How institutional investors drive up shares of multinationals in Africa

Jude Fejekwu
By continually purchasing the shares of multinationals over the years because they are familiar with the parent companies, Africa institutional investors have driven up the prices of these stocks to expensive levels.  Despite these price surges that rarely reverse at a pace anywhere close to how they rose and disappointing results in recent years, the stocks are continually in high demand by portfolio managers who are paid to seek value and not brand names .  Their repetitive and persistent actions over time have led to overly generous and sincerely undeserving stock price increases in these stocks across African stock markets; this further strengthens their desire to continue investing in more multinational companies.

Find below a snapshot of multinationals in Nigeria and Ghana to buttress our point.  The complete analysis is much larger and will not be provided through this medium…

We will assess the companies herein based on P/E multiple, Year-to-Date price performance and year-on-year net income changes for each company's most recent earnings release as at July 21st, 2014.

Companies P/E YTD Net Income,
y-o-y change
IBL (Sab Miller) 46.1 2.79% -9.5%
NESTLE 33.4 -6.25% 0.1%
NB (Heineken) 31.1 5.47% 16%
GUINNESS 24.9 -16.31% -22%
Unilever Nigeria 39.5 -6.80% -47%
Unilever Ghana 78.2 -2.8% -211%
CADBURY 38.7 -18.21% -29%
FLOUR MILLS 26.8 -10.49% -32%
WAPCO (LaFarge) 12.6 3.48% 34%
CCNN 10.7 2.47% 87%
DANGOTE SUGAR 10.3 -20.94% 7%
VITAFOAM                    8.7 -11.22% -4%

 
 
We will only discuss some of our key observations from the above.  Price-related variables are as at July 21st, 2014.  All the selected companies fall within a broad context under Consumer Goods.  Kindly note that Cadbury has been assessed post its quasi share buyback for its year-to-date performance and net income change.

Unilever Nigeria and Unilever Ghana are both doing poorly presently; despite this, their price performances are much better than their net income performances.  Unilever Ghana has even performed better than the Ghanaian stock market index whose performance is in the red in double digits and has a P/E of 78X and a net income decline of 211%.  Its stock price has only declined 2.8% as at July 21st, 2014.  Unilever Nigeria has declined only 7% despite its net income declining 47% at the half-year mark. In reality, our analyses reveals that Unilever Nigeria should be trading below N33.22 presently for its fair value and at N33.22 during Q1 2014 based on its actual 2013 audited performance.  Meanwhile, its 52-week low is N43.32 .  A 30% premium to its lowest price in a year just for a name?

Flour Mills is not a multinational as we know it and in the context of the others we assessed but, it is majority owned by a Greek company.  Despite this, It still reflects the behavior of the other multinationals.  Net income has declined by 32% and its price performance has only declined by 10.5%.

All the multinationals above (except Lafarge) have earnings multiples in excess of 20X.  Lafarge was able to avoid this because it did not pay tax in 2013 and even got a tax credit in excess of $3.4 million.  This led to a boost in EPS by 92% instead of 30%.  We estimate its current P/E to have been 19X instead of 12.6.  Despite having a decent P/E in comparison to the other multinationals on the list, its P/E is still higher than the local company in the same cement manufacturing sub-industry.

CCNN's net income rose 87% during Q1 2014 (32% tax rate) and its stock price has only risen 2.5%; Lafarge WAPCO's net income rose 34% (5% tax rate) and its stock price was still able to rise 3.5%.  Lafarge WAPCO has still done better than CCNN based on year-to-date price performance despite, CCNN having better net income growth and a lower P/E.

 
The last scenario we will provide.  Dangote Sugar's net income has risen by 7% and its price performance has declined 21% with a P/E of 10.3X.  Nestle's net income has remained flat and its price performance has dipped by 6%. All this is taking place despite Nestle having a P/E of 33x and more than 3X higher than Dangote Sugar.

The local stocks get punished more when they disappoint and get rewarded miserly or not at all when they perform creditably.  Some readers will argue that Heineken deserves to rise with its net income growth of 16% and its price performance of 5.5% and a P/E of 31X.  Valid point.  Wait!  Should it rise ahead of Vitafoam with a net income decline of 4% and a price performance dip of 11% and a P/E of 8.7X (almost 4X less than Heineken)?  I do not think so.

To all the professionals who do manager research , start finding out if the fund's NAV rises are due to playing smart or being lazy (investment narrow).  So far, being lazy is making money for fund managers and you really cannot argue against them pitching their tent almost exclusively with multinationals (e.g. Coronation Funds).  Ask yourself this pertinent question:

Are you making as much as you could if you went outside your comfort zone and invested outside the box?  I doubt it.  As I said in an earlier email, first discoverers get the largest chunk of the find.  Making money in Africa is less about doing fancy stuff with Excel and more about understanding the language of numbers .  The numbers are talking to you.  Do you understand what you are being told?

In Tanzania, the TSI (houses the companies with local ownership) gained approximately four times more than the DSE (houses the companies with foreign ownership) in 2013.  Interestingly enough there are more Africa institutional investors not in Tanzania than are in it.

Safety may be in the multinationals….   The money is in the locals supported by the retail investors.  This is why in Nigeria the companies ranked by market cap from 26 – 50 will generate better price performances on average than companies ranked 1 – 25 every year barring the negligible anomaly.  Most of the multinationals in Nigeria are in the top 25.

These are frontier and sub-frontier markets; are you getting enough reward for your risk?  The patient dog may eat a fat bone; I doubt if it will be the fattest bone if institutional investors stick with being investment narrow instead of smart.

Jude Fejokwu is a Principal Analyst with Thaddeus Africa Research