There are no Tigers in Nigeria


“The fact of the matter is that the company made a significant investment mistake in Nigeria, the only good news for shareholders is that this is now history, a bad chapter in their history. And ours as shareholders, we have a right to be peeved to a certain extent.”


To market to market to buy a fat pig. With the US markets closed yesterday for a celebration of family and collectiveness, thanksgiving, our markets were bound to be quiet. We did rally during the course of the day, up 0.61 percent on the Jozi all share by the close of trade. Resource stocks were mixed, some heavyweights at the top of the leaderboard, South32, Glencore, Amplats and Anglo themselves, BHP Billiton right at the opposite end of the spectrum, the news of the dam burst at Samarco gets worse. The UN suggested that a high level of toxic waste has been found in the waste that spilled from the dam, both metals and chemicals. With hundreds of kilometres of water impacted by the spills, the cleanup costs and fines for BHP Billiton could be less than not disconnecting unregistered sims in Nigeria run into the billions. That was cheeky.

A correction, a reader of the letter brought to our attention two things, when we were discussing Anglo American and Mondi: “Good morning team – your point is well made, but the situation is even more skewed as Mondi’s market cap is actually R158bn, and parity was passed a little while ago. And, keep in mind that Mondi unbundled Mpact in June 2011, so you could add a further R7.5bn.” The market cap of the collective Mondis, Mondi Plc. is at 120 billion Rand (as at close last evening) and Mondi Limited is at 38.5 billion, collective at the number the reader pointed out. Add in MPact as he points out, it is an extra 7.5 billion Rand to the collective value, 166 billion Rand in total. Anglo was up sharply yesterday, up 3.88 percent, with the market cap now nearly 130 billion Rand. Thanks for pointing that out, we always appreciate your feedback!

Another conversation that I had with a client yesterday is also worth sharing, he raised concerns over MTN, rightfully so, the stock has been a significant laggard in our client portfolios, we have consistently suggested that until we know something, we know very little other than there is a pending fine, that at face value looks ridiculous. A traffic violation that gets a 400 year sentence is the analogy that a Nigerian blogger used early on in this unfinished business. I think that in my answer (I have left out client sensitive information), again I was a little forceful with the way that the Nigerian authorities have handled this.

” … the situation has been poorly managed, and perhaps MTN tried to call the regulators bluff. If this is the case, then no doubt that is why Sifiso Dabengwa fell on his sword.

There are plenty of reasons to sell the company today, as you point out, the news flow has been increasingly negative.

The shift of whether or not a fine will be levied (and the quantum) is at the highest office in the land, Muhammadu Buhari, the president. This is a man who was once the dictator of Nigeria in the eighties and the man that also took half a year from being elected (this year) to appoint a cabinet. Yet, the people of Nigeria elected him and knew all of this, and that part we must and should respect.

That said however, MTN are an important part of the Nigerian economy, 46 percent of all subscribers in Nigeria use their services. MTN operate in a hostile economic environment, the electricity supply is patchy at best, the infrastructure is poor and they need to be shown to be complying with first world communication authority standards. It seems a little skewed.

Call us optimists here at Vestact, the company has invested more in the Nigerian infrastructure than most foreign companies. They are still putting up 2G base stations in Nigeria, that is how far they are behind. We think that in the end, the stock has baked in a 50-60 percent chance of the full fine being levied against them, we think that the quantum will be reduced, and the fine will be converted to an investment commitment.

In Africa, across our continent, internet penetration is a mere 26 odd percent, somewhere in that region. There is no chance of a big infrastructure roll out of fixed line options any time soon. It will be mobile solutions that connect Africa to the internet, MTN has a massive first mover advantage.”

I hope that answers more questions for all of our other clients on the matter.


Company corner

With everything going on we have had to delay the bringing of the Tiger Brands results for a while, apologies. Rather late than never I say. The results themselves are available via the company website, Key financial indicators. As you can no doubt see, the stronger domestic performance, i.e. in South Africa offset the well documented problem business in Nigeria and irregularities at Haco in Kenya, as well as the failure of a key supplier in Mozambique. Remember that not so long ago the company decided not to fund their business in Nigeria any more. School fees. Equally they wrote the business off to nothing, and will carry that business as a discontinued operation.

Total group turnover advanced only 5 percent to 31.6 billion Rand, profits before tax decreased 20 percent to 2.1 billion Rand, as a result of the significant impairment of the Nigerian business. Earnings per share from continuing operations decreased 14 percent to 1068 cents, headline earnings per share from continuing operations decreased one percent to 1786 cents. Wait for it, by another measure, “Adjusted headline earnings per share from continuing operations, excluding the TBCG deferred tax asset impairment, increased by 6% to 1 920 cents”. I am not a fan of that, it is comparable to saying, well, if I didn’t get 20 percent wrong in that test I would have got an A.

The fact of the matter is that the company made a significant investment mistake in Nigeria, the only good news for shareholders is that this is now history, a bad chapter in their history. And ours as shareholders, we have a right to be peeved to a certain extent. The dividend for the second half is 611 cents (519.35 cents after tax), unchanged from last year, the interim dividend was 10 cents higher, effectively the write offs and the poor performance did not impact on that. Although, you would argue without that, it would be higher.

At a management level, CEO Peter Matlare exits the business in the coming month, the ex CFO in the Nick Dennis era, Noel Doyle was appointed the COO during the course of the year, that should soften the blow somewhat. In fact, Noel Doyle has been appointed as the interim CEO, Matlare will leave 31 December, and the announcement of a new CEO will be made in due course. Do you think that Doyle has a chance for the top job, any Tiger insiders who want to comment there?

The outlook is muted at best, it “remains challenging, with low domestic economic growth, rising costs and job security concerns weighing on the South African consumer. These factors are exacerbated by the weak rand which is fuelling inflationary pressures and intensifying the competitive trading dynamics already evident. The macro-economic outlook for the rest of sub-Saharan Africa is muted, while currency devaluations and foreign exchange liquidity are additional risks. However, Tiger Brands has the brands, people and capability to address these challenges. In addition, the group will continue to focus relentlessly on cost savings and efficiencies, as well as further investment in innovation, customer engagement and brand development.”

Notwithstanding that, the share price reacted positively to the results, in other words they were not as bad as many had anticipated, the South African segment performed better than many had penciled in. The market has pencilled in more than 20 Rand worth of earnings inside of this financial year, and around low teen earnings growth the year after, i.e. above 22 Rand worth of earnings in 2017, a long way away to make any predictions with a great deal of accuracy. With dividend cover of around 2 times (that region), the stock yields 3.3 percent forward, pre-tax. Not a kings ransom, better than most on the local front. We continue to hold Tiger Brands in our client portfolios.


Linkfest, lap it up

Interesting to see how much DNA can tell us about our ancestors, what they looked like, where they moved and what they were eating – Agriculture Linked to DNA Changes in Ancient Europe

Given our human bias to want to protect ourselves we tend to give more attention to people that talk about how things are going to get worse, they are great story tellers and seem smart – Covariation Bias and the Bear Market “Genius”. As Cullen Roche points out in the blog, there has not been a recorded spider death in Australia (where everything is trying to kill you) since 1979, yet we are still overly concerned about spider bites and death.

As you read this there are many Americans queuing to get their share of the Black Friday deals. Locally retailers are also using Black Friday as a reason to offer specials to try get you to spend some money with that never to be seen again special price – Black Friday Falters as Consumer Behaviours Change. The article highlights how online retail takes a bigger chunk of total sales each year and it makes sense. Who wants to queue and fight the crowds only to find out the product that you really wanted is sold out? Sitting at home sipping coffee, watching sport and doing my shopping online sounds much better!


Home again, home again, jiggety-jog. Michael pointed out that it is Black Friday today, the US markets are open for half a day. The biggest news for today is without a doubt the Naspers results, that will be released at 16:00 local time, if you are still around, make sure that you look out for that.


Sent to you by Sasha and Michael on behalf of team Vestact.

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