Investors are combing the global markets in search of companies with pricing power. They assume that African companies do not belong to this group. But is this really true? We decided to do our own search to find out.
Capital News Africa: From the Trading Floor – Week 21-2022
The investment theme en vogue this year is pricing power. Given the recent rise in inflation caused by the war in the Ukraine and China’s zero-Covid policy, investors are looking for companies that can pass on their higher costs by raising the prices on their products.
Of course, there are also companies like those in the service sector that are largely spared the higher costs as they do not rely on commodities. There are companies that, despite the higher costs, can’t raise their prices for fear of losing customers.
And still there are those firms whose customers remain loyal even if they raise their prices. Examples of them are luxury goods firms like Louis Vuitton, Hermès or Gucci or companies with strong brand names like Apple or Nike. Finally, there are companies on whose goods consumers are completely dependent, for example oil companies or those that supply foodstuffs.
It should be noted in this context that the two-year long Covid pandemic has altered the price sensibility of consumers. The airline and hotel sectors were, before the onset of the virus, considered to be very competitive on price. Today, one observes that vacationers are quite willing to pay higher prices in order to finally travel.
In their search for companies with pricing power, investors and analysts don’t, suprisingly, consider the continent of Africa. We, therefore, did our own search and made some interesting discoveries.
Our first discovery is Guinness Nigeria (ISIN: NGGUINNESS07), whose share is up 151% to NGN 98 (EUR 0.2213) since January. The reason? Guinness Nigeria, 58% owned by UK spirits firm Diageo (ISIN: GB0002374006), supplies several beer brands and spirits that sell at comparatively high prices.
Its beer brands include, naturally, Malta Guinness as well as Harp Lager, Dubic Lager, Dubic Dark Ale and Satzenbrau Lager. Guinness Nigeria also distributes the alcoholic beverages Smirnoff Ice, Orijin Bitters and Orijin Spirit Mixed Drinks. Those in Nigeria who cannot afford Guinness Nigeria’s booze either brew their own beer or make their own spirits.
Guinness Nigeria’s share has taken off despite some scepticism among stock analysts. At the end of April, analysts at Deutsche Bank downgraded the share to neutral. Meanwhile, those at Barclays withdrew their “overweight” rating for the share and those at Bernstein affirmed their neutral rating of it.
On the other hand, analysts at Goldman Sachs and Credit Suisse are still recommending Guinness Nigeria as a buy. And for good reason: In the first quarter of this year, the brewer’s net profit was up more than seven times to NGN 15.3 billion (EUR 35 million).
Another African share that has performed well is household goods company PZ Cussons Nigeria (ISIN: NGPZ00000005). Traded on the stock exchange in Lagos, PZ Cussons supplies soaps and detergents; beauty and hygiene products; as well as foodstuffs and pharmaceuticals.
The many established brands and the sizeable market share held by PZ Cussons are the reason why investors like the stock. Since the start of the year, its share is up 113% to NGN 13 (EUR 0.0294). PZ Cussons’ share has indeed continued its ascent since we last reported on it in early May. Back then, the share was trading at NGN 10.40, or 25% below its current level.
Moreover, the African continent is home to a few interesting tourism stocks. One example is Moroccan hotel operator Risma (ISIN: MA0000011462), whose share has gained 12% to MAD 123.05 (EUR 11.56) so far this year.
In Mauritius, shares in New Mauritius Hotels (ISIN: MU0036N00007) have also put on 27% to MUR 9.00 (EUR 0.19) since January. Its peer Sun Limited (ISIN: MU0016N00009), which is also the market leader on the island, is up an impressive 105% to MUR 26.90 (EUR 0.58) of the same period. We already reported on the gains in these stocks. Since then, they have continued to gain ground.
All of these examples show that in Africa, investors will find those particular stocks that they are currently looking for. Such stocks also fit well with a defensive strategy that is taken amid the challenging environment of late.