As its stocks have gained 24.3% since January, the Lagos Stock Exchange (LSE) has had an impressive performance vis à vis other international stock exchanges. Let us crunch some numbers to underline this: On Wall Street, the S&P 500 is down 13% so far this year, while the Nasdaq 100 has lost as much as 23%. Elsewhere, the Stoxx 600 in Europe is down 9% and the Nikkei 225 in Japan 5%. The LSE is also doing well if you compare the performance of its constituents with those in other emerging and frontier markets: Jordan’s exchange is nearest with a plus of 22% for its stocks, but the exchanges in Brazil and in Indonesia are behind with increases of 5% and 8.5% for their stocks, respectively.
It seems that the LSE has become a favourite among investors in emerging and frontier markets. You may presume that this has to due with the surge in the oil price over the last year. But Nigerian stocks are also doing better than those in other oil-rich countries. Stocks listed in Saudi Arabia are up by 14% since January, those in Qatar by 12% and those in Bahrain by 4.5%. With an average price-to-earnings ratio (P/E) of 10.3, Nigerian stocks are looking cheaper than stocks in Saudi Arabia whose average P/E is 19.4 and those in Qatar whose P/E is 13.4.
In our view, investors are betting on Nigeria’s economic recovery rather than on oil stocks. Consider that the LSE stocks that have gained the most this year are not in oil. These include the brewer Guinness Nigeria (ISIN: NGGUINNESS07), which is up 132%; the household goods firm PZ Cussons Nigeria (ISIN: NGPZ00000005), which is up 107%; and the food company Cadbury Nigeria, which is up 101%.
Donor countries are afraid that Africa might fall into a new debt trap. They base these fears both on higher prices for crude oil, natural gas and foodstuffs as well as on the economic consequences of the Covid-19 pandemic. In March, the International Monetary Fund (IMF) warned that 23 out of 54 African countries were in debt distress.
However, French credit insurer Coface has recently assuaged these fears somewhat by evaluating the integrity of African bonds denominated in euros and US dollars. It reaffirmed its “D” credit rating for Nigeria and its “C” ratings for Tunisia and South Africa. Coface assigned a “B” rating for Ivory Coast, Ghana and Senegal. It also upgraded Algeria’s credit rating to “C” from “D” and Egypt’s to “B” from “C”.
Investors should, however, be cautious concerning African debt. Coface estimates that the war in Ukraine will lower African gross domestic product (GDP) by 0.5 percentage points. Inflationary pressure will also continue, and the monetary policy tightening by the Fed will likely have a negative impact on capital flows to Africa.
Meanwhile, some African countries are reviewing their borrowing options. As Kenyan eurobonds are currently yielding more than 10%, Treasury Principal Secretary Julius Muia said last week the government was concerned about this and was considering alternatives. Yet African sovereign bonds issued in local currency are offering even higher yields. Kenyan 10-year bonds pay 14%, Nigerian 10-year bonds 11.3% and South Africa 9.98%. So, it will be interesting to see what alternatives are used.
As their continent is so rich in commodities, many Africans do not consider their home poor, but rather as one of the richest in the world. One company that is benefitting from the global shortage in industrial metals is Morocco’s Compagnie Minière de Touissit (ISIN: MA000001179). Its share price is up 21% to MAD 2134.00 (EUR 202.25) since January and up 35% for the past three years.
Touissit specialises in the extraction of silver-bearing lead and zinc minerals. It also extracts rare metals like stratoid and vein tungsten in the form of scheelite and wolframite. Analysts expect Touissit’s sales to rise by 9% to MAD 504 million (EUR 47.8 million) this year. However, they also see the company’s net income declining by 12% to MAD 33.9 million (EUR 3.2 million).
Despite the profit decline, analysts at Moroccan investment bank BMCE Capital are bullish on Touissit. This is due to the company’s other fundamentals. The analysts point out, for example, that Touissit raised its capital expenditure (capex) by 53% to MAD 28 million (EUR 2.7 million) in the first quarter 2022 compared with a year earlier and reduced debt by 6% to MAD 361 million (EUR 34.2 million). You could say that Touissit is taking one step back by spending more on capex at the expense of profit to move even farther forward.
It seems that it was just a flash in the pan on the Nairobi Stock Exchange (NSE): In early June, the share price of Flame Tree Group (ISIN: KE4000001323), also known as FTG Holdings, rose 16% to KES 1.26 (EUR 0.1000). But then the fireworks stopped just as abruptly as they had started. Flame Tree’s share price fell to KES 1.12 (EUR 0.0089) shortly thereafter. Indeed, the share is down 11% since January.
The company’s fundamentals do not explain the share’s decline. For 2021, Flame Tree reported net income of KES 102.5 million (EUR 816,000), up from KES 75.2 million (EUR 598,000) a year earlier. This is an increase in profit of 36%, which investors obviously are ignoring.
We believe that the share’s weakness has to do with Flame Tree’s unclear business model. Flame Tree generates most of its revenues with plastic products, including water tanks, mobile toilets, septic tanks and PVC pipes sold under the brands Jojo Plastics and Roto. But the company also offers body creams, lacquers, hair care products and chips sold under the brands Zoe, Alana Hand, Cerro, Siora, Happy’s Golden and Chirag. These two activities are, in our opinion, too dissimilar for a company that has a market cap of just EUR 1.7 million.