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