With no Covid-19 lock down and gold exports surging,
Tanzania will be among world’s fastest growing economies in 2020

Aerial view of Bali, leaving to Tanzania
Photo taken after take-off in Bali last week.

Greetings from Tanzania! I finally made it to Dar es Salaam, after a 22-hour journey from Bali and plan to spend the rest of 2020 here with my family, away from the coronavirus madness gripping much of the planet.

To be clear, Tanzania is not immune to the pandemic. Hotels are operating at a fraction of their full capacity. At the high-end Hyatt Regency Kilimanjaro Hotel, for example, the two main restaurants are mothballed, with only the lobby lounge operational. I decided NOT to stay there partly for that reason. Why pay a premium price for half the usual services?

There are few overseas visitors right now. However, the local functions and events business seems strong. Yesterday there was a function in my hotel with 170 attendees. Today there is a Southern African Development Community (SADC) conference scheduled.

Tim at the hotel in Tanzania
Tim at the hotel in Tanzania

Generally, life is continuing as normal. People here are used to taking sensible precautions against bugs and viruses. There are hand-washing stations in the front of most commercial establishments. The population is also young with a median age of just 17, and the sort of lifestyle diseases that are prevalent in the West – obesity, heart disease, diabetes, and hypertension – are thankfully not common.

“For most people, the immediate risk of becoming seriously ill from
the virus that causes Covid-19 is thought to be low.”

This notice from the Tanzania Centre for Disease Control (CDC) on the front page of The Guardian newspaper in Tanzania about Covid-19 has a measured and sensible tone, far from the doom and gloom you are constantly hammered with in the West. “Fact 2” being the most relevant.

Contrast that with all the fear-mongering in the mainstream media in most countries. It’s no wonder the majority of people around the world are worried, and economic activity has been decimated because of all the uncertainty surrounding the path forward out of the pandemic.

If you’re feeling the need to be cautious and defensive with your investments right now, you’re likely in the majority.

However, it’s important, I think, to not lose sight of your longer-term investment objectives. If you are saving for your retirement many decades hence, or even if you are recently retired and have 20 to 30 years ahead of you, by definition you are a long-term investor. Or, at least you should be.

That means you should be allocating a good portion of your capital to promising growth assets, including equities. While a small group of mega-cap technology stocks in the United States are currently trading at nosebleed valuations, as I scour the world, I see plenty of other places where valuations are reasonable, or even downright cheap.

COVID reminder on the front page of The Guardian TZ newspaper
Source: The Guardian newspaper

For instance, I recently recommended two Hong Kong-listed small cap stocks selling for less than their net cash backing in my 4th Pillar newsletter. I also reiterated a BUY recommendation on Sam Jung Pulp, a South Korean maker of toilet tissues, and pulp-based personal care products, which I estimate is selling on a multiple of only two times this year’s likely earnings. No wonder members of the controlling family have been buying more shares on market.

However, right now there’s only ONE country where I see three positive factors converging all at once:

  1. The overall economy is robust and growing strongly (5%+) — a feat fewer than a handful of countries will manage in 2020
  2. Growth companies are doing very well in the present environment
  3. Valuations are cheap

That place is Tanzania. The data is undeniable.

To gauge the strength of the economy I looked at the government’s level of income tax receipts. They have been skyrocketing in recent months.

Goverment of Tanzania income tax
Source: Bank of Tanzania

I also looked at bank lending. The picture there is also incredibly strong. The two largest banks, CRDB Bank (CRDB) and NMB Bank (NBM), which between them account for nearly 40% of the total market, each posted double-digit annualized loan growth for the latest quarter. 

CRDB’s loan book expanded by 3.76% just in the three months to June 30, 2020 from where it stood March 31. NMB meanwhile reported a 2.7% increase in its outstanding loan book in the same period.

Driving loan growth is loans to salaried employees (the same ones paying the rising taxes in the chart above), and loans to businesses looking to expand.

The banks’ respective earnings for the first half of 2020, surged. CRDB reported a 17.4% increase in earnings per share. NMB’s earnings per share jumped by 65.5%.

Tanzania's two major banks, CRDB and NMB at the International Airport in Dar es Salaam
The two largest banks immediately prominent in the arrivals hall at the airport

The are several reasons behind the positive outlook for Tanzania’s economy and blue-chip companies

The Tanzanian government decided not to shut down large swathes of the economy for coronavirus. In general, it’s been business as usual. Large infrastructure construction projects have continued uninterrupted. Banks are still lending. Consumers are still spending.

The Tanzanian shilling is steady. Inflation is low, at just 3.3% in July versus the same month in 2019. Falling fuel prices are a huge help across the entire economy.  Unlike some African nations, Tanzania is a net oil importer. (Though it has extensive natural gas reserves).

According to the Bank of Tanzania, “Domestic prices of petrol, diesel and kerosene declined by 26.1 percent, 22.3 percent and 19.4 percent to TZS 1,781 per litre, TZS 1,799 per litre and TZS 1,832 per litre, respectively, in July 2020 from the corresponding month in 2019.”

As far as the country’s export industries go, tourism has taken a hit not because Tanzania was shut down, but because other countries shut their borders and instituted quarantine requirements for returning residents. A general fear of traveling has also taken hold.

Setting tourism aside, sales of Tanzania’s other main exports, gold and agricultural products are booming. Gold in particular has seen a meteoric rise in price this year from under $1,500 to well over $1,900. Gold is benefitting from the pandemic panic as investors seek a safe haven.

As a result of this price rise, as well as rising production, for the 12-month period ended July 31, Tanzania’s gold export receipts leapt by over US$1 billion. That’s a big deal in an economy where total GDP is approximately US$62 billion per annum – making it the 10th largest economy in Africa.

What’s more, the numbers should improve further going forward, as the gold price is now several hundred dollars higher per ounce than what it averaged in the 12 months to end-July.

In total, Tanzania recorded an impressive increase in its external trade balance for the 12 months ended July, 31, 2020. As reported in the Bank of Tanzania’s (BoT) August 2020 Monthly Economic Review, the value of exports of goods and services increased by over US$1.1 billion to US$9,815.3 million in the year ending July 2020 from US$8,706.6 million in the corresponding period in 2019.

That’s a hefty 12.7% year on year increase, in a period that takes in the brunt of the worldwide coronavirus pandemic lock downs. But, it’s not just exports that are doing well. The local economy is growing fast as well.

The country’s dominant cement company, Tanzania Portland Cement Company (TPCC), also known as Twiga Cement, is a good proxy for construction and infrastructure spending growth. It saw cement sales volumes rise by 8% for the six months ended June 30, versus the same half-year period in 2019.

Overall the Tanzanian economy is still expected to grow by 5.5% in 2020. That will almost certainly place it among the fastest growing economies in the world for this year.

That means investment opportunities here are very attractive by global standards. As the half-year results of the blue-chip companies I’ve mentioned attest, there are some excellent profit growth numbers for listed equities.


Tanzanian stocks are cheap both in absolute terms and relative to historical multiples

There appear to be two main reasons.

    1. Just like the rest of Africa, liquidity has drained out of the Tanzanian market as foreign investors exited in droves over recent years.
    2. There is a degree of political uncertainty ahead of the Presidential elections in late October.

While I can’t tell you exactly when there may be a catalyst to turn these negatives around, as a traditional value investor I am of the belief that markets always move in cycles. Tanzania will come back into favour at some stage. When it does, I’ll be here holding the likes of CRDB Bank (CRDB) and Tanzania Portland Cement Company (TPCC), both of which I own, and benefitting from the re-rating of their current lowly valuations.

CRDB currently trades for less than three times projected 2020 earnings. It also yields well into double digits.

On my forecasts, TPPC meanwhile is selling on a multiple of just under six times this year’s likely earnings. It yields more than 13%.

Both stocks are ones I can afford to simply be patient and hold, given their hefty dividend yields.The second factor keeping the market depressed seems to be a distaste by some investors for President Magufuli’s nation-building policies. While I don’t see things the same way as the naysayers, what I’d say is that good businesses tend to perform well, no matter who is in political power. For my newly launched African Lions Fund, all we are interested in buying are good businesses.

A company like Twiga Cement, with an iron-clad balance sheet with net cash, a return on equity approaching 30%, low valuations, yet, exhibiting 8% volume growth, 12.9% revenue growth and 33.4% net profit growth for 1H2020 vs. 1H2019 is exactly what we’re looking for.

There are liquidity challenges in the Tanzanian market, as mentioned, and it’s not easy to buy meaningful quantities of these great businesses right now – not many people are sellers – but, I have managed to do so over the past couple of years. With a bit of patience, African Lions Fund should be able to do the same.

What’s more, I think it is likely that things will pick up just as soon as the election uncertainty is over, and people start to see how well Tanzania’s economy and blue-chip stocks have been performing in 2020 relative to the rest of the world.

I have made the decision to move here. My family and I will be here until the end of the year laying the groundwork for our move next year.

I’m glad I came. And I’m glad that after nearly six months in Bali, I made the choice to fly again.

The trip over was surprisingly smooth. One low-light was having to take a coronavirus test prior to boarding my flight from Bali to Jakarta. I may be a big, strong 200-pound, 6ft guy. But my knees go weak at the sight of blood.

Once up in the air it was worth it. “The view of Bali flying out being just the start…”

Until next time,

Good Investing!

Tim Staermose

Globalvaluehunter.com and, African Lions Fund.

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