BUT, as usual with Malawi, the shaky macro-economic policies are enough to keep investors away and depress this trend. For the brave foreigners however, and for those that get their timing right, the rewards as we have seen in the past, can be stellar. I hereby bring you the NITL market commentary for the Malawi Stock Exchange (no link provided as a visit is unlikely to add value):-
“Investor appetite for Malawi equities remained subdued throughout the year and, unlike its African peers, the market has yet to stage a recovery from the prolonged bear run of 2009. Even the impressive results published by a good number of listed companies received a muted or non-existent response from the market.
Foreign investment capital has yet to return to Malawi to any significant extent as concerns persist over the country’s foreign exchange position and a perceived concomitant risk of currency re-alignment to address the structural imbalance. Domestic institutional investor interest has also remained lukewarm and, by and large, was confined to bargain hunting to remove historic market overhangs in a number of counters.
Our overall fund value grew by a modest 2.5% over the year with fair value increases, particularly in Press Corporation and Standard Bank, being largely cancelled out as NBS Bank Limited, the contrarian star performer in the portfolio last year, gave up a considerable percentage of its exceptional 2009 gains. The performance of the fund does, however compare favourably with the Malawi domestic share index which declined by 1% over the corresponding period.
Almost all our investee companies matched or exceeded expectations both in terms of profits and dividends. In the financial sector, our three bank investments; National Bank of Malawi, NBS Bank Limited and Standard Bank Limited posted good results. Composite insurer, Nico, recovered well from the adverse impact of the 2009 downturn in the equity market buoyed also by good results from its majority holding in NBS Bank Limited. Strong regional sugar prices more than compensated for a weather related drop in Illovo’s sugar production and record profits were once again achieved by this company. Diversified conglomerate Press Corporation Limited maintained profits at historic levels which was commendable against a background of erratic fuel supplies and persistent foreign exchange shortages which negatively impacted its food and beverages, telecommunications and fuel distribution businesses.
Property investments, MPICO and Kang’ombe Investments, continued to achieve capital growth through fair value gains on valuation of their respective property portfolios. Both also returned increased distributable profits reflecting the buoyant property rental market, particularly in the capital city, Lilongwe. In the manufacturing sector, Packaging Industries Limited, despite facing serious constraints in importing raw materials for production, managed to achieve some growth in profits through productivity improvements and cost saving initiatives. Dairibord Malawi Limited, however, disappointed with a break even position as it continues to incur significant losses on its non core fruit canning operations. With a reduction in average selling prices of tobacco outweighing the benefit of an increase in national tobacco production to record levels, commission earned by Auction Holdings Limited fell below that of the prior year.
Increased rejection rates on the floors also led to increased overheads. Nevertheless, this group remains very profitable with an enviable asset base. The carrying value of our investment in Auction Holdings is derived from a share transfer price fixed by its directors which is extremely conservative, translating to a dividend yield of 36% and a price to book ratio of a mere 15%. It is hoped that the company’s board will consider addressing this anomaly in the near future.
A relatively modest shareholding was acquired in the 2008 IPO of mobile telephone operator TNM. Returns to date are low as the company invests heavily in network roll out and subsidization of handsets to increase market penetration.
In line with the overall upward trend in profitability of the companies in our portfolio, total dividend income grew by 29% and, at K149million, equates to a dividend yield of 5.87% on the 30 September 2010 closing investment portfolio valuation. This is comfortably above the MSE domestic weighted average dividend yield of 4.58% at 30 September 2010. Interest earned exceeded the prior year level by K2.4million and, as a result of reduced management fees, the increase in overall expenditure was contained below inflation at 6.2%. Overall distributable profits continued,therefore, to trend upwards, increasing by 36% and permitting your board of directors to recommend a very healthy increase in the total dividend to be declared for the year.
In the near term, despite the country’s very positive GDP growth story, for as long as other macro economic uncertainties persist, foreign investor interest in the Malawi equity market is likely to remain subdued. The market should, however, receive a major positive impetus when the proposed new pension legislation is enacted. The requirement that virtually all employed persons be members of pension schemes will greatly increase the domestic savings base and, almost inevitably, lead to greater domestic institutional investor demand for equity investments.
Prices of Malawi listed equities have now become, in the main, undemanding relative to their emerging market peers. Furthermore, dividend yields thereon now compare very favourably with yields available from alternative domestic investment opportunities in the property and money markets. It might, therefore, be expected that, some time over the course of the coming year, the Malawi market could see some firming of equity prices. Irrespective of investor sentiment, our diversified portfolio of investments across a range of leading Malawi corporates should continue to generate strong dividend flows into the future.
First Merchant Bank Limited
11 November 2010
