagine they’re in the camp that continues to see opportunity. I’ll learn soon enough.

Driving in from the airport on the expressway to Victoria Island, Nestle’s famous Nescafe brand, and Unilever’s Lipton tea were already evident from billboard advertisements, down to the complimentary drinks in my hotel room. They have been in the country a long time already, 59 years for Nestle, and 99 years for Unilever.

Nestle and Unilever products in Nigeria
Complimentary drinks in my hotel in Lagos.

Part of the attraction of the Nigerian market to a value investor like me is that right now, because of what effectively amounts to capital controls, US dollars are very hard to come by in Nigeria. As a result, they trade at a huge premium on the unofficial, “parallel” foreign exchange market.

While the official Naira-US Dollar rate on the investment and trade account at the moment hovers between 415 and 430, the parallel market rate for dollars on the streets of Lagos is more like 680 to 700. So if you’re a long-term foreign investor, you’ll get a lot more for your dollars here.

But there’s an even better exchange rate, which allowed me  to park some money in Nigeria, ready to deploy in stocks I may find which meet my criteria – if any.

By purchasing selected Nigerian shares in London and moving the registration of the securities to Lagos, I’ve been able to get US Dollars into Nigeria for African Lions Fund at an effective exchange rate of as much as 1,019 to the Naira. This makes Nigeria among the cheapest, if not THE CHEAPEST stock market on the planet.

Even before considering this huge foreign exchange rate discount, you can buy selected Nigerian blue chips, such as Guaranty Trust Holdings, and Zenith Bank for as little as 2 times their likely earnings this year.

But, you don’t need to be as intrepid as I am and venture into the Nigerian stock market directly. The Global X MSCI Nigeria ETF (NGE) trades on the New York Stock Exchange. It offers a basket of blue-chip Nigerian stocks, including the two aforementioned banks, Dangote Cement, the crown jewel in the empire of Africa’s richest man, Aliko Dangote, as well as Nestle Nigeria, and MTN Nigeria Communications –  which make up the top five holdings.

All in all, this basket of Nigerian blue chips trades for about 4.9x earnings and the trailing dividend yield is 8.3%. But there is one catch: at the moment, foreign investors who sell shares in Nigeria are forced to join a long line at the central bank, to obtain foreign currency to remit home.

So, there is no guarantee that the NGE ETF can get money out Nigeria in the short to medium term.

As a solution, some institutional investors resort to doing what I have done for African Lions Fund, but in reverse. They buy shares of a company with a dual listing in Nigeria, move them to London, and cash out for hard currency there, at a much lower effective exchange rate than what they would get by waiting in the queue at the Nigerian central bank and getting the official rate.

With Nigeria’s upcoming presidential election due in February next year, I don’t think there will be any major change in the central bank’s foreign exchange policy over the coming six months. But, one never knows.

More likely, with the inauguration of a new administration in the country in the first quarter of 2023, we may see some changes then.

Were the Naira to be allowed to devalue, or float freely, what the parallel market is currently indicating is that there’d be about a 40% devaluation from US$0.0024 per Naira to US$0.00143 per Naira.

Given, I’ve moved money in at an effective rate of less than US$0.001 per Naira, I am not afraid of this potential devaluation. I’d actually welcome it. It should help to unclog the Nigerian economy and financial markets, which right now, are operating in a weird sort of twilight zone, because of the dysfunctional foreign exchange market.

Furthermore, because African Lions Fund has a 5- to 10-year minimum investment horizon, we have the advantage of sitting on our investments until such time that this anomaly is fixed. It’s only a matter of time.

I’ll have more to say from Lagos in coming days, to let you know what more I find on the ground.

Until next time,

Good Investing!

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

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