Global Value Hunter

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Only three times in my career have I seen a
risk/reward set-up this good…

and the last two times prices soared 5 to 10-fold

A lioness and lion in Africa

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 liberalized 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).

At the same time, value investing was out of fashion globally, just as it is now. Back in 1998 and 1999 all anyone wanted to own in the stock market was so-called “New Economy,” TMT (Tech, Media, and Telecoms) stocks. “Old economy,” value stocks such as consumer staples were toxic.

Yet, it was the PERFECT time to buy such stocks in Asia. I remember recommending Korean instant noodle maker Nongshim, and confectionary and beverage conglomerate Lotte to clients at the time. They did spectacularly well. Nongshim, for example, soared more than 10-fold from just over W40,000 at the beginning of January 1998, to a high of well over W400,000 in 2016. Today it’s W368,000. And that doesn’t even include dividends.

How markets sometimes miss what’s blindingly obvious

The second time in my career I saw such an obvious a mismatch between the value on offer and the future growth potential of an asset class was in commodities in 2002, after the bubble had burst, and left most asset prices on the canvas. Commodities had already been cheap pre-collapse. Now they were a steal.

Gold at the time was around $300 an ounce. Copper was below 80c a pound. And nickel was around $7,000 a ton.

The great commodity demand boom, as China industrialized and urbanized, was only just getting underway. Yet almost NO ONE foresaw just how enormous it was going to be.

There’s an infamous slide deck I’ve seen, from a BHP-Billiton corporate strategy presentation in 2001, where China didn’t even feature among the top five projected markets for the company.

Not once in the 40-page presentation was the word “China” mentioned. Instead there’s a minor market category called “other Asia” projected to account for 11% of total sales.

The slide comes courtesy of my old friend Alun Jones, whose colleague Andrew Hines supplied it. You’ll have to excuse the quality. I had to dig way back in my email archives to even find it.

Keep in mind, this was the strategy department of one of the world’s biggest mining companies, and they didn’t even see what was coming. Their biggest customer, by far, for the next 15 years, did not even feature prominently in their business plans.

Nuts, right? But it shows how it’s sometimes possible for markets to completely miss things that with hindsight become blindingly obvious.

At the time I was working for a small investment research outfit in Manila. I started a product called “The Natural Resource Hunter,” in late 2002. One of my first investment recommendations was a trio of nickel mining stocks in Australia, WMC Resources, Mincor Resources, and Jubilee Mines. I remember people laughed at me when I predicted the nickel price would go to US$10,000 a ton on the back of rocketing stainless steel demand in China.

My readers had the last laugh. Nickel didn’t go to $10,000 a ton. It went to $50,000 by 2007!

Nickel chart

Both WMC Resources and Jubilee Mines subsequently received multi-billion dollar takeover offers and Mincor Resources shares rose hundreds of percent. As a result, as I recall, the worst of my three recommendations, WMC Resources, made my readers more than 60%. In Jubilee and Mincor they multiplied their money between two and three-fold. 

In a quirky twist of fate, today I serve on the board of a publicly listed mining exploration company in Australia, Emu Resources NL (EMU), alongside Terry Streeter who was one of the co-founders of Jubilee Mines and made hundreds of millions of dollars out of it.

I did well out of the boom in commodities markets in the years 2003-2008 myself. I had bought gold at $320 an ounce, for example. But I didn’t do quite as well as Terry.  

So, I’m still plugging away doing what I love – looking for the next big investment opportunity where I see the market’s outlook and the fundamental outlook being diametrically opposed. For that’s the rare set of conditions that gives rise to these once-in-a-decade opportunities to potentially make a fortune, with very little risk of permanent loss of capital.

Today, I think that golden opportunity is in African stocks. Admittedly, I’ve only done a deep enough dive thus far to be 100% confident in one country – Tanzania – but my preliminary research in other countries shows 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 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% of export earnings), or diamonds and gemstones in Botswana (90.6% 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:

            1. Mount Kilimanjaro
            2. Serengeti National Park
            3. Ngorongoro Crater
            4. Olduvai Gorge
            5. 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 are also propelling the economy forward. The country has nearly 60 million people. The median age is under 20.

      1. 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.

      1. Politics is one thing. The economy is another. The publicly listed businesses that I have analyzed 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).

Twiga IS

Since bottoming at 198 Tanzanian shillings, its earnings per share have increased by 67.7% 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, which I also have a position in:

For NMB Bank, CRDB’s biggest rival, the pattern is the same:

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?

Twiga chart from MarketWatch

Why did CRDB’s shares fall from over 400 to a low of just 90, before rebounding to 145 today?

CRDB Bank PLC chart from MarketWatch

And why did NMBs shares recently trade in a pre-arranged off-market block sale at just 700 Tanzanian shillings per share – just 4.9 times last year’s earnings, when their high was over 4,700?

NMB chart from MarketWatch

It baffles me somewhat.

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.

TNZ Breweries chart from MarketWatch

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 too much lower

In the meantime, we’ll collect handsome dividends and make a decent return while we wait.

These are the dividends I’m earning right now.

NMB just paid out a dividend of 96 Tanzanian shillings per share yesterday. That’s a 13.7% yield based on the last price at which a significant number of shares traded (700).

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).

And Twiga is paying out 290 shillings a share on June 30, representing a 13.8% 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 Johnny-come-latelys, just like my clients did with Nongshim, WMC, Jubilee Mines and Mincor.


Until next time,

Good Investing!

Tim Staermose

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