🎧 S1E4 | Axel Krohne, Founder, Krohne Capital LLP

In this interview, Axel shares what value investing means to him, his approach to navigating FX currency risk in Africa, and why global investors should take more interest in African public markets.

FULL INTERVIEW TRANSCRIPT

Chipo Muwowo: Great to see you, Axel.

Axel Krohne: Hi there, thanks for having me.

Chipo Muwowo: Thanks so much for joining me. I really appreciate you making the time to talk to me.

Now, Axel, you're known as a value investor, and I would just love to hear a bit more about, you know, what that means for, you know, how you invest across different markets. You know, in a sense, every investor should be a value investor, but I'm curious to hear what that means for you.

Axel Krohne: Well, certainly, and I might disagree with you, not everybody should be a value investor because all those growth investors made so much more money than us value guys. And it seems being thoughtful […] did not pay off over the last decade or so. But that aside, I mean, for me, what does it mean to be a value investor? Well, I mean, the tagline of my website, what you'll see is “value investing without borders.” And so I, foremost, do not see myself as somebody who invests in a specific continent or country or industry, but somebody [who] just looks at companies, the cash flow that they generate, and tries to buy those future streams of cash flow at a very low rate, and kind of ignoring where the country sits. So the country might be in Sweden, but it could as well be in Kenya or in the Philippines. And so I'm really global in my scope and it's really just looking at companies that are very attractive by my measurements, and then buying shares and holding those for, ideally, many years.

Chipo Muwowo: So, that is quite a wide universe potentially. Give us a sense of how you go about doing that research, how do you do it efficiently, also how do you get to know these companies once you've narrowed it down to a particular pool, how do you get to know them better?

Axel Krohne: Yeah, obviously, right? I mean if the universe is, whatever, 350,000 stocks then, yeah, you've got to narrow it down. So how do you narrow it down? I mean first of all I look for companies, you know, at a certain market cap and that has to be somewhat investable and should be ideally probably north of 30, 40, 50 million dollars, you know, and then look for companies that have been profitable throughout long periods of time. And look at companies that have very little or no debt. And all those things reduce the pool quite a bit. And then you say, okay, I want a company that's always profitable, that has no debt and trades at a single digit P/E, and it is growing, and is paying a dividend, right, then all of a sudden it becomes quite manageable.

Chipo Muwowo: Now, turning the conversation to Africa. Once you've narrowed your pool, are you finding that the companies you're left with sit in particular sectors or is there quite a nice spread across sectors as well?

Axel Krohne: So right now I have quite a few investments in Africa. It's a larger part of the fund. And maybe what I should as well say, I started this in 2004, the fund, and I was initially very heavily invested in Africa from Day 1 invested in countries like Botswana, Zambia, Senegal. And then did quite well for the next few years, because I thought I was so smart, until I figured out, no, it was not because I was so smart because everybody else started moving into Africa, right? You had a lot of funds that were launched in 2006, 2007, and then a bunch of money flew into the markets, markets did well, everybody got rich, until they didn't, right? 2009, to the a great financial crisis, money started leaving Africa and kind of has not come back. And all those large funds that had committed billions of dollars to equities on the continent, they all imploded basically. And for long periods of time, for the next decade or so, I was not invested in Africa at all. And its just in the last two, three years that valuations became so compelling and it feels like it's just when I started in 2004 that you get those big, solid companies at extremely low valuations. And the businesses that were always, I thought, the most sexy and most people totally agreed with me, were the consumer goods companies which made them unaffordable. Yet those very same companies have imploded along with the overall markets and are now, I think, ridiculously cheap.

Chipo Muwowo: Now, one of the big challenges of investing in Africa as an international investor is foreign exchange risk. Obviously in recent years, we've seen issues in Nigeria, in Egypt. How do you approach that? What's your attitude to that?

Axel Krohne: Well, obviously it's a problem and I hate it, right? I mean, how can you not? It takes flexibility off the plate. But I've seen those FX restrictions come and go over those 20 years in markets, in Egypt, in other African markets […] My time horizon is so long that I think I'll see through that. And so when I look at companies, look at valuations markets, I mean, I look at it in hard currency terms. I mean, how much has this company grown revenues? How much has it grown earnings in US dollars? Not in some kwacha nonsense currency, but in real currencies.

Chipo Muwowo: And what other challenges are peculiar to investing in Africa from your perspective?

Axel Krohne: Well, I mean, I think the fascinating point is to put a positive spin on it, is that those markets have imploded, right? I mean, that there used to be vibrant stock exchanges that were trading millions, if not, I mean, some instances, tens of millions of dollars, and now you can barely put US$100,000 to work in some markets and much, much less in others. So, those capital markets, I mean, I think they're barely functioning anymore.

Chipo Muwowo: So I guess it makes sense then to take your approach, which is, you know, buy when things are really cheap and just hold it for many, many years, because as you're alluding to, they don't seem functional in some respects. So would you say that's the only way really to play the game within African equities?

Axel Krohne: Yeah, I guess, I mean, obviously there's markets like South Africa where you can use other approaches, but it's not an approach… Short-term trading, I have zero skills and I would not use that approach in any market. I wouldn't use it on investing in the US. I would not use it to invest in Uganda. So I don't look at it much differently. This when I say markets imploded, what does it mean right? I mean, there became extremely inefficient, which is what us value investors want. And in my last quarterly letter or so, I mean, I looked at some of the consumer names that I've invested in and looked at the peak market cap and the current market cap in US dollars. And then we found... I'll show you a little for little treat here, Fan Milk in Ghana, which I just visited and quite liked, is 62% owned by Danone in France. Peak market cap was US$520 million. And as I wrote this, the market cap was US$13 million. So 98% loss in capital, or put it differently, if it had to go back to its all-time high again, it would have to go up 50 times, 5-0 from this level. And Unilever Ghana is 94% below its peak. I mean, so, you know, what is that, right? It would have to go up 20 times to reach your all-time high. So you're buying incredible amount of company for very, very little money. The question is, do you find the liquidity? But I think at these prices, I mean, it's a steal. So yeah, you get paid for, for all kinds of […] sovereign defaults and possibly not being able to take the money out every day. I think you get paid quite handsomely by just getting those super blue chip companies that have been in the countries on the continent for whatever, a century or whatever, and will probably be there forever. I mean, I just met a bunch of them, they're all committed to saying this is where we need to be. Asia's saturated, Europe is no more growth, and Africa is where you've got young people who wanna eat their first ice cream, and in the case of Danone, Fan Milk Ghana, they got the ice cream monopoly. What more do you want?

Chipo Muwowo: Hmm. Yeah. Now, I know you look at things on a company by company basis, but are there sort of sectors that you like, you know, you sort of hinted at, you know, the sort of consumer sector, are there any sectors that you're particularly keen on and think have really strong growth prospects over the long term?

Axel Krohne: Well, I mean, as you know better than me, that those markets are thin markets, right? You just can't go to the Ugandan Stock Exchange and say, oh, I want to invest in the next Facebook or I'd like to invest in a food delivery company […] You’ve just got to pick what's there and there. The picking is a lot of times quite slim. It's just a dozen investable companies. But what I do like as well is some of the banks, especially in French-speaking Africa, because those, you know, got a currency that's pegged to the euro and managed by the French central bank in effect, which is probably good for banks because [it's] unlikely that they're going to default. Probably on the flipside it makes those countries less competitive in terms of manufacturing, it might be a little bit tougher to do that in the French-speaking Africa, because you've got basically the Deutschmark there. But in terms of running a bank, yeah, you don't run the risk of having a bunch of sovereign bonds that default, as you've seen in Ghana and other countries.

Chipo Muwowo: Now, as you look ahead to 2024, what are some reasons for optimism as you look at the African listed space and reasons for caution from your perspective?

Axel Krohne: Your reasons for optimism is probably that the thing that brought down a lot of those markets and caused problems in the economies is that their countries were overleveraged and defaulted on their debt and they seem to be working those things out now with their creditors. And by 2024 those things should be something of the past and then, I think for the capital markets to appreciate, you just need very, very little. Basically things have to stop getting worse. Just stabilizing and obviously, I mean, you and I, we can pick plenty of countries that as well have positive GDP growth, right? As journalists [inaudible] this continent as one country, which is obviously total bullshit, right? It's many different economies growing at various speeds. And some of them obviously have been doing well throughout this. But in order to make money, we just need a little bit of more interest from the global capital markets. A little US$100 million would probably be a big deal for the continent. And that's something that probably moves in and out of Microsoft in the first 10 minutes of the trading day, which [would] change the fortunes of African capital markets. And if money flows into the equities, of course, if you want to buy a stock, you want to buy some Safaricom, you name it, what do you got to do? You sell pounds or dollars to buy the local currency, to buy then the shares, and so that as well should benefit the currencies, because we've seen the flip side. People sold the equities, sold the currency and convert it into US dollars to buy something nonsense on [the] NASDAQ. And so that should be… the double whammy should be double positive. When that's gonna happen, I have no idea.

Chipo Muwowo: Fantastic. Really interesting, Axel. I really appreciate you sharing your thoughts. Thank you so much for joining me today.

Axel Krohne: It was a pleasure. Thank you so much.


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