Value Investing In Nigeria

UBA's Competitive Advantage : Tony Elumelu

2006-09-16T10:23:00.000+01:00

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffet

Standard Trust Bank/ UBA at NYSC

I moved back to Nigeria in Feb. 2005 (after 12years away) with little knowledge of the Nigerian Banking Sector. My first encounter with Standard Trust Bank (“STB”) was at National Youth Service Camp in March 2005. At the Camp there were over ten (10) banks providing services to youth corp members. I noticed something very peculiar – The STB tent was well patornized, while the other bank tents stood empty. I was curious as to why this was the case hence I made inquires from my fellow corp members as to why they seemed to prefer STB to all the other banks. Most of the corp members I spoke to pointed to a map of Nigeria with red dots all over it (that indicated STB branches) as if to say “see stupid American boy STB is in every corner of Nigeria.”

“THE NEW UBA” at HBS

On February 8^th, 2006 at the Africa Business Conference at Harvard Business School, Boston, Massachusetts, Mr. Tony Elumelu, the Group MD of United Bank for Africa(“U.B.A”) gave a keynote address. I sat attentively in the audience absorbing every word Mr. Elumelu spoke.

In his speech Mr. Elumelu detailed his journey from a Bank Manager to his establishment of BGL LTD , and BGL’s takeover of the struggling Crystal Bank (later STB). At the helm of STB, Mr. Elumelu took the bank where no other bank would go (a strategy paid off heavily). STB went into every corner of the country – To the Grassroots; STB developed innovative new products and targeted markets (i.e youth corp. members) that other banks ignored. Mr. Elumelu and his team drove the STB brand into the psyche of most Nigerians as a bank that was easily accessible and welcomed everyone, regardless of social class. The most intriguing aspect of the STB story was that a bank that was practically dead a few years ago became very profitable and took over U.B.A - one of the most prestigious banks in the history of Nigeria.

UBA at the NIGERIAN STOCK EXCHANGE

I am always excited to go to the Nigerian Stock Exchange (“NSE”); hence I find every excuse possible to go there. On June 28^th, 2006 my excuse to visit the Nigerian Stock Exchange was UBA’s Interactive session with financial stakeholders and stock brokers.

At the event, Mr. Elumelu laid out his vision for the future of U.B.A. His vision was clear and simply – UBA is going to be the leading bank in Nigeria, the leading Bank in West Africa, the leading bank in Africa and finally a leading Global player.

Mr. Elumelu and his team reminded the audience of their continued innovativeness and the dominance of the UBA Group in the Nigerian Financial Services Industry.

On an August 1^st, 2005 visit of Mr. Elumelu and the UBA team to the NSE to commemorate STB’s de-listing and the listing of the new United Bank for Africa (UBA) Plc, Director-General, NSE, Dr Ndi Okereke-Onyiuke, speaking on the occasion said: "The emergence of the new UBA shows that Nigerians, when they put their mind into achieving something, can truly perform. Today marks the first truly consummated merger in line with the CBN directive."

I would rephrase Dr. Ndi Okereke-Onyiuke’s statement to say “The emergence of the New UBA shows that Tony Elumelu, when he puts his mind into achieving something, can truly perform..”

UBA’s competitive advantage : Tony Elumelu

In evaluating the stock of any company one should consider many factors like a company’s P/E ratio, history of past performance , profit margins, competitive edge and several other fundatmenatal factors. One of the most important fundamental factors in analysising a business is the track record of the Management. In any analysis of the U.B.A Group Mr. Elumelu should be considered a strong competitive advantage for the Bank.

Mr. Elumelu is a man with vision that sets his mind to achievieng a goal and delivers. I would compare Mr. Elumelu to Warren Buffet who took over an ailing textile mill (Berkshire Hathaway) and turned it into one of the foremost business empires in the world. Just like Buffet, Mr. Elumelu continues to prove himself time and time again. $10,000 invested in Berkshire Hathaway in 1965 (When Buffet took over the company) would be worth well over $50 million today. How much would your 1million naira invested in UBA today be worth in say 10 years, 30 , 40 years from now?

The Zenith Bank Public Offer - Can an elephant be as nimble as a cheetah?

2006-03-22T11:47:00.000+01:00

Zenith Bank’s (“Zenith”) N50bn public offer ended on Monday March 20th, 2006. The offer was previously scheduled to close two weeks earlier on March 6th, 2006. In a recent Vanguard Newspaper article it was suggested that “the offer might have actually been fully subscribed and that the bank’s decision to extend the closing date might be aimed at a bigger target of between N60 billion and N70 billion and would work towards retaining everything subject to SEC approval since government new liberal regulations on financial institutions allow banks to retain any excess proceeds of an offer.” Ummm……. Sounds Interesting?

Whatever the case may be if the public offer is fully subscribed or on the contrary undersubscribed like the rumor mill says, is/was Zenith a good buy?

Jim Ovia (Zenith’s CEO/MD) has done a wonderful job running Zenith Bank over the years; In 2004 Zenith Bank successfully went to the market to raise capital and they are doing it again this year. The issue about raising capital is that one has to be able to use this ‘new’ capital to generate adequate returns for shareholders. Has/can Zenith use/invest this additional capital effectively? Or a more appropriate question is can an elephant be as nimble as a cheetah? Zenith is growing from a cheetah to an elephant in the space of two years - from a N15bn bank (shareholders funds) to a potential 100bn bank.

The dynamics of managing a bank with 15bn in shareholders funds in 2004 is a lot different from managing a bank with 90bn - 100 bn in shareholders funds 2006.

There have been many rumors about what Zenith intends to do with the money, 1. Acquire Union Bank - the 2nd largest bank in the country or 2. Manage external reserves (the Banks in the country require a capitalization of $1 billion or N127 billion to qualify for the management of the external reserves) – apparently this is a very profitable business or 3. e.t.c but whatever the case might be it would be interesting to see how it all plays out..

In summary an investor in Zenith’s offer on has to consider:

Has/can Zenith use/invest new capital effectively?

Can Jim Ovia manage a N100bn bank as well as he did N10-15bn bank?
I don’t have a clear cut answer to these questions, hence buying the shares will be purely speculating (There is a clear difference between speculating and investing). But I think regardless of how Zenith turns out its shares are probably going to go up substantially because the Nigerian stock Market is highly inefficient.

How and Why Do Companies Pay Dividends?

2006-02-08T11:55:00.000+01:00

How and Why Do Companies Pay Dividends?:

"Arguments Against Dividends
First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create 'homemade' dividends. These analysts claim that this income is achieved by individuals adjusting their personal portfolio to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (whose interest payments don't change), rather than a dividend-paying stock (whose value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.

The second argument claims that little to no dividend payout is more favorable for investors. Supporters of this policy point out that taxation on a dividend is higher than on capital gain. The argument against dividends is based on the belief that a firm who reinvests funds (rather than pays it out as a dividend) will increase the value of the firm as a whole and consequently increase the market value of the stock. According to the proponents of the no-dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets.

"

Empowering Financial Decisions

2006-01-26T17:35:00.000+01:00

A study of Graham Value Investing Principles in the South African Markets

Long-term Investing

2006-01-03T09:44:00.000+01:00

Dah Hui Lau (David): Long-term Investing:

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.'

'We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?" by Warren Buffett

UNION BANK's Public Offer

2006-01-01T01:14:00.000+01:00

Union Bank Nigeria Limited's shares went on sale by way of a public offer and rights issue on Wednesday, November 23, 2005. The offer which was initially scheduled to close on December 21, 2005 will now close on January 9 2006, while the rights issue will close on January 17 2006 (Why the extension?).

As most of us know, Union Bank (formerly Barclays Bank of Nigeria) has been one of the foremost banking institutions in Nigeria for several decades. The bank has the largest amount of the savings deposit in Nigeria, second only to First Bank. The bank has also produced solid financial results over the last few years. But are the bank shares currently an attractive buy?

The recent banking consolidation exercise has changed the landscape of the Nigerian Banking Industry. It is essential to analyze Union Bank’s competitive advantage in the post consolidated banking industry as guidance in buying the bank's shares.

Qouting Warren Buffet:
"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

So what is Union Bank’s competitive advantage?

It is absolutely no secret that the bulk of Union Banks clients are pensioners and baby boomers. What plans or strategies are being implemented by Union Bank to target the younger generation -key drivers of the banking business in years to come?

Pre- Consolidation, Union Bank’s major competitive advantage had to do with its size. Post Consolidation will Union Bank be much larger than its competitors?

Has Union Bank produced commendable return on capital compared to its peers and will it do so in the new dispensation?Avg Return on Equity over three years - First Bank : 33% , Union Bank : 22%, Zenith : 30%

These questions are among a very long list of questions an investor should ask in consideration of purchasing Union Banks Shares.

Economic Development Bulletin

2005-12-31T13:09:00.000+01:00

Cato Institute:

"According to the president of the Institute of Chartered Accountants of Nigeria, Chief Jaiye K. Randle, individual Nigerians are currently lodging $170 billion in foreign banks – far more than Nigeria’s foreign debt of $35 billion."

Okomu oil can only get better ?

2005-12-29T09:45:00.000+01:00

One of my favorite tests for investing in Nigerian companies is to determine if the company can effectively compete in the global market or against dominant foreign players in the Nigerian Market. Goods and services produced in one part of the world are increasingly available in all parts of the world: Customer service call centers for U.S companies are operated out of India and Ghana. The cotton from a shirt, made in china and sold in a boutique in Lagos might come from somewhere as far as Texas. Although Nigeria employs some protectionist policies, the Nigerian market is rapidly moving from the worst form of market imperfection to the purest form of competition (WTO, External debt rationalization, Deregulation and Privatization, e.t.c).
Thus said, it was rather interesting to read the comments of the CEO of Okomu Oil Palm Company stating that if the ban on palm oil importation is lifted, Okomu wouldn’t be able to compete against Malaysians and Indonesian players.

Okomu oil can only get better - Article from Businessday
"So I would say, Okomu today is at an advantage and I hope it would still be like that because it would be very, very difficult to remain competitive with Indonesia and Malaysia."

Development of the Nigerian Financial Markets

2005-12-23T15:46:00.000+01:00

As the country of Nigeria moves forward with its development many things will happen to stabilize the financial markets. In light of the mass corruption and numerous business scams that have burnt countless investors, the government of Nigeria continues the push to legitimize the nation’s position in global markets.

Sitting on top of one of the largest, highest quality deposits of oil in the world, reality presents itself in a sad form for the citizens of Nigeria. The status of the countries infrastructure is a testament to the lands vastly squandered potential. As in the case with most developing nations it is not a question of having enough resources but efficient allocation to the hands of many instead of the privileged few. Again the only solution is the erosion of corruption and tighter governmental controls.

My experience with Nigeria has been a positive one, and yes I have heard and seen with my own eyes the results of the horror stories. Trusting my gut reaction I see excess returns possible via investing in liquid financial instruments in the Nigerian Markets – especially issues collateralized against fixed assets. The current inefficiencies allow for numerous arbitrage opportunities that have long since disappeared from western markets. With the integration of technology to the management of the exchange new possibilities of statistical arbitrage or “black box” trading will present themselves. This will inevitably grind inefficiencies out of the market but will allow for fair valuation of equities. The market is at the stage in which the supply of competent and ethical asset managers is crucial for its continual growth.

Nigeria has caught the attention of several global investors who are known for their genius in spotting the next big thing. Richard Branson and his brand of “Virgin” companies is currently bringing many large ideas to life in this densely populated west African Country. From my studies and visits it is easy to identify the leverage Nigeria has over the rest of their African neighbors both geographically and in terms of potential growth.

Another driving factor in the maturation of Nigeria is the return of intellectual capital. Nigerian nationals that have migrated to developed nations to attend school typically wanted to live in work in a country with more opportunity. Nigeria along with so many other developing nations was left to be run by westerners and little of this skill and knowledge was passed on to the local populations. This trend is seems to be coming to an end as a result of several factors. Nigerians within the 20 to 40 age group and increasingly repatriating to their home country. Additionally, the baby boomer age group is retiring from their jobs in western nations and returning to Nigeria. This influx of intellectual capital may provide the impetus for change and continual adoption of western business practices.

Trey Murdock
Austin, Texas

NSE in 2005 & A farewell to the "Nify Eight"

2005-12-23T14:58:00.000+01:00

In 2005, the market cap of the Nigerian Stock Exchange (NSE) grew by 29% to N 2.48 trillion (as of Dec 22^nd, 2005) and the All Share Index (ASI) remained flat. This year denotes the beginning a shift towards market efficiency and sophistication from an utterly inefficient market. Nigerian investors are starting to understand the issue of market exuberance and how fortunes could be lost in a change of tide in the stock market. Ndi Okereke-Onyiuke, Director General of NSE put it best; “It is a long drawn torture for the capital market to continue to enlighten Nigerian Enterprises on how to invest”. The market is gradually becoming governed more by fundamental principles than by investor psychology.

In the past year we’ve seen a series of IPOs from the banking sector as banks attempted to raise additional funds to meet the new capital requirements. The erstwhile culture of non-adulteration of ownership seems to have faded to the background as banks scrambled to save their franchise from demise. The series of banking IPO’s in market was the primary reason for the increase in market capitalization in 2005.

The panic set by the withdrawal of public sector funds from the banking system took its toll on the equity market. The cutting of credit lines by the big banks forced banks with large equity investments to offload their shares. The market obeyed the laws of supply and demand – excess supply led to a correction.

FAIRWELL TO THE NIFTY EIGHT

During the early 1970s in the U.S, the “Nifty Fifty stocks” a group of Blue chip companies dominated the stock market. Mostly household names (with the likes of Coca-Cola, Xerox and Ford), the Nifty Fifty fared well during the onset of the 1972-73 bear market. Investors assumed prices would go up forever, and raced to purchase them even with borrowed funds. Eventually, the bear market prevailed and investors suffered crash and burn scars. This led to a change in “Nifty Fifty” Investing toward fundamentally attractive stocks.

In the Nigerian market, investors have historically had a strong bias for the “Nifty Eight” -Nigerian Breweries, Nigerian Bottling Company, Cadbury, Flour mills, Uniliever, First Bank. Union Bank, UACN. Investors have assumed the prices would go up forever and invested in them without considering the fundamentals. Times have changed – The market is becoming more efficient and there is increased competition for Investors naira. Leading new players have entered the market (i.e Zenith Bank) and are more are expected soon (i.e . MTN, Vmobile, and the Dangote Group) ; in 2006 and beyond “the Nifty Eight” companies (and others) would now actually have to produce capable results to support their share prices.

Food for Thought

2005-12-22T23:25:00.000+01:00

“To buy when everyone is desperately selling and sell when everyone is buying requires the greatest fortitude but pays the highest rewards.”...Sir John Templeton

Speculation vs. Investing

2005-12-22T16:01:00.000+01:00

There is a difference between a speculator and an investor. Benjamin Graham put it best in the opening pages of Security Analysis, “The speculator admittedly risks his money upon his guess or judgment as to the general market or the action of a particular stock or possibly on some future development in the company’s affairs.” Graham goes on to define an investor as one who makes investments based on “analysis of value.”

In Margin of Safety, Seth Klarman differentiates an Investor from a Speculator:

To investors, stocks represent fractional ownership of underlying businesses and bonds are loans to those businesses. Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk. Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses. Investors in a stock thus expect to profit in at least three possible ways: from free cash flow generated by the business, which eventually will be reflected in a higher share price or distributed as dividends; from an increase in multiple that investors are willing to pay for the business as reflected by a higher share price; or by a narrowing of the gap between share price and underlying business value.
Speculators, by contrast, buy and sell securities based on whether they believe those securities will next rise or fall in price. Their judgment regarding future price movements is based, not on fundamentals, but on a prediction of the behavior of others.

The bulk of the players in the Nigerian financial markets are speculators because they buy securities based on everything else but fundamentals. Buy and sell decisions are made on the basis of (a) general market trends; (b) information on the future development of a company’s affairs and (c) simply because everyone else is doing it.

I find it rather astonishing that most players in stock market don’t even bother to analyze the financial reports of companies they buy shares in; As this will help them better understand the company's underlying fundamentals like its capacity to generate cash from operations vis-a-vis its competitors. Then there is the ignorance of many “so called investors” who say “I am buying XX stock because it is a good company and everyone else is doing so.” How do you know it is a good company? Will you jump into the fire because everyone else is doing so?

I will be quick to add that I not opposed to speculation, as I agree with Benjamin Graham’s assertion that "there is intelligent speculation as there is intelligent investing." Nevertheless I believe it is very important to understand the difference between speculation and investing. This brings to mind the proverb that states that a person that doesn’t know what he is doing, but thinks he knows what he is doing is destined for failure?

What is Value Investing?

2005-12-21T23:13:00.001+01:00

"All intelligent investing is value investing - to acquire more than you are paying for." - Charlie Munger (Warren Buffett's partner)

An explanation of "Value Investing" from Investopedia:

Value investing is the strategy of selecting stocks that trade for less than their intrinsic value. Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, causing stock price movements that do not correspond with the company's long-term fundamentals. The result is an opportunity for value investors to profit by buying when the price is deflated.

Value Investing In Nigeria - An Introduction

2005-12-21T09:18:00.000+01:00

Last Saturday I gave a presentation to a group of bankers titled “The Nigerian Stock Market in 2006”. During my presentation, a gentleman spoke out in objection to my observation that most players in the Nigerian Stock Market are speculators rather than Investors. The Gentleman insisted that that there is no difference between speculation and investing. I attempted to give a brief explanation on speculation vs. investing but unfortunately due a time constraint I didn’t successfully get the message across.

I spent the rest of day dreaming of a platform were I could openly address the gentleman’s objection and discuss other issues related to investing in Nigeria. This blog is an outset of that dream. The goal of Value Investing In Nigeria is to discuss investment ideas in the Nigerian financial markets based on the value investing tenets of Benjamin Graham and Warren Buffet.