Blurb
Is Nigeria’s mutual fund industry a duopoly dominated by two fund managers?
There is no doubt that the Nigerian mutual fund industry has come of age. Until 1991, there was no mention of mutual funds in the country.
There is no doubt that the Nigerian mutual fund industry has come of age. Until 1991, there was no mention of mutual funds in the country. But in December 1991, what may well be described as Nigeria’s first mutual fund —Paramount Equity Fund — was established.
Some comparison for your consideration
The total net asset value of the Nigerian mutual fund industry then was N17.5 million. As at today, analysts at Quantitative Financial Analytics estimate that the total net asset value of mutual funds in Nigeria is about N688 billion. If that is not an achievement, I am not sure what is.
READ: Mutual Funds in Nigeria and how they rank in reporting and transparency
But the industry a duopoly
What is a duopoly? – In spite of the strides and achievements in the industry, one may not be far from the truth by characterising it as a duopoly. According to elementary economics, a duopoly is an industry or business structure where two companies share all or nearly all of the market share of goods and services in the industry.
Measuring market share in the industry – The market share of fund management companies in the mutual fund industry is best measured by the sizes of the Asset Under Management, AUM, just like the market share of fund administration companies is measured by the Asset Under Administration, AUA.
READ: Top 5 Fund Managers in Nigeria by asset value
The industry is dominated by two companies – Against that backdrop, the Nigerian mutual fund industry is indeed a duopoly. This is because only two fund management companies — Stanbic IBTC Asset Management Company and First Bank of Nigeria (FBN) Asset Management Company — account for 65% of the Asset Under Management of Nigerian mutual fund industry.
The dominance by those two fund management companies is not surprising and unfounded. Out of about the 90 mutual funds that exist in the Nigerian market, Stanbic IBTC Asset Management Company manages 13 of them while FBN Asset Management Company manages 6 funds. The only fund manager with as many funds is Vetiva Fund Managers with 6 funds under its management.
The next fund management company that comes close to managing as many funds is Asset and Resources Management (ARM) Limited which manages 4 funds.
READ: Fund of funds, missing link in Nigeria’s mutual fund industry
Herfindahl-Hirschman Index (HHI) says Not Quite So
Even though monopoly and duopoly have been known to stymie competition as much as perfectly competitively structured industry will be, and even though only two fund management companies dominate the Nigeria mutual fund industry, none of that indicate that the industry is overly concentrated.
Using a tried and tested mechanism used by the US Department of Justice to measure concentration, Quantitative Financial Analysts applied Herfindahl-Hirschman Index (HHI) to find out if the dominance of the mutual fund industry predicts over concentration. According to Quantitative Financial Analytics, the Herfindahl-Hirschman Index (HHI) for Nigerian mutual fund industry is 2,474, which proves that the industry is moderately concentrated.
READ: As AMCON nears possible ‘liquidation’, what should we expect?
About Herfindahl-Hirschman index (HHI)
The Herfindahl-Hirschman Index is an index that measures the market concentration of an industry. A highly concentrated industry is one where a few players in the industry hold a disproportionately large portion of the market share. A low degree of concentration indicates that the industry is close to being a perfect competition while the opposite is an indication of a monopoly.
Ordinarily, Herfindahl-Hirschman Index (HHI) index is used to measure the potential impact of mergers and acquisitions. But it could also be used as a measure of how much influence consumers may have in an industry.
READ: Understanding Mutual Fund Liquidity and Redemption Penalty
How is the Herfindahl-Hirschman Index (HHI) Calculated?
The Herfindahl-Hirschman Index is calculated by taking the percentage market share of each company in an industry, squaring the number obtained, and then adding all the squares together.
Herfindahl-Hirschman Index Scale and Interpretation
The Herfindahl-Hirschman Index ranges from 1 (lowest concentration) to 10,000 (highest concentration). Since the 10,000 comes from a theoretical scenario where there is only one company in an industry with 100% of the market share, the sum of the sum could be multiplied by 10,000.
According to the US Department of Justice, an HHI index of less than 1,500 indicates an industry with low market concentration, an index of between 1,500 and 2,500 indicates moderate concentration, while any measure from 2,500 to 10,000 indicates a highly concentrated industry.
READ: The Pain and Gain of Money Market Fund Investment
The Verdict
Based on the calculation by Quantitative Financial Analytics that resulted in an HHI index of 2,474 for Nigerian mutual fund industry, one can say that even though two fund managers dominate the industry, it is only moderately concentrated.
Blurb
Buy what? Dangote vs BUA Cement
Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization, but does size win?
I want to review the performance of the largest quoted companies in Nigeria.
On the Nigerian Stock Exchange, they don’t come any bigger than Dangote Cement (Dangote) and BUA Cement (BUA). Only MTNN stands with both cement companies in terms of market capitalization. Dangote and BUA are both blue-chip companies, in the same sector and both enjoy federal import protection, they also both serve a local market with huge demand for cement.
Which is a better investment? Let us assume I have N100,000.00 (One Hundred Thousand Naira,) which should I buy? Let us review both stocks with FY 2020 results they posted. For consistency, I am going to use my trading view terminal numbers.
READ: Dangote Cement joins MTN in the trillion-naira club, as 2020 revenue surpassed N1 trillion
Market Capitalization
First, we talk about capitalization, (Market cap is the number of shares issued x market value of shares ). Dangote Cement has a market capitalization of N3.65 trillion, while BUA posts a N2.49 trillion capitalization. Does size win? Dangote is bigger? Not yet!
Market Price
With N100,000 I can buy about 465 shares of Dangote at N215 a share and 1,360 shares of BUA at N73.50 per share. Is BUA cheaper? do we have a winner? Not quite. Let us dig deeper.
Dangote Cement posted a Net Income figure of N276 billion, if we divide this earning by the number of issued shares which is 17 billion, we get an Earnings Per Share (EPS) of N16.14, so every share of Dangote Cement earns (not pays) the investors N16. Similarly, the Earning Per Share of BUA is N2.0
READ: BUA Cement loses N162 billion in market value in a week
Thus when I buy Dangote Cement N215 per share, I am buying 16 times the earnings of Dangote. We can simplify this by simply comparing the price I pay per share of Dangote to the EPS of Dangote (Price to Earnings Ratio), thus I invest my cash of N215 to buy 16 times the earnings of Dangote, thus the Price to Earnings Ratio of Dangote is 13.31 (P/E). Using the same calculation, the price for each earnings of BUA (the P.E.) is 35.38. This means even though I am paying more cash for each share of Dangote, I am paying less to buy the earnings of Dangote, thus Dangote is cheaper than BUA.
So our first milestone is reached, we have used the Net Income, Market Price, and Number of Issued shared to get the Earnings Per Share, we have then determined what amount of earnings we are buying to determine which stock is at a bargain.
READ: Oba Otudeko’s stakes in Firstbank and Honeywell are worth over N10 billion
What else?
Let us look at the earnings that will be paid in cash. Remember, Earnings, is just the Net Income of Dangote, we as equity holders have the opportunity to share in any portion of the Net Income.
Dangote in 2020 paid out from earnings N272.69 billion as dividends, this translates to about N16 per share or in terms of returns 7.44%. We get this Dividend Yield return by comparing the dividend paid to the market price per share (D/P). BUA also in 2020 paid out N59.26 billion as dividends from earnings, this translates to a dividend yield of 2.81%.
So, if I invested N100,000 in shares of Dangote Cement, I would earn a cash return of 7.44%, if I did the same with BUA I would earn a cash return of 2.81%.
READ: Jumia: In search of the elusive break-even sales
Let us go a bit deeper…
When you buy a stock, you are buying into the earnings and cash flow. Dangote Cement in 2020 earned N276 billion and paid N272 billion as dividends meaning they retained about N3 billion for that FY while generating over N248b in Free Cash Flow. Similarly, BUA earned a net N71.52 billion, paid out N59 billion in dividends, retained N19 billion but posted a negative Free Cash Flow of (N95.49 billion). Should BUA cement have simply used that cash to finance working capital rather than paying it as dividends? Perhaps. Let us speak more of Cash flow.
Cash retained is cash not paid to you the investor. You have to ask how well your company is utilizing that cash retained. Should it all be paid out as dividends? Or retained in the company to fund expansion and growth?
READ: Three things Nigerians can learn from Warren Buffet’s latest letter
Look at it this way, if Federal Government Bonds were offering a Yield of 15% and we see that Dangote is offering a yield of 7.44%, then as shareholders you should demand that Dangote pays more cash to you to allow you to invest in FGN bonds because you get a higher return (at lower risk). The point is any company retaining cash or paying cash at a lower yield than the market is hurting the investors, who are missing the opportunity of investing higher elsewhere.
Let us score both company managers by how well they have managed the revenues and capital of the companies
| Return on Assets % | Return on Equity % | Return on Invested Capital % | EBITA Margin % | Net Margin % | Debt to Assets | Long Term Debt to Assets | |
| Dangote Cement | 14.62 | 31.21 | 26.92 | 44.04 | 24.31 | 0.24 | 0.08 |
| BUA Cement | 11.15 | 19.12 | 15.35 | 41.87 | 32.03 | 0.36 | 0.23 |
FY 2020
Across the board, the management of Dangote Cement has done a better job when compared to BUA Cement in managing the assets of the company. Dangote Return on invested capital is higher with a much lower recourse to debt and of course a higher FCF number.
Overall, on Earning, Returns and Efficiency, it appears Dangote Cement posts better fundamentals…
Do follow @FinPlanKaluAja1
This is not investment advice, this is not a recommendation to buy or sell. Past performance is not a guarantee of future performance. Speak with your adviser before investing. Equity is risky.
Blurb
Is something fishy going on at Custodian Plc?
Custodian stock hit a year high just as it announced a Convertible Loan Instrument set to be approved at its AGM.
Custodian Plc, one of the largest insurance companies in Nigeria is currently trading at a new year high of N7.10 and is up 21% year to date. Nairametrics Blurb team has in recent days noticed an upsurge in its share price especially since the company announced its AGM.
As we pen this article, about 2.9 million units have exchanged hand at a share price of N7.
The stock is included in the Pension Index and by some measure quite illiquid. It is also one of the stocks recommended in our Premium Service Stock Select Newsletter thus the need for further introspection.
READ: Buy what? GTBank vs Zenith Bank
Custodian Investment AGM
Typically, when companies announce AGMs we are keenly curious as this is where decisions that can ultimately affect shareholders (especially smaller retail investors) are approved.
In its recent filings, the company stated as follows in item 10.
That the Board of Directors of the Company be and is hereby authorised to:
(a) raise the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars), as additional capital through a convertible loan instrument;
(b) convert the loan in the Naira equivalent of up to $15,000,000.00 (Fifteen Million US Dollars) into shares in the Company (the “Conversion Shares”) at a conversion price, being the higher of N6 per share or the 12-month historical average daily share price of the Company derived from the Daily Official List of The Nigerian Stock Exchange (for the period ending on March 23, 2021), subject to adjustment upon the occurrence of certain adjustment events;
(c) allot the Converted Shares to the Lender upon the exercise by the Lender of its right to convert the Loan into shares in the Company, subject to applicable law; and
(d) take steps necessary or reasonably desirable to give effect to the foregoing resolutions and for effecting any transactions pursuant thereto, including the appointment of professional advisers, and the obtention of relevant regulatory approvals.
READ: Notore Chemicals is swimming in debts – company to access equity market in Q2 2021
What this means?
In simple English, the directors of Custodian are seeking the approval of its shareholders to borrow $15 million (N6.1 billion) in convertible loan instrument.
A convertible loan instrument is simply a loan that you can convert into shares if the lender so wishes. The share price for conversion are predetermined and in this case, they stated N6 per share or the 12-month historical average daily share price of the company’s stock.
If the lender does decide to convert the loans to shares at the current share price of N6 per share, it means about 1 billion shares will be offered to the lender, an equivalent of 17.4% of the total outstanding shares of the company. This loan is in effect, a potential dilution of existing shareholders of the company if it is approved at the AGM.
So why is the company seeking a convertible loan or even diluting its shareholders?
READ: Gains on quoted investment stocks rescued Custodian Investment Plc from loss in Q3 2020
Fishing around for why
Typically when a company decides to raise money via a convertible loan instrument, they are looking for lower interest rates, debt that avoids the burden of periodic repayment, and/or looking to delay when the actual equity is issued. There are also tax considerations at play but not as significant as the ones mentioned above.
Except, Custodian is looking to purchase another asset, after it bought UPDC, we do not understand why it will be looking to raise capital huge enough to dilute existing shareholders. It also did not explain why it is seeking to raise the said capital in its AGM Notice, a slight departure from the norm in cases like this.
- Custodian is also highly capitalized with a Net Asset of about N46 billion and a balance sheet size of N176.1 billion (after the acquisition of UPDC) as of 2020.
- Suffice to add that the company recently paid shareholders about N2.6 billion in dividends, making us wonder why it is seeking to dilute shareholders when it could have just ploughed that amount to its capital raising needs.
- In fact, the dividends paid in 2020 was just 21% of profits, meaning it had retained about N10 billion in profits made during the year. Again, why does it need N6.1 billion in loans?
- Custodian also has a thriving insurance business which fetched it about N58 billion in gross premium income out of which N32 billion was from non-life. Again, why does it need N6.1 billion on convertible loans?
- The company currently carries a debt of about N5.5 billion which was inherited from its acquisition of UPDC. The debt is mostly a bond issued at an interest rate of 16% per annum and due for full liquidation in 2023.
- There is no rush to pay down this debt.
READ: NPF Microfinance vs C&I Leasing: A tale of two rights offer
What then?
We are lost as to why the company is looking to raise this capital and can only now think of two reasons. Firstly, could it be the existing shareholders looking to tighten their stake in the company? Custodian’s majority shareholders are Gratitude Capital Limited and Mikeade Investments Limited with 22.48% and 15.72% respectively.
- The company CEO Oluwole Oshin represents Gratitude Capital while Business Mogul Micheal Ade (Elizade) owns Mikeade Investments Limited. Could it be either of these two investors looking to up their stakes?
- There could also be a reason for this back door approach. About 74.5% of the company is owned by just 20 shareholders so it is clear that increasing majority stake will be difficult to achieve.
- The other reason is perhaps an institutional investor looking to acquire a significant stake in the company through the backdoor. Is this plausible?
READ: Investors react to Fidelity’s bond listing, as it gains N1.74 billion
Well, these are speculations that only Cusdotian can confirm. We hope they do so as soon as possible.
