OUT OF AFRICA WELL PLACED TO BENEFIT FROM OPPORTUNITIES IN EUROPE AND AFRICA OLD MUTUAL EQUITIES MOROCCO JUNE 2018

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May Greene
5 years ago
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OLD MUTUAL EQUITIES OUT OF AFRICA MOROCCO JUNE 2018 WELL PLACED TO BENEFIT

Travelling around Africa to visit companies has always been an exciting and

Not only does it give us an opportunity to get updates on our current

and friends for a week! Yes, it s a short time, but cherished nonetheless.

It requires going from the southern tip of Africa to the far north.

A direct flight would be about 10 hours, but a doorto-door trip currently

A few years back, there were talks about a direct flight connecting

Being Moroccan born, going home is always a long and tiring journey for me

This time we rented a car in Casablanca and as I was driving it struck me

infrastructure being built or under maintenance.

1 OLD MUTUAL EQUITIES OUT OF AFRICA MOROCCO JUNE 2018 WELL PLACED TO BENEFIT FROM OPPORTUNITIES IN EUROPE AND AFRICA Sanaa Zarif, Africa Analyst Travelling around Africa to visit companies has always been an exciting and enjoyable experience: the different cultures, the markets and the people are fascinating. However, going to Morocco for the same purpose is a different matter for me. Not only does it give us an opportunity to get updates on our current positions and new investment ideas, but I personally get to see my family and friends for a week! Yes, it s a short time, but cherished nonetheless. Morocco is by far the most time consuming of our business travels in Africa. It requires going from the southern tip of Africa to the far north. In fact, Cape Town is 33.9 south, while Casablanca is 33.6 north. A direct flight would be about 10 hours, but a doorto-door trip currently takes around 24 hours, at best. A few years back, there were talks about a direct flight connecting Casablanca and Johannesburg, but this still hasn t materialised, sadly. Being Moroccan born, going home is always a long and tiring journey for me and my family. This time we rented a car in Casablanca and as I was driving it struck me that the congestion the city is experiencing is exacerbated by all the infrastructure being built or under maintenance. The whole city is a building site: bridges, tramway lines and tunnels, as well as a new theatre and renovation works for the city s landmarks. This, plus of course Casablanca s more favourable location relative to Europe, explains why Morocco is expected to overtake South Africa as the continent s biggest motor vehicle manufacturer.

2 BACK IN UNION In January 2017, Morocco was readmitted to the African Union (AU) after an absence of 33 years. It is the 55th member state. Morocco left the AU in 1984 after the Union recognised Western Sahara as an independent state. Morocco annexed Western Sahara in 1975, declaring it part of the Kingdom of Morocco. Morocco is now around 30% of our portfolio s benchmark, the MSCI Emerging Frontier Markets Africa ex South Africa Index. This makes it the largest country within the benchmark. The largest single owner of shares on the stock exchange (Bourse de Casablanca) is the Société Nationale d'investissement (SNI) or National Investment Company which is the royal family s investment company. It has positions in every key sector, from banking to telecommunication to food retailers and more. For some time now we have been very underweight to Morocco as the underlying stocks have not screened well relative to other opportunities within our other key markets. While we think the dividend yields are relatively attractive, the underlying earnings growth has generally been unexciting. Furthermore, the price-earnings (PE) ratio of the market is tracking near a multi-year high. In addition to being expensive, there is the added risk that the Moroccan market can easily become victim to the locals tenacious behaviour. The best example of this is the latest boycott of some products because of rising prices, which prompted one of the companies in question to cut their production and plan layoffs. While we were there, the impact of the boycott was clearly visible, with retailers offering specials to try and clear stocks that were not moving. All three companies involved, a petroleum product distributor Afriquia Gas, a bottled water producer Oulmes and the largest milk and yogurt manufacturer Centrale Danone, are listed on the Bourse de Casablanca and investors are waiting to see the extent of the damage in the numbers. KEEPING OFFICE HOURS (AND HOURS) We had a very full schedule of meetings. Having grown up in Morocco, it was business as usual for me, but my colleague Cavan Osborne always finds it really interesting that in Morocco you are just as likely to have a business meeting scheduled from 07:00 as you are to start at 18:30 in the evening. I guess having full days available is a good thing because our meetings often ended up taking longer than expected, as I had to translate from Arabic or French into English for Cavan. That said, I always enjoy the opportunity to have meetings in my home languages. While our portfolio s two main investments in Morocco are consumer shares, their investment cases are quite different: Brasseries du Maroc is the local brewer, which is part of the Castel Group (a private company controlled by Frenchman Pierre Castel, of which ABInbev owns a 20% stake). Being a Muslim state means beer consumption on a per capita basis is low (less than 10 litres per capita versus South Africa at more than 50 litres per capita). However, low consumption means that competition is also lower, allowing for better margins and returns. The growth driver is the shifting of Ramadan from the winter months to the summer months, when consumption is greater. Furthermore, the company has significant cash on hand. Our meeting with the company management revealed that it is actively investigating new opportunities to deploy this cash. However, things happen slowly in Morocco, so any decision is likely to take time. In the meantime, the dividend yield remains above 5%. MSCI MOROCCO: EXPENSIVE, BUT WITH ATTRACTIVE YIELDS (JULY JUNE 2018) Price-Earnings (PE) Ratio NTM Dividend Yield NTM MSCI MOROCCO Jun 2008 Dec 2008 Jun 2009 Dec 2009 Jun 2010 Dec 2010 Jun 2011 Dec 2011 Jun 2012 Dec 2012 Jun 2013 Dec 2013 Jun 2014 Dec 2014 Jun 2015 Dec 2015 Jun 2016 Dec 2016 Jun 2017 Dec 2017 Jun 2018 Source: FactSet BRASSERIES DU MAROC PRODUCTS

3 Label Vie is the largest local food retailer. This company has significant growth potential. In many ways, Morocco appears to be one of Africa s most developed countries, yet shopping is still largely informal. Modern retail represents less than 20% 1 of sales in Morocco. This compares with South Africa at more than 55% 2. The big growth story is the rollout of new stores. Label Vie is the second largest chain in Morocco and had 76 outlets at the end of 2017, with management indicating plans to add another 15 stores this year. Compare this with Shoprite, which states that it has over outlets in South Africa alone across its different brands. Many Moroccan businesses seem to have accepted that growth from the local markets is difficult to come by, and have invested into Frenchspeaking countries in West and North Africa, in particular. Many of these countries are reporting strong economic growth rates. However, given that Morocco remains the dominant contributor to earnings within these companies, the overall earnings growth from Moroccan listed companies is generally unexciting. The trip has confirmed our views on the opportunities within the Moroccan market and we re comfortable with our current positions. All things considered, a visit to my homeland did not uncover many new buy ideas, but I also made sure that I didn t come home empty handed: I brought back some of the delicious Moroccan cookies made with nuts and honey that our team loves. WATER SELLER FAST FACTS 75 listed companies Only African nation to have both Atlantic and Mediterranean coastlines Population (July 2017 est.) Casablanca has 3.5 million people and RABAT (capital) 2 million Highest life expectancy in Africa: 77.1 years with very low HIV infection rate (2017 est.) GDP PER CAPITA (PPP) (2017 est.) Morocco: US$8 600 South Africa: US$ United States: US$ Only 13km from Europe, across the Strait of Gibraltar EXPORT PARTNERS (2016) Spain 23.4% France 21.1% Italy 4.6% GDP BY SECTOR (2017 est.) Agriculture: 14.8% Industry: 29.1% Services: 56% (mainly tourism) Source: cia.gov 1 USDA'S Global Agricultural Information Network 2 Sagaci Research

4 POURING TEA FROM A HEIGHT IS A SIGN OF RESPECT FISH FOR SUPPER

OLD MUTUAL EQUITIES AFRICA TEAM CAVAN OSBORNE AFRICA PORTFOLIO MANAGER SANAA ZARIF AFRICA ANALYST RANDOLPH OOSTHUIZEN AFRICA ANALYST OLD MUTUAL INVESTMENT GROUP: 2016 SINGLE MANAGER AWARDS Best

Tel: +27 21 509 5022 Fax: +27 21 509 4663 www.oldmutualinvest.

financial services providers, approved by the Financial Sector Conduct Authority (www.fsca.co.

5 OLD MUTUAL EQUITIES AFRICA TEAM CAVAN OSBORNE AFRICA PORTFOLIO MANAGER SANAA ZARIF AFRICA ANALYST RANDOLPH OOSTHUIZEN AFRICA ANALYST OLD MUTUAL INVESTMENT GROUP: 2016 SINGLE MANAGER AWARDS Best Actively Managed Equity Fund (1 Year): African Frontiers Fund & Best African Domiciled Asset Manager 2016 CONTACT DETAILS: Old Mutual Investment Group (Pty) Ltd, PO Box 878, Cape Town Tel: Fax: Old Mutual Investment Group (Pty) Ltd (Reg No 1993/003023/07) (FSP 604) and each of its separately incorporated boutiques (jointly referred to as Old Mutual Investment Group) are licensed financial services providers, approved by the Financial Sector Conduct Authority ( to provide advisory and/or intermediary services and advice in terms of the Financial Advisory and Intermediary Services Act 37, Old Mutual Investment Group (Pty) Ltd is a wholly owned subsidiary of Old Mutual Investment Group Holdings (Pty) Ltd and is a member of the Old Mutual Investment Group. Market fluctuations and changes in rates of exchange or taxation may have an effect on the value, price or income of investments. Since the performance of financial markets fluctuates, an investor may not get back the full amount invested. Past performance is not necessarily a guide to future investment performance. The investment portfolios may be market-linked or policy based. Investors rights and obligations are set out in the relevant contracts. Unlisted investments have short-term to long-term liquidity risks and there are no guarantees on the investment capital nor on performance. It should be noted that investments within the fund may not be readily marketable. It may therefore be difficult for an investor to withdraw from the fund or to obtain reliable information about its value and the extent of the risks to which it is exposed. The value of the investment may fluctuate as the value of the underlying investments change. In respect of pooled, life wrapped products, the underlying assets are owned by Old Mutual Life Assurance Company (South Africa) Ltd, who may elect to exercise any votes on these underlying assets independently of the Old Mutual Investment Group. In respect of these products, no fees or charges will be deducted if the policy is terminated within the first 30 days. Returns on these products depend on the performance of the underlying assets. Disclosures: Personal trading by staff is restricted to ensure that there is no conflict of interest. All directors and those staff who are likely to have access to price sensitive and unpublished information in relation to the Old Mutual Group are further restricted in their dealings in Old Mutual shares. All employees of the Old Mutual Investment Group are remunerated with salaries and standard incentives. Unless disclosed to the client, no commission or incentives are paid by the Old Mutual Investment Group to any persons other than its representatives. All intra-group transactions are done on an arm s length basis. We outsource investment administration of our local funds to Curo Fund Services (Pty) Ltd, 35% of which is owned by Old Mutual Investment Group Holdings (Pty) Ltd. Disclaimer: The contents of this document, and to the extent applicable, the comments by presenters do not constitute advice and the information is being distributed to you at your request. This document is not an advertisement and is not intended for general public distribution. The information does not constitute an offer or a solicitation of an offer to buy any securities or use any of the Old Mutual Investment Group s services in particular where such an offer or invitation is not lawful, nor has it been prepared in connection with any such offer or invitation. The Old Mutual Investment Group has comprehensive crime and professional indemnity insurance. For more detail, as well as for information on how to contact us and on how to access information, please visit

OUT OF AFRICA NIGERIA APRIL 2018

OLD MUTUAL EQUITIES OUT OF AFRICA NIGERIA APRIL 2018 ON THE RISE, BUT STRUCTURAL CHALLENGES REMAIN Randolph Oosthuizen, Africa Analyst We travelled to Nigeria in early February for two days of meetings