Lagos, Nigeria International equity markets have recovered sharply from the March lows, however, African markets made only a modest recovery. As the continent’s leaders face the extensive task of guiding an economic recovery in the months to come, Rory Kutisker-Jacobson , portfolio manager at Allan Gray, discusses African equities’ disappointing year-to-date returns and highlights some of the areas where he sees value.
At the end of June, the MSCI World Index was down 6% year to date, compared to declines of 23% for the Egyptian market, 13% for Kenya and 17% for Morocco. The Standard Bank Africa Index (SBAI) had done well as gold shares, which account for 27%, performed exceptionally.
Across our portfolios we have a wide range of companies that are exposed to a variety of different risks dependent on industry and geographic location. For some of the businesses, it is far from “business as usual”, as they – or their clients – have been exposed to significant hardship under lockdowns of varying degree. Other businesses, whose earnings are defensive in nature, have been largely unaffected, while some businesses, such as grocery retailers, have been thriving in the current environment. The common theme is that all are trading at a significant discount to our estimate of fair value. Despite the broader economic challenges, we are finding compelling value
Within our African funds, Nigerian banks are 2020’s biggest detractors by some margin. We touched on the valuations in April , and we still think there is exceptional value. Unfortunately, the Nigerian regulator is steadily adding to the regulatory burden, which flows through to profitability and investor sentiment. We think the current burdens, and more, are reflected in the valuations.
Two companies we have not previously discussed are telecommunications company Sonatel and energy provider Umeme. Sonatel is an Orange subsidiary operating in Francophone West Africa. Its share price has halved since 2017, despite earnings only falling 6% and steady revenue growth. We think earnings will grow from here and the 7.5 price-to-earnings (PE) multiple could rerate sharply. If there is no rerating, the 9.5% dividend yield will provide a decent return. Unlike many telcos, Sonatel has very little debt – net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) is only 0.2 times.
Umeme administers the Ugandan power transmission grid on a 20-year concession, expiring in 2025. If the contract is not renewed, Umeme has the right to sell the […]