I made a contrarian call on NMB Bank PLC (NMB on the Dar es Salaam Stock Exchange) in the third quarter last year, along with other Tanzanian blue-chip stocks.
At the time, nearly every foreign investor and media outlet was deeply negative on Tanzania and its economy. It got so bad, I felt compelled to call out The Economist for inaccuracies with the data cited in their reporting. The Tanzanian media republished my article.
When it comes to the banks specifically, I have been following NMB closely since 2018. I have visited the management team twice, and I hold my own Tanzanian custody account with them. I also know some of the largest shareholders in the bank personally.
By visiting Tanzania and speaking with NMB and the other big bank, CRDB — which is also seeing spectacular profit growth at present — in October 2018, and again in February 2019, it was pretty clear to me that after three tough years for the country’s banking sector, the cycle had turned. Business was getting better.
Despite the backdrop of negative media reporting about Tanzania’s economy, the data told a different story. Few others seemed to see it. This is why my investment methodology only draws on primary sources of information in the first instance, and completely ignores opinions.
After a banner year in 2020 where earnings grew 45%, in the first three months of 2021 earnings grew by a further 31%. Earnings per share rose from 100 Tanzanian shillings per share in the first quarter a year ago, to 131 this year. At that rate, the company is on track to earn TZS 524 per share for the full year, though of course it could be even more (or less).
Driving this rapid improvement in profits has been healthy loan growth, and the compounding of NMB’s interest income from its large portfolio of high-yielding government securities. Naturally, there is a risk as the good times roll that the bank overextends and starts making loans that would be best not made, or gets too much exposure to Tanzanian government paper – which can yield as much as 16%.
But I have a high regard for the management’s acumen and expect them to be well aware of these risks. And with NMB shares currently trading off-market in pre-arranged block trades at TZS 1,700 per share, the forward P/E multiple is only 3.3x.
Moreover, with a dividend payout ratio of up to 35% typically, the indicative yield for the year ahead is as high as 10.8%. Price to book value is only about 0.7x and the bank generated a very strong return on average equity of 22% in the first quarter. So, I believe there’s a significant margin of safety.
I am still facing plenty of skepticism from the majority of investors, when I mention Tanzanian stocks. That’s OK. My African Lions Fund has only been going for about seven months, and we’ve only deployed just over US$9 million into African Frontier Markets to date. I want to be able to deploy two or three times as much money over the coming year or so, if investors see fit to back me.
Doing so at low prices would make me and my investors much happier than having to pay up.
It’s important to note that our portfolio consists of only the very best companies in these markets. Our number one priority is to buy quality. But the beauty of the prolonged downturn in frontier markets, since about 2014, is that we can also do so, for the time being at least, at attractively low prices.
Our blue-chip portfolio currently trades on an average price-to-earnings multiple of just 6.8x and yields 8.5%. Only in Frontier markets can you find value like this today. Leading US banks, for example, which are growing much more slowly than NMB and CRDB, typically trade at multiples that are 3 to 5 times higher than those banks I am buying in Africa.
Moreover, I only buy shares in companies that have iron-clad balance sheets, which generate superior returns on invested capital, are run by ethical and competent management teams, and occupy the dominant competitive positions in their industry.
Plus, we don’t pay up for them. We only buy them when we feel valuations are so low that they have the potential to double through the next market cycle.
Unlike NMB and our second-biggest holding, Tanzania Breweries Limited, which are both still being offered cheaply by block sellers, and still offer great long-term value, some of our holdings have started running higher.
Filtisac, a packaging company in Cote d’Ivoire, is up 53%. MTN Ghana, the leading telecommunications company in West Africa’s fastest growing economy, is up 33% since we got our (alas, too small) holding less than two months ago. The Ghanaian Bank we’ve taken a position in is up 21% since we started buying it 6 weeks ago. And our biggest gainer, Rwanda’s dominant bank, BK Group, is up more than 105% in our portfolio.
Overall, since I started investing the fund’s capital back in October, the Fund is up about 15%, after all fees and expenses. I am still awaiting final numbers from my Administrator, Circle Partners in Singapore, for the month of April. So that figure is preliminary.
Tanzania aside, where only two of our holdings have moved up solidly, I am beginning to sense that it’s becoming more difficult to deploy new capital at rock bottom valuations. These African Frontier markets where I invest are beginning to catch a bid again, after years of relentless selling by foreign funds as they faced redemptions, or, in many cases, even shut up shop.
I love nothing more than to buy a great business on a low multiple of earnings and high dividend yield — some of our holdings yield as much as 19% — from price-insensitive, forced sellers. Here’s hoping that all the cheap inventory of stocks hasn’t gone just yet.
In the case of NMB Bank, I know for a fact you can still buy at TZS 1,700. No fewer than four local brokers in Tanzania have offered me that price this week. The catch is you need to buy in a “pre-arranged, off-market block trade,” and according to the trading rules on the Dar es Salaam Stock Exchange, such trades must be for a minimum of TZS 200 million, or the equivalent of approximately US$86,500.
Now, you could band together with a bunch of other people to do this, and have a broker execute a trade for a number of clients at once. If you are genuinely interested, I’d be happy to put you in touch with one or more brokers, if you email: firstname.lastname@example.org.
Or check out my fund at africanlionsfund.com, which is another way to get exposure to NMB, and a whole lot more, with me doing all the leg-work for you.
This kind of investing is not for everyone. But my job, as I see it, here at Global Value Hunter, is to point out such ideas, so you can conduct your own due diligence and then decide for yourself.
To my knowledge, African Frontier markets are one of the only places you can buy leading blue-chip growth stocks at value stock prices in the world today.
Until next time,
Global Value Hunter
African Lions Fund