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African portfolio investors driving shares of multinationals to undeserving high — Report

African portfolio investors’ patronage of shares of multinational companies trading on African Exchanges has over time aided in driving their share prices to an undeserving high, said Mr. Jude Fejokwu, Principal analyst at Thaddeus African Research.

AfricaIn a research report titled, “The craze for multinationals by institutional investors in Africa: Lazy or Smart?”, Fejokwu noted that the price surge usually recorded on the shares of the multinational companies rarely reverse, even with their disappointing results in recent years.

Regretting the high demand by portfolio managers for the shares of multinationals despite their poor performances in relation to their PE ratios, he stated that the local stocks get punished more when they disappoint and get rewarded miserly or not at all when they perform creditably.

He argued that local stocks supported by retail investors offer more return than the multinationals, saying, “This is why in Nigeria the companies ranked by market capitalisation from 26 – 50 will generate better price performances on averagethan companies ranked one – 25 every year barring the negligible anomaly.  Most of the multinationals in Nigeria are in the top 25.”

He said, “Africa and Frontier funds have continually over the years invested their funds in multinational companies operating in Africa and not African companies operating in Africa in comparison.  This phenomenon is even more strongly felt once you exclude the banking industry from the equation across the continent.

“By continually purchasing the shares of multinationals over the years because they are familiar with the parent companies, Africa institutional investors have driven up the prices of these stocks to expensive levels.

“Their repetitive and persistent actions over time have led to overly generous and sincerely undeserving stock price increases in these stocks across African stock markets; this further strengthens their desire to continue investing in more multinational companies.”

Accessing the performance of some multinational companies listed on the Nigerian Stock Exchange, NSE, and Ghana Stock Exchange, GSE, based on their P/E multiple, year-to-date price performance and year-on-year net income changes for each company’s most recent earnings release as at July 21st, 2014, he stated that Unilever Nigeria and Unilever Ghana, which have PE ratio of 39.5x and 78.2x, are both doing poorly presently.

“Despite this, their price performances are muchbetter than their net income performances.  Unilever Ghana has even performed better than the Ghanaian stock market index whose performance is in the red in double digits and has a P/E of 78X and a net income decline of 211 percent.

Its stock price has only declined 2.8 percent as at July 21st, 2014.  Unilever Nigeria has declined only seven percent despite its net income declining 47 percent at the half-year mark.”

“In reality, our analyses reveal that Unilever Nigeria should be trading below N33.22presently for its fair value and at N33.22 during Q1 2014 based on its actual 2013 audited performance,” he stressed.

Continuing, he said, “Flour Mills is not a multinational as we know it and in the context of the others we assessed but, it is majority owned by a Greek company.  Despite this, it still reflects the behaviour of the other multinationals.  Net income has declined by 32 percent and its price performance has only declined by 10.5 percent.”

On the contrary, he said that CCNN’s net income rose 87 percent during Q1 2014 (32 percent tax rate) and its stock price has only risen 2.5 percent; Lafarge WAPCO’s net income rose 34 percent (five percent tax rate) and its stock price was still able to rise 3.5 percent.  Lafarge WAPCO has still done better than CCNN based on year-to-date price performance despite, CCNN having better net income growth and a lower P/E.


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