The Nigerian Bear Market; is it really a good time to buy?

• The Case of TransCorp
  
• The Case of Nascon
• The Case of Oceanic bank plc

For anyone who will be investing for years to come, falling stock prices are good news, not bad, since they enable you to buy more for less money. The longer and further stocks fall, and the more steadily you keep buying as they drop, the more money you will make in the end if you remain steadfast to the end. Instead of fearing a bear market you should embrace it… Jason Zweig.


In recent times, I’ve had people walk up to me to ask what I think of the present market situation and what I think they should do with their money. The little more enlightened ones ask the confirmatory question; is it really a good time to buy? My answer is usually ignored for the more deafening advice of fear and more effective pounding of their quickened heart beat.

A few months ago, just before the market slipped into recession, when stock prices where high with a corresponding high-spirited followership, there where IPOs, POs, stock seminars, investing gurus sprung up from desert grounds of nothingness; we had penny stock gurus, blue chip gurus or just plain gurus, stock newspapers sold like lozenges in the raining season, all saying the same thing: BUY! And boy, did people buy!
Fast forward a few months to the present; IPOs are announced in near shy-ness, POs have receded to a trickle, stock seminars have vanished, stock newspapers are cooling their feet at the stands, and the gurus, well, they are still there, only they are whispering now: “it is the best time to buy…” But no one is listening, no one is willing, no one is buying.

So is it really a good time to buy? I’ll try to answer this question by putting things in perspective. Like Robert Greene says; ideas are best communicated in metaphors.

The Case of TransCorp

The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he should refrain from buying and probably would be wise to sell. --Benjamin Graham, the Intelligent Investor.

A very good friend of mine, Kehinde, was sharing an anecdote with me in his usual delightful exaggeration. He was telling of his father’s bitterness towards the performance of TransCorp. He said if one wanted to discuss say, transport, with his father and begins the conversation by saying, trans… There will be a visible transformation of his father’s visage, complete with pulse racing at the neck region and eyes narrowing in apparent anger, only after the word is completed with, “port”, will his father’s psychological and mental balance return to normal saving the person confabulatory anguish. (He didn’t tell of the consequences if the word was actually completed with “corp”, my guess is that would have being a more delightful story).

As humorous as this story is, many of us are very much like my friend’s father. We sunk thousands or millions on TransCorp based on promises; promises of a better future, and now we want dividends (actual and metaphorical) even in the face of contrary evidence. The prospectus of TransCorp’s IPO clearly stated that it expects to make an N8billion (8,166,433,000) loss for the year 2007, another N1.9billion loss for 2008. TransCorp expects to pay its first dividend of 5kobo by 2010 and 2nd dividend of 8kobo by 2011. And so far TransCorp has done its best to keep its promise.

My point is, doesn’t it defy logic that we bought TransCorp at that time for N7.50 per share and now, with almost nothing changing (except for bad press and a little more enlightenment on the ever present trouble at NITEL), we refuse to buy TransCorp at N1.50?
This is not to say to buy or not to buy TransCorp but to point out the hitherto obnubilated illogicality of buying at N7.50 and not buying at N1.50.

The Case of Nascon

The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. -- Benjamin Graham, The Intelligent Investor

It is still very fresh in my memory billionaire Aliko Dangote’s “Largesse” and the public applause that went with it. I remember vividly how people stepped over each other and nearly wiped out Nascon’s availability from the stock market. They purchased Nascon stocks at the “discounted” price of N22 per share. This is 159% of the present price of N9. If Dangote’s magnanimity scrapped bottom at N22 and caused a stampede, what would you expect with Mr. Market’s (link) price of N9? An avalanche, a Tsunami, or even hurricane “Buy-Nascon”? (For all our lack of natural disasters). But no, we have none of these. Instead, by stock market mathematics, many of those who bought at N22 are selling their shares faster than a salesman with an impossible deadline. Is this logical? What part of Nascon’s business is worse than it was then? If anything, it’s better, way better than I expected. Not that I think N9 is a good price or that Nascon is a good investment, but if you bought it then, why are you refusing to buy now? Or worse why are you selling now? How come you don’t consider it "cheap and heavily discounted"? Doesn’t this defy logicality?

The Case of Oceanic Bank Plc

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies. -- Benjamin Graham, the Intelligent Investor.

On Monday, 5th March, 2007, the Oceanic Bank International Plc share offer opened. By the time it closed sometime in April, 2007, all shares offered had been bought with a whooping 215percent oversubscription easily making the bank Nigeria’s largest bank by shareholder’s funds at the time. Oceanic had offered 3.357billion shares at N16.50 per share, with a 215percent oversubscription… you do the math.

What, possibly, could have been the reason for such massive response? A quick look at the prospectus reveals that Oceanic had projected a profit after tax of N16.3billion by the end of 2007, N24.24billion by the end of 2008 and N29.32billion by the end of 2009. Could this be the reason people lined up in queues for hours to get this stock? I don’t know, but the figures looked good to many stock market pundits at the time. So, has Oceanic met its projections? No, it has SURPASSED its projections. By the end of 2007, the bank recorded a profit after tax of N17.5billion. A marginal increase, but when we consider the 4th quarter unaudited results released recently (Guardian, Thursday, October 9, 2008), things seem a little different. With a profit after tax of N41.2billion, it is hard to ignore Oceanic’s present price of N17.

So, do we have digital telephone call queues at stock broking offices begging to buy Oceanic? As the price suggests, this is not the case. Is this logical? Why did so many people buy this stock at the time based on relatively mediocre projections and would not buy it now based on Actual results?

Stocks should be bought like any other commodity, say, oranges. If you find a good orange for N10 and buy it, what would you do if you find oranges of the same quality (or better) for N2 each some time down the line? You either buy more or fight the person that sold the former one for N10. One thing you certainly wouldn’t do is; try (in some cases, very hard) to sell the orange you have for N2.

But then the question arises, how do you know good oranges from bad? At this point, I recommend you read the essays  and more importantly buy “the Intelligent Investor by Benjamin Graham”.

On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well established standards of value. –Benjamin Graham, the Intelligent Investor

Conclusively, study the words that are italicized,
Look closely and open your eyes,
They say not to buy when prices are high,
So is it really a good time to buy?
Your guess is definitely as good as mine…

Of Dangote Sugar and Economic Moats

• Moats
• The Value Investing Concept of Economic Moats
• Dangote Sugar; Quintessential Economic Moat


Moats

A moat is a wide water-filled ditch surrounding a fortified place, such as a castle. It was usually installed as a form of protection to keep unwanted persons or hostile opposition out of a sovereign area. It wasn’t unusual, in those days, to find a moat equipped with wild aquatic animals and, of cause, the wider the moat the better the protection.

With a history dating back to the 11th century, Moats, which are also referred to as “water defenses”, became an essential part of Castle design for a long period of time.
But how do moats relate to investing and who could possibly find a relationship between a moat and the stock market?

The Value Investing Concept of Economic Moats

“In business, I look for economic castles protected by
unbreachable ‘moats’.”
-Warren Buffett

Engage yourself in a little mental exercise by simulating a relationship between a Castle and a business/Industry. In place of a Castle imagine a business and in lieu of ‘water moats’ imagine ‘Economic moats’ represented by creative policies or ideas utilized by the business owner to stall a proliferation of that line of business. Thus, Economic moat involves the creation/utilization of ideas and policies, by a business owner, that put up significant barriers to entry into that line of business. It is the competitive advantage a company has.

After assimilating this concept, it would not be difficult to realize that the wider the economic moat, the longer it would take for would be entrepreneurs to scale the barrier and dilute the business. The company is said to have an enduring competitive advantage. Consequentially, the profitability of that business (castle) is secure for a long period of time, sometimes 10-15years hence, and so is your investment if you happen to have invested in such a company.

I’m writing this essay to show that Dangote sugar might be such a company.

Of Dangote Sugar and Economic Moats

Intangible assets generally refer to the intellectual property that firms use to prevent other companies from duplicating a good or service. Of course, patents are the most common economic moat in this category… A strong brand name can also be an economic moat
-Matt, Warren Buffett on castles and moats, www.37signals.com


The following excerpts from the Chairman’s letter in the Dangote Sugar offer unabridged prospectus (dated November, 2006) gives a rare view into economic moats in practice…

Strong barriers to entry:
The leading position of Dangote Sugar in the Nigerian sugar business is preserved by the following barriers to entry:
 
High import duties: The import substitution strategy of the Federal Government of Nigeria is designed to promote the development of local industries by setting low tariffs on raw materials and complete knocked down parts, and high tariffs on finished goods.
Accordingly, raw sugar is taxed at 5% compared to 50% (plus 10% sugar development levy) for white sugar. This tariff differential makes imported white sugar very uncompetitive in the Nigerian market.

Vitamin A fortification requirements: Nigeria has been a pioneer in the developing world in mandating the fortification of staple foods (such as flour, vegetable oil and sugar) with
Vitamin A as a means to eradicate Vitamin A deficiency and malnutrition amongst Nigerian masses.
Dangote Sugar has perfected and patented its Vitamin A fortification technology and fully complies with the fortification requirement. Very few countries in the world have similar requirements. None of the white sugar exporting countries has this requirement. Thus, for a Nigerian importer to meet the Vitamin A fortification requirement, it has to make a special request which will attract significant additional cost because of required customized production. In addition, Vitamin A is relatively unstable and difficult to transport, which makes the importation of fortified sugar more difficult.

High investment requirements: The cost of setting up a sugar refinery in Nigeria is quite high. The Company has spent approximately US$250 million to set up its refinery at current production capacity. Lower capacity factories are possible but may be less efficient because of reduced economies of scale.

It is my sincere hope that you have been educated. But I still encourage further research on the subject. You can begin your research by studying the Buffett articles on the side-bar -->
Happy researching.