🎧 S2E3 | Tim Staermose, Founder, African Lions Fund Ltd
In this conversation, Tim shares about his move from investing in Asia to Africa, the opportunity for value investing in Africa, and the macro factors he’s keeping an eye on between now and year end.
FULL INTERVIEW TRANSCRIPT
Chipo Muwowo: Great to see you Tim. Really thankful for you joining me on the podcast today.
Tim Staermose: Good to be here Chipo. Thanks for inviting me along.
Chipo Muwowo: Now Tim, you have been based in Tanzania for the last four years. I'd love to just hear a little bit about your journey as an investor and how you ended up in Tanzania.
Tim Staermose: Sure, so I'm actually born in Dar es Salaam in Tanzania and I lived there as a small child, but I grew up mainly in Australia. And after I graduated [from] university, I moved to South Korea and worked for a stockbroking firm there on the sell side and I spent the next 25 odd years in Asia, in South Korea, Philippines, Hong Kong and Indonesia. Initially in brokerage firms, I also worked briefly in investment banking in Hong Kong. But my real interest is investing and managing money and I was lucky to have the opportunity to do that for a few high net worth individuals in sort of separately managed accounts, as well as my own money. And I ran a small investment business in Australia.
[In] 2018, I went back to Tanzania for a holiday and some administrative stuff to have my birth certificate reissued and I kind of got stuck there for a few weeks. And I realised that there was a stock market and there were actually some pretty good businesses that were trading at very attractive valuations, which is something that I had been looking for all around the world. And at that time, valuations in most developed markets were very high. So it was interesting to me and I started to invest for my own account. I went back there for a couple of trips to visit companies and meet with managements [sic].
And then during COVID, I had the idea to turn that investing experience of my own into a small fund for others to come along and join me on the journey. And I expanded the coverage for that fund to frontier African markets, mainly Tanzania initially, but at the moment we've also expanded into a lot of other markets. Most of our capital is in Tanzania and Kenya, about 70% [in] total.
Chipo Muwowo: Just going back to your experience of working in Asia, I'm kind of curious, you've been in Africa for a few years now. Are there particular correlations or things that you're noticing about Asia back then and Africa today from an investment perspective?
Tim Staermose: Yes, that's actually one of the theses behind my fund. It’s quite extraordinary. If you look at a population pyramid of Asia in 1970, it's almost identical to that of Africa in 2020 when I set up the fund. So sort of 50 years difference in time, but the exact same structure of the population with lots of young people that are dependent on their parents and governments for schooling and facilities and things like that. So part of my thesis is that what happened in Asia as more people became educated and entered the workforce can also happen in Africa in aggregate. Obviously Africa is different, there's 54 countries, you know, they're very different. Lesotho is not the same as Morocco. But there are parallels, definitely. And Africa has a lot of low-hanging fruit, as it were, I would say. Development potential, simple businesses that are easy to understand, have great long runways, and that's what attracted me to the investment space in Africa.
Chipo Muwowo: Now, give us a sense of how you're invested at the moment and feel free to mention any particular companies that you have exposure to as well. But I'm keen to hear what sectors are you particularly bullish on and why.
Tim Staermose: Okay, so there are 17 equity markets in Africa. I don't do South Africa, I don't do Egypt, I don't do Morocco, and I don't do Tunisia. So the other 13 markets which I call ‘frontier Africa’, sub-Sahara, ex-South Africa, we're invested in a number of those. Those markets are dominated by financials – banks and insurance companies. If you look at the market capitalisations, by far the largest share are those sectors. There are also a lot of listed telecom companies. Many governments as a condition of the licences that they handed out made telecom companies list their local subsidiaries on the exchanges in the various countries. And there are also a lot of consumer stocks, you know, beer and food and things like that.
I have exposure more heavily in the reverse order. So African Lions Fund, which is the fund that I manage, has more consumer names, consumer staples, and then we also own a good deal of telecommunications companies around the continent. We only own two banks, although NMB Bank in Tanzania, which is a fantastic business, is our largest holding. Not because it was so large when we first bought it, but because it's done so well. I mean, I think I have an average entry cost of 2000 Tanzanian shillings and it's trading at over 5000 three years in or three and a half years in. And it has been paying us 10% plus dividend yield based on our entry cost as well. So I'm bullish on these, as I said, easy to understand basic industries that were once also very promising industries in Asia and developed markets, but they kind of matured and became almost utility like in the case of telecoms. Whereas in Africa, telecommunications is still a very exciting growth industry because you've got to transition away from simple mobile devices to smartphones, away from voice to increase data consumption.
And then you've got the added element of many of these companies being payments services providers that are crucial for the economy. Everyone knows the story of Safaricom transforming the Kenyan payment system and that's also being played out in other economies now. Nigeria is a bit of a late comer in that space because of the regulations not allowing it previously but it makes you know the industry quite exciting and valuations on a lot of these stocks are also incredibly attractive and that's the best thing for me as a value investor. I can buy good solid businesses with long-term growth potential at cheap valuations and it's been going well.
Chipo Muwowo: On that, I'd love to talk about value investing. Tell me more about what that means to you and why African frontier markets are particularly ripe for that kind of investing.
Tim Staermose: So to me, value investing is to buy a good business at a better than fair price. I dabbled in sort of deep value investing for many years, buying mediocre businesses at extremely cheap prices. And it's not the same as buying a business that can compound and grow at a low valuation. So it's, you know, in the Warren Buffett mould, I guess, more so than the Ben Graham mould that I operate. Having had the experience of being a more deep value activist investor, I got quite fed up with it. And Africa offered me the opportunity to do what I really wanted to do, which is to buy high quality businesses at low valuations. So that's been the journey so far for me. And as I say, it's going well.
Chipo Muwowo: That seems to be a theme in different African frontier markets where you have companies that are fairly priced or below fair and are growing and are profitable. You look at the share price and it's maybe not moved very much or the price-to-earnings ratios are particularly low. Can you speak to that, that sort of mismatch? What's going on there?
Tim Staermose: Yeah. So the African frontier markets are currently out of favour with large institutional investors in developed markets. There are very few new funds that have come into existence and attracted capital. African Lions Fund that I started four years ago is a rare exception to that. But what I've found among my peers who are investing in Africa from foreign countries, they tend to have been in business for 10 to 15 years and they got in during the last cycle where Africa frontier markets got popular in the rest of the world, which was sort of 2010 to 2014. And there seems to be a bit of a hangover among some of those funds because they bought in at prices that were in hindsight too high. You know they were excited about the growth potential they paid growth multiples and then things didn't work out and others started pulling money out and then the whole thing sort of went into a downward spiral for a number of years.
The markets have been steadying is the way I would put it for the last four or five years. But businesses have been growing and what you've had is the earnings per share of a lot of high quality businesses have been going up, but the multiples that investors are willing to pay for those earnings have not expanded. So they were sold down to mid-single digit PEs. Earnings were depressed for a time back in 2020 with the pandemic. But since then, we've come out of that difficult economic period. And some markets, you do have to be selective, have started to do well in terms of the economy and the earnings that businesses are generating as a result of that. What we haven't seen yet is that being recognised by investors in other parts of the world and attracting them in to bid up the multiples, which I think, you know, it's not guaranteed, but I think that inevitably that will happen at some point.
Chipo Muwowo: Do you see much involvement, particularly in Tanzania, from other African fund managers? So, you know, we're talking, I think we're mainly right now talking about international investors, but what about domestic African investors allocating capital to our listed markets? Can you give me a sense of that in Tanzania?
Tim Staermose: Yes, sure. So there is an element of cross-border flows. There are a lot of South African pension funds and mutual funds that do invest in other parts of Africa, frontier Africa, but also within the East African community. The Ugandan NSSF has been quite aggressive in buying shares in Tanzania back during the bear market.
Chipo Muwowo: And that's the Social Security Fund.
Tim Staermose: Yeah, that's the government pension fund in Uganda. So they are quite substantial investors in some of the Tanzanian blue chips that I also own. But the markets are a little bit less developed in that respect than say Europe, where there is a lot of cross-border flows. So it's another growth opportunity. There are countries where pension systems are quite advanced and as the working age population grows and people are paying into these pensions, it's compulsory in most countries, there will be these larger pools of capital that, for example, the Ugandan Pension Fund can't put to work in its own stock market alone because it's such a small market and they do look outwards.
Chipo Muwowo: I want to talk about Tanzania from a macro perspective now. Can you give me a sense of just recent macroeconomic happenings within the country? And yeah, just what particular, maybe say industries are playing a significant part in GDP growth and that kind of thing.
Tim Staermose: Certainly. So Tanzania is a blessed country in many respects. It's got the largest density of animals per square metre of any country on the planet. And it's also, well, I mean, it's obviously famous for its safaris for that reason. It also has abundant natural resources. It doesn't have oil, but it does have offshore natural gas that has not been developed yet, but lots of metals and minerals and things that are being used for the benefit of the people finally. There's a new mining law that came in a number of years ago where the government gets a 16% free carried interest in any new mine. And it's given a stability to the framework for the mining industry, which is quite helpful.
So the economy is, I like to use the analogy of a three-legged stool in terms of the export economy. And it's reliant on tourism services, metals and minerals, mainly gold, which is a very good mineral to be exporting nowadays with the gold price at near record highs. And the third stool of that leg is agricultural produce. Tanzania is fortunate that it's one of the African countries that's self -sufficient in food and actually exports food to its neighbours. It's quite shocking to me that there are countries in Africa that have abundant farmland and, you know, labour that don't have self-sufficiency in food for historical reasons, but Tanzania is fortunate that it has this diversified economic base. What's lacking is investment capital.
And the government has been on a drive to attract investment capital over the last several years. [It] seems the president is, you know, on a plane somewhere else in the world every other week. She was in South Korea last week. She was in Europe the week before that. So there is a lot of interest from foreign investors to put money into the economy. And there's a lot of potential growth for that. If the government puts in place, as I said, with the mining industry, an easily understandable framework that everyone adheres to, that's really the key. And I think that there's every reason to believe that things will move in that direction going forward as well.
So the economy is doing well. There is the one sort of Achilles heel that Tanzania has is that it imports all of its oil and petroleum products. And with the shocks of recent years with the Russia-Ukraine situation and so on, when oil prices go up, it does mean that foreign exchange leaves the economy and the exchange rate has been depreciating steadily because of that. There are concerns among some investors that the currency has not depreciated enough to reflect the economic realities. But it's not in a situation such as Ghana where the cedi really collapsed because of bond defaults and that sort of thing. Tanzania does not have any eurobonds issued. There's no hard currency liabilities of that nature, mainly syndicated loans and direct investment from foreign investors are the exposures, not the bond market.
Chipo Muwowo: We're now halfway through the year, believe it or not, and as you look ahead to the end of the year, the next six months, what's on your radar from an investment perspective? What's front and centre of your thinking as we go through the rest of the year?
Tim Staermose: So inflation concerns, you know, they're global I think. The gold price is sort of signalling that there are a lot of people nervous about that. Interest rates are obviously dominating the conversation with European banks starting to cut. So I think there's an expectation that the Fed will start to lower interest rates, although there's no guarantees. So that, I think, should be a tailwind for frontier African markets in a number of respects. You know, spreads should come in. But also, when investors in Europe and the US can get mid -single digits on, you know, short-dated government paper, it's not as attractive to be doing the hard work of going out and finding African businesses to buy with the aim of, you know, earning two or three times that. So if interest rates do come down, I think that will be a tailwind for the markets that I operate in in the second half of the year. So fingers crossed on that.
Inflation, as I mentioned, food inflation in Nigeria, for example, is a real concern. It's general inflation there is running at over 30%. I'm off to Nigeria the week after next for a research trip. And then the weakness in foreign exchange rates around Africa is also something that's been quite painful over the last couple of years. So hopefully that moderates and I think interest rate cuts in the developed world should help in that regard.
Chipo Muwowo: These are significant challenges that are facing economies and investors. What's your long-term thesis, and you have hinted at it through the conversation, but to help you get through these challenges, what's the driving force?
Tim Staermose: Yes, sure. Look, I always remind myself that I need to remember why I got into this endeavour in the first place. And it's really the 20, 30 year long term view of the demographics in Africa being very favourable relative to other parts of the world. And all of the noise of macroeconomic variables changing from month to month. It's relevant, but it's easy to get caught up in all that and not keep your eye on the big picture. So that's basically what guides me. And the story is playing out. My businesses that we own exposure to in the fund are all doing well and growing customer bases, selling more, earning more. And if they keep doing that and compound, eventually I think, other investors are going to recognise that despite the macroeconomic headwinds from time to time.
Chipo Muwowo: Indeed, yes. Tim, really, really interesting and informative. Thank you so much for talking to me and all the best.
Tim Staermose: Thank you very much. It's great to be here.
© Capital Markets Africa, 2024
Founded by journalist Chipo Muwowo, Capital Markets Africa aims to raise the profile of African listed companies. Whether you're a retail or institutional investor, based in Africa or outside, we want you to be better educated about the investment opportunity set and the broader African equities market ecosystem. Subscribe today!
Thank you for this informative and educational Podcast, and thank you Mr. Staermose for freely sharing your views and and thinking, very helpful!!!
My only quaestion is your views on technology (everything from AI, IoT, big data, blockchain, and ultimately potential for CBDC), how do you assess disruptive potential of all these or rather beneficial transformational possibilities and how can one position himself to remain relevant going through?!
Fortius William Rutabingwa
rutabingwa@orbit.co.tz, +255620650616
Orbit Securities Co. Ltd
Dar es Salaam, TANZANIA.