Global Value Hunter

We are ready to add to our Nigerian exposure.
Here’s why . . .

We are ready to add to our Nigerian exposure

Last week I made my second investment research trip to Nigeria. This time, I not only visited the bustling, chaotic commercial capital Lagos, I also had the opportunity to visit the capital Abuja, for the MTN Nigeria Capital Markets Day event, November 14-15.

To state the obvious, things have changed massively in Nigeria from when I last visited, in September 2022. This was not unexpected. The Buhari regime had left the country in a precarious state, and no matter which of the three candidates won, the Presidential election in March was always going to usher in change.

But, Tinubu, who has now survived all legal challenges to the legitimacy of his election win, surprised everyone — even his most senior advisors — by impulsively declaring an end to fuel subsidies during his inauguration speech, and jailing the former central bank governor the very next day.

Immediately, two of the biggest issues were put front and centre. 

The population has been wincing in pain since, as petrol prices, long held at absurdly low, subsidised rates, went up 6-fold overnight.  The pretence that 460 Naira could buy 1 USD also went out the window, with the official exchange rate adjusting to nearer 800 when it was allowed to float. That has pushed up the cost of many imports, on which Nigeria depends heavily… not just capital equipment, but even basic foodstuffs, such as wheat, sugar, and crucial farm inputs like fertiliser. Don’t forget, this is a country that, despite its vast agricultural hinterland and enormous rural population cannot feed itself. 

With the Naira devaluation, inflation soared and daily life became an even bigger struggle for nearly all Nigerians. 

But, Nigerians are a resilient and optimistic bunch, and they are adapting. More than one person I spoke to from the rank and file — not the guys in fancy suits who are paid to tell me what I want to hear — said that they were willing to suck up the temporary pain, if it is necessary for a long-term gain.  

Tinubu has perhaps been a little reckless, in announcing these big policy changes before the infrastructure was in place to properly implement them, and many of his technocrats are no doubt muttering under their breath as they try and effect policy on the fly. 

But, politically, I think it was a masterstroke, as it gives him the longest possible runway until the next election to effect some meaningful change. 

The question is . . .

Will the post-election policies by the new Nigerian government work?

All the policymakers who gave speeches, and with whom I spoke on the sidelines of the meetings I attended, said all the right things. But, as ever, the real question — to which I do not have an answer — is whether they can execute.

Clearing foreign exchange backlogs for those waiting in the redemption and repatriation queue, and getting the foreign exchange market to function again, adding depth and liquidity, as well as getting more oil out of the country’s oil fields, and into local refineries, such as the massive new Dangote one, and refurbishing the government’s own mothballed refineries, are the top priorities.

Tax reform is another high-priority item on the government’s agenda, to make it more attractive for investors to come to Nigeria. The many taxes and levies at the Federal level, added to all the ones at the local state government level are a massive deterrent to business. The government recognises that, but as with anything, a turf war over taxation rights with the states is a tough political battle to win.

As ever, the people I met on the ground were optimistic, and resilient. And, the mood was generally more positive than when I visited in September 2022. There are no riots in the streets here, though food inflation is running at over 30% and overall inflation is in the high 20s. People are getting on with life, working hard to make ends meet.

Food inflation has hit 40% before, back in the early and mid-2000s. But each time things came back under control, within a few quarters. The Nigerian economy and stock market actually boomed from 1Q2005 to 1Q2008 when the last big inflation spike came back under control.

Nigeria Food Inflation (% per annum)

This chart shows some promising potential for the Nigerian Stock Exchange following the policy changes put in place by the current regime. In fact, it has so far sent the index to a 15-year high, in Naira terms.

How Nigerians are coping with the temporary economic shocks

During my time there, traffic on the streets of Lagos was noticeably lower, however, as the fuel price spike has really hit affordability hard. Most companies indicated that they have had to massively increase salaries, and employee benefits, with many offering transportation services to their employees, and the flexibility to avoid commuting by working from home for part of the week.

How this evolves, and whether it is merely a one-off shock to remuneration expenses remains to be seen, but it will certainly hit most companies’ profit margins hard in 2024. 

To recoup costs, companies that have pricing power took their medicine and hiked prices considerably (+49% in the case of the Dangote Group’s salt and condiments business, to cite just one example). Alternatively they have combined partial price hikes with “shrinkflation,” or import-substitution away from pricier foreign ingredients to local, somewhat inferior ones.

In the case of UAC Foods, for example, they have started to make a smaller version of their famous Gala sausage roll, to retain the NGN200 price point. And they have started to make a cheaper version, with cassava flour sourced locally, rather than imported wheat. 

The Telecommunications industry which reportedly now accounts for 19% of GDP remains in robust health. MTN — at their capital markets event — and Airtel, where I met with the new Nigeria CEO, Carl Cruz, both talked up future prospects, in particular for data traffic growth as the market continues to upgrade from cheap feature phones, to 4G smart phones. 

The progress in Mobile Money, where Nigeria is way behind other African countries, however, looks more measured. Banks have decent digital products already for the 20% of people in Nigeria who have bank accounts. And, many unbanked people have so little money that there is perhaps not such a big use-case yet. I got the feeling that what Nigeria needs for mobile money to take off is several years of solid economic growth to put more money in the pockets of people across the board. Then they will have greater demand for financial services such as mobile money. 

For the Chinese backed “Fintech” payments firms we met, O-Pay and Palmpay, they also see a huge opportunity. But to be frank, I cannot see how they can ever make much money by charging just NGN10 (about USD 1c) per transaction. They need additional revenue sources if they are to succeed.

But, the payments space, and mobile money, is a very exciting area, that is worth watching closely. Carl Cruz, the new MD of Airtel Nigeria, who spent 35 years in the fast moving consumer goods (FMCG) space, mostly with Unilever, confided in me that the single biggest reason he decided to embark on a whole new chapter in his career, and take the Airtel role, was the massive potential he sees in mobile money.

With over 200 million people and between 30 and 40 cities of more than 1 million people in Nigeria, a population growing by about 5 million people per year, and a renewed reform impetus taking root, I think Nigeria is a market that we cannot ignore. 

The broad consensus on Nigerian stocks is still very bearish

London Stock Exchange Group’s FTSE Russel indices downgraded Nigeria to an “unclassified” market status in September 2023, below even “Frontier.”

MSCI followed suit, reclassifying Nigeria to a standalone market status, from “Frontier.”

S&P – which produces the index that we use as the “Hurdle” rate to calculate African Lions Fund’s performance fees, may well follow suit. You get the picture…

As I commented on our Telegram Channel, often this sort of development marks the end of the bottoming process. But only time will tell.

For now, African Lions Fund has two defensive investments in Nigeria, in the Food and Beverage Sector. We will be looking to allocate more capital to Nigeria, adding to these investments, and possibly branching into other sectors, over the coming 12 months.  But the macro environment and exchange rate snafus remain major impediments.

For now, the best way to ensure one gets a good exchange rate on entry to Nigeria remains using the backdoor, by buying one of the London-listed Nigerian companies, transferring the shares to Lagos and selling them there, usually to someone who wants to go the other way.

Implied NGN/USD rates of more than 1,200 are achievable this way. That compares to rates in the 800 to 900 range, at the new official, “willing buyer willing seller,” foreign exchange window, and around 1,100 on the parallel market in Lagos.

When it comes to the exchange rate, my feeling from spending my own money on the ground was that, even at a rate of 1,000, the country is too cheap. In the high-end hotels where I stayed, I was paying US$2 for large (500mL) bottles of local, “Star” beer. I paid US$6.5 for a large grilled chicken Caesar salad. Some locally printed books I bought for my kids downtown were US$1 each.

The implied FX rate on the London dual listings, last at 1,200 to 1,400, and the so-called “parallel” market rate on the streets of Lagos, in the 1,100 to 1,200 range, both therefore feel too cheap to me. 

But we will not see any meaningful strengthening of the naira until there is adequate liquidity and depth on the official FX market, and that is still a work in progress. 

For now, I am cautiously optimistic short-term on Nigeria, but more bullish long term, as reform measures have time to positively affect the economy. I’ve been saying this all along since my trip last year. I believe there is a very real chance of things turning around for Africa’s sleeping, mismanaged giant.

African Lions Fund will be acting accordingly in 2024, and seeking to increase our weighting in Nigeria.

Until next time,

Good Investing!

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

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