Monday, July 23, 2012

How far off the beaten path for a moat?

Warren Buffett made a lot of money for himself and shareholders by investing in Coca-Cola in the 1980s when beverages were a growth industry.  How many Buffett watchers wish they could go back in time and replicate that trade in their own accounts?  Well the opportunity exists by investing in Bralirwa the only listed company in Rwanda.  I should clarify, there are actually three listed stocks in Rwanda, but the other two are Kenyan cross listings.  Bralirwa (BLR.Rwanda) is the only domestic Rwandan stock.  I've been known to find some companies off the beaten path, but I think this is the furthest from the path I've ever strayed.  Bralirwa has all the characteristics that investors salivate over, a moat, enormous growth, and most important a reasonable price.

Bralirwa produces a variety of beer products and has held an exclusive license to distribute Coca-Cola products in Rwanda since the 1970s.  Consider this the ultimate moat, an exclusive license to sell a product for which demand is exploding.  For the upwardly mobile in Africa displays of wealth often start with small things such as upgrading from crummy water to Coke, or home-brew beer to bottled beer.  Bralirwa is capitalizing on this process and in turn minting money.

Rwanda's image is scared by the horrible genocide of the 1990s but things have improved since then.  The country is known for its coffee export and has been making headway in tourism.  Incredibly 42% of the population is under the age of 15.  The country's economy has grown like a weed rising from a GDP of $2b in the year 2000 to $6b in 2011.

Pulling Bralirwa up on a screener doesn't immediately reveal anything exciting.  The company has a P/E of 12, a P/B of 9x and EV/EBITDA of 7.2x.  One enticing aspect is that 85% of earnings are paid out as a dividend which gives the stock a current yield of 6.8%.  The stock seems fairly valued using developed world numbers, but that paradigm might not be applicable to Bralirwa.  How many developed companies with the growth shown below sport a P/E of 12?

It's not uncommon for a company to have a break out year reporting a 40% increase in profits, what's not common is for a company compound net profit at 40% annually over the past five years.  Astute readers will notice unit volume has only grown 8% indicating revenue and profits are coming from a more profitable product mix and expense management.

The company sports an impressive 22% net margin and an eye-popping 74% return on equity.  The balance sheet is simple consisting of the current assets, some plant and equipment with liabilities not much more than a few payables.  The return on equity can in part be explained by the fact that property plant and equipment are held on the balance sheet at cost minus depreciation.  In a country where inflation has risen as high as 25% in the last decade it doesn't take long before the plant cost is insignificant.  Current inflation is somewhere between 2% and 6% depending on the data source used.

Eventually growth will have to slow, the market will be saturated and Bralirwa will move from growth to being mature, but it doesn't seem like that day is coming anytime soon.  The company reported in their 2011 annual report that they expect future results to be consistent with the past.  In support of this view the company is expanding their manufacturing facilities to support increased demand.  Return on equity will drop with a recently priced facility on the balance sheet.  For a company being priced on growth a lower return on equity shouldn't have much of an impact.  

The question to ask when looking at Bralirwa is does this company with a 22% profit margin, 40% annual growth, and a solid moat deserve to trade with a P/E of 12, or a EV/EBITDA of 7x?  There are definitely risks involved with investing in Africa, but has that already been priced in?  If the company can keep up the frantic growth pace five years from now they'll be earning Rfw 79m which on today's purchase price would be a P/E of about 2x.

Maybe the Bralirwa growth story is enticing but you don't have a way to trade in Africa, there happens to be another way to own a piece of this company.  Bralirwa is 75% owned by Heineken which trades in the Netherlands and in the US with an ADR.  There's actually a bit of a valuation discrepancy between Heineken and Heineken Holdings which could enable an investor to buy Bralirwa even cheaper.  I'll leave it to the reader to find this little quirk.

Disclosure: No position


  1. Very interesting.. too bad it is hard to get access in Rwanda exchange, at least my broker doesnt offer that in spite of many other countries it provides.

  2. Hi Nate,

    Do you know if it is possible to purchase shares from the US? Which broker would you use?


    1. I don't know of a broker in the US that will trade in Rwanda, your best bet is to email the brokers listed on the Rwandan exchange website and see if they'll open an account for an American.

  3. It's a drop in the bucket for Heineken. That's not a great way to play it.

    Were you able to buy this as a US investor? If so, how?

    1. My broker doesn't allow trading in Africa so I haven't figured out a way to buy shares on the continent. I agree that it's tiny for Heineken, but Heineken does give some exposure.

  4. Hi Nate,

    You have to realize that inflation in Rwanda is not at all the same as in the developed world, and that is of course going to have a major impact on returns and what kind of multiples are appropriate. As recently as begin 2009 inflation peaked at 20+%. Today it's a more normal 6%.

    1. Agreed, that's why I mentioned that inflation has been anywhere between 2-25% over the last decade. That's also the reason for the high ROE.

      For a foreign investor this might not matter much, if the investor hedges the currency they should get the actual growth because as inflation kicks up and the currency falls the hedge protects against a falling currency locking in the actual company return.

  5. Nice find!

    Rwanda could become the next Singapore of the world. Paul Kagame is definitely trying to learn from Singapore's lessons.

    He has a very good track record as a leader. He successfully won a war against the RGF, who were being supported by the French. And Rwanda has been doing very very well economically under his command.

    Unfortunately you have to be careful about the military and political situation as there has been a lot of conflict since the genocide. After Kagame's RPF defeated the RGF, the genocidaires were able to flee into neighboring countries with their weapons. There has been continued fighting and mass killings since the genocide. There are various parties with different motives. There are definitely ethnic tensions, groups with grievances against other groups, experienced and well-armed soldiers, etc. etc.

    If you believe in Kagame's brilliance, then it is possible that he will strive for stability in the region (which was originally difficult because the genocidaires were allowed to run free... that is why Rwanda supported rebels in the Congo who were aligned against Hutu genocidaires) and stop Rwanda from being ravaged by war.

    There is very little freedom of press in Rwanda, even less than in Singapore. One reason is to prevent ethnic tensions from developing within Rwanda (where you have a mostly Tutsi minority ruling over a Hutu majority). Arguably another reason is so that Kagame can continue to act as a benevolent dictator (much like Singapore, where the political leaders don't really change).

    Overall my opinion is that Rwanda is a much better place to invest than China (way too much fraud in the reverse merger stocks), Argentina (appropriation), DRC (appropriation), Russia (fraud/robber economy). It's probably better than the rest of the BRIC too.

    1. Glenn,

      Thanks for the comment, this is a lot of excellent information.

  6. Interesting in theory but not really actionable and therefore not a good idea. Here are some thoughts:

    - Have you ever traded stock in Rwanda or in Africa? How easily convertible is the Rwandan Franc (it is supposed to be freely floating but...)? My guess is that 95% of your readership won't be able to execute this in a cost effective manner (take an extra 2% in transaction cost each way)

    - Given that it is a US$300mm mkt cap with 25% free float and the stock is very thinly traded ($50k per day on a good day), liquidity is a concern. Realistically, how much of your portfolio would you actually invest (2%, 3%, 5%? Even with 100% upside, I'm not sure it is worth it.) Roach motels in frontier markets are notoriously easy to get into but impossible to get out when you want

    - Also, given Heineken owns 75%, your likely upside is a take-out (to the extent allowed by law) and since Heiny would be bidding against itself, your upside is capped. On the other hand, if Heineken decides to sell its stake for whatever reason, you'd probably want to get as far away as possible.

    - Re the business analysis, I get the bull case for consumption but bottling is a capital intensive business. ROICs are probably going to come down as they expand?

    - What about fx? The RWF has been depreciating and their COGS are probably tied to USD or EUR. The RWF is down 11% since 2008, not catastrophic but not trivial either.

    I would want a stock to be alot cheaper than 7x EBITDA to compensate me for the economic, political, liquidity and business risks presented here.

    1. Mickolas,

      Thanks for the comment. If it isn't entirely clear I don't invest in everything I write about, some posts are merely ideas for readers. Some are on the border of ideas and entertainment, such as this one. This blog isn't a newsletter where each post is a "pick" or a suggestion. Some companies I don't have much interest in others might, that's what makes a market.

      I agree investing in Africa is hard, but maybe not as difficult as you make it out to be. I would imagine if a broker firm in Rwanda would open an account for a foreigner they would handle a client wiring in money and converting it into Rwandan Franc.

      I disagree on the upside. The goal of the IPO was so that Rwandans would be able to buy shares of a domestic company. The company takes great pride in citizens owning shares. Remember without this firm there are zero Rwandan firms. I also don't think Heineken is going to buy it out, they themselves listed it a year ago. The stock has doubled since the IPO, so clearly local buying can move the price.

      As for FX, I think that would be the biggest concern for an investor. A bigger investor could probably create a hedge. Maybe via the Kenyan cross listings in Rwanda, some sort of short long then hedge the Kenyan Shilling. I personally let all my foreign holdings go unhedged, right now everything I own is in dollars outside of a few investments. I'm so concentrated I don't mind a bit of currency diversification, so I'd probably let it go.

      Yes there are risks to the Rwandan market and the risks you articulate are not unique, I'd say that's the reason most people won't touch Africa. That's probably the reason my broker told me they don't trade anything on the continent! My view is there are good and bad companies everywhere, caveat emptor.

    2. Nate, I enjoy your blog and I think you post some interesting ideas. I also applaud you for doing this on the side, away from your day job. Hey, Mike Burry got his start this why.

      I recognize that this is not a newsletter but rather a forum for idiosyncratic/value driven ideas. However, I am of the mindset that if you can't act on an idea, it's probably not worth doing too much work on it.

      Anyway, you cannot not effectively hedge the RWF. My point was also that the company probably has USD or EUR linked cost of goods sold (I bet they pay fees to Heineken and also for the cola in USD/linked) and earn their revenues in RWF. This isn't so good if their is a macro/political event, which seems to happen every 5-10 yrs in Africa.

  7. mickolas is right, this is a tease - honestly you wont be able to set up to trade in rwanda - it is all locals. I know this because I have tried.

    1. I'd be curious to know your experience in trying to trade there. I'm not interested in this exact trade, but I wouldn't mind trading in Africa outside of a mutual fund.

    2. So following your comment I went ahead and emailed all the brokers listed on the Rwanda Exchange website asking if they would open an account in local currency for an American to trade Bralirwa.

      It's not a good sign that three emails bounced instantly… I'm guessing this is the same thing you did? If any of them are open to it I'll post the details.


  8. since you brought up the idea of investing in a frontier market , my main question is how much an investor should be rewarded for taking the risk? What should be the discount rate for the risk taking? What i understand from my novice knowledge is like this

    risk free rate + equity risk premium + country risk + company risk which is like

    Yield on 10 yrUS treasury note + Average return of US equity market + bond yield spread + beta of the company
    However , i don't understand lack of account of currency exchange rate which is very solid risk esp in the frontier markets. i have very limited knowledge so will appreciate your input.. Thank you

    1. Very good question, I agree that investing in Rwanda is going to need a much higher return than investing in a developed market. I think where we both struggle is how exactly do you quantify that? I know finance professors would look at Beta, but in Bralirwa's case they're 1/3rd of the market. I'm guessing their shares don't vary from "the market" much.

      There's the mathematical risk and then what I'd call real world risk. So think of real world risk like this, someone gives you $1m to start a company in Rwanda. What sorts of things do you do to make sure you return at least $1m or more to your investors. To me one way to address this risk is super quick paybacks. I know this is how mining companies look at mining projects in frontier markets. They try to get a one or two year payback, if the government seizes the mine they haven't lost anything. I think the same concept could be applied here. So at today's prices how long for a payback? With a P/E of 12 it's twelve years, but with the growth it'd be about six years or so.

  9. Nate,

    Thanks for answering my question about quality and net nets in a previous post. Congratulations for your son and the best for your family.

  10. Did you send those brokerages an e-mail in English or in their language?

    1. I emailed them in English and they responded in English.It seems based on a small bit of research English and French are the languages of business in Africa. If you can speak one or the other about 50% of the continent is investable.

      Rwanda actually uses both, but it appears English is the language of business there.