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Our apologies for bringing up South African coal producer Thungela Resources (ISIN: ZAE000296554) again today. You might think we are getting some benefit by writing about this stock frequently. But we assure you that we do not own a single share of the company.
Our point is this: Thungela Resources is an anomaly. In the minds of ESG and impact investors, with whom we have great sympathy, this company should not exist at all because of its environmentally unfriendly business. Consider that Thungela generated in 2021 sales of ZAR 16.5 billion (EUR 933 million) from the supply of hard coal from underground mines and another ZAR 9.8 billion (EUR 553 million) in sales from open-cast mining.
The reason for Thungela’s success has to do with the world’s need for a cheap and reliable substitute to gas for the generation of electricity. Sanctions imposed by the West on Russia in retaliation for its invasion of the Ukraine have severely disrupted the supply from that country and led to runaway prices on gas. As a result, many countries, including European ones like Germany and Poland, are importing as much hard coal as they can.
This situation has led to bumper sales for Thungela and buoyed its share. It seems that investors are ignoring legitimate concerns about coal, which is basically a dirty source of energy. Last summer, it was expected Thungela’s share could lose steam after an impressive rally. But this has not happened: In the last month alone, Thungela has put on 16% to ZAR 376.87 (EUR 21.30). This puts the company’s valuation at EUR 2.8 billion. Since January, Thungela’s valuation has more than tripled and is up an incredible 1,862% since 7 June 2021, when the share listed on Johannesburg Stock Exchange at ZAR 19.25.
We find it difficult to recommend the share as a buy at this level. That said, Thungela looks very attractive from a valuation standpoint. Thungela’s price-to-earnings ratio (PER) is at just 2.35 based on its 2022 earnings per share (EPS) of 2.38 and its expected EPS for 2023. On the other hand, the share’s potential may be held down by a projection from Standard & Poor’s that Thungela’s revenue growth will be low over the next few years. Whether this forecast comes true depends heavily on geopolitics.
Africa’s financial sector is performing quite well this year. This is particularly true for Jaiz Bank (ISIN: NGJAIZBANK05), which is listed on the Nigerian Stock Exchange in Lagos. Since January, Jaiz is up 50%. Fidelity Bank (ISIN: NGFIDELITYB5), which is also listed in Lagos, has gained 36%. On Tanzania’s stock exchange, NMB Bank (ISIN: TZ1996100222) and CRDB Bank (ISIN: TZ1996100305) have gained 40% and 39%, respectively. In Tunisia, meanwhile, Société Tunisienne de Banque (ISIN: TN0002600955) and Banque Internationale Arabe de Tunisie (ISIN: TN0001800457) have each put on 34% since the start of the year.
Bank shares traded in Kenya, South Africa and Egypt have also registered price gains this year, though these are more limited. In Egypt, the share prices of Albaraka Bank Egypt (ISIN: EGS60101C010), Egyptian Gulf Bank (ISIN: EGS60182C010) and Faisal Islamic Bank of Egypt (ISIN: EGS60321C014) rose by 9%, 7% and 6.5%, respectively. In South Africa, the gains were relatively higher with the share prices of Absa increasing 20% and those of Nedbank 19%.
Although Kenyan banks have not been among the top performers in Africa’s financial sector, they have done well economically in the first half of 2022. According to the Central Bank of Kenya, the country’s banks reported second-quarter profit before tax of KES 62.6 billion (EUR 535 million) in the second quarter, up 9.3% from KES 57.3 billion for the first quarter. The sector’s total assets rose to KES 6.2 trillion (EUR 53 billion) in June 2022 from KES 6.1 trillion in March 2022. The slight increase was mainly attributable to another slight increase (3.3%) in loans and advances to KES 3.5 trillion.
The central bank’s positive view of Kenyan banks is probably true of Africa’s financial sector in general. There are two reasons for this: For one thing, unlike in Europe, Japan and the USA, interest rates in Africa have always been positive. The continent's banks have also been lifted by the relatively strong economic growth of past years. Finally, banking regulation has improved significantly in many African countries.
International tourists are coming back to Africa as the world gets a better handle on the Covid-19 pandemic. In Kenya, earnings from tourism have more than doubled in the first eight months of 2022. In South Africa too, the situation is improving. "Our current performance as a sector is now at about 85 percent of 2019,” said Blacky Komani, chairman of South Africa’s Tourism Business Council recently.
Unfortunately, no tourism shares are listed on the Nairobi Securities Exchange since trading in Kenya Airways shares was suspended in July 2020. But several hotel operators are listed on the Johannesburg Stock Exchange.
They include those of Tsogo Sun Hotels (ISIN: ZAE000272522), which while in an upward trend recently may be a bit volatile for cautious investors. Recently, Tsogo’s shares climbed to ZAR 3.65 (EUR 0.21) from a year-low of ZAR 2.76. But last week, the shares lost 2.7%. The same is true of Sun International (ISIN: ZAE000097580). While Sun International has gained 82% to ZAR 31.79 (EUR 1.82) in the past twelve months, it is down 3% since the beginning of September.
That's an impressive jump: Shares in Egyptian Iron and Steel Company were up steeply last week, gaining 33% to EGP 6.26 (EUR 0.33). Indeed, over the past year, the share has more than tripled in value on the Egyptian Exchange (EGX).
A traditional manufacturer, Egyptian Iron and Steel supplies products like steel bars, steel beams and steel rails. In 2021, the company reported EGP 278 million (EUR 14.5 million) in sales. The year before, the company posted a loss of EGP 983 million (EUR 51.1 million). The Egypt Ministry of Investment holds an 83.5% stake in the company, which does all of its sales in that country.
We are very cautious about this stock for three reasons. First, as reflected in the latest figures, the company is very behind in fulfilling its reporting requirements. Second, there are often days on which the share is not traded at all, raising concerns about its liquidity. And third, the state-owned company has difficulty procuring raw materials from abroad due to the scarcity of foreign currency in Egypt.