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Exclusives

Odds in play for premium returns on 11 Plc delisting

Minority shareholders are growing wary of getting a good return on their investment as the current value of the stock trades at N228.

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In 2017, NIPCO Investments Limited took over the 60% majority equity stake of ExxonMobil Oil Corporation in Mobil Oil Nigeria Plc, in a deal estimated to be valued at $301 million.

Barely three years later, the board of directors of 11 Plc. (formerly referred to as Mobil Oil Nigeria Plc) approved the voluntary delisting of 11 Plc. from the Nigerian Stock Exchange (NSE).

Minority shareholders are growing wary of getting a good return on their investment in the leading oil company as the current value of the stock trades at N228.

READ: Total Nigeria Plc records 0.7% increase in 2020 FY pre-tax profits

Khalil Woli an Oil & Gas analyst at CardinalStone Partners in an exclusive interview with Nairametrics shared insights on the exit price minority holders are anticipating after shareholders approved the delisting of the stock from the NSE at the Annual General Meeting (AGM) on October 19, 2020,

Woli said, “According to SEC rules, the company has to offer a price not lower than its highest in the last six months to minority shareholders in the event of a ticker delisting. MOBIL’s highest trading price in the last six months is N249.95, a 9.6%% premium to its last closing price of N228.00.”

READ: Unilever Overseas Holdings acquires N352 million worth of shares of Nigerian subsidiary

Although as a growing amount of investors become nervy about whether the delisting process would ever see the light of day, Olamide Adeboboye an investment analyst at an investment outfit based in Lagos, dampened such anxiety on the bias that the margins of the company under review has improved significantly amid an era of no subsidy;

“I think they will go ahead with the delisting. I guess the delay is just to buy some time for some pick up in the share price given the margin between six-month high and current price.

“Since margins are expected to improve for the downstream players this year, following an end to the subsidy regime. I think we might see them conclude the process towards the later part of the year,” Adeboboye said.

However, Olamide explained in detail that 11 Plc’s business model wasn’t so rock solid, as its core business failed to hit stock experts’ expectations. She said, “Though its core business has not reported a solid performance so far, it’s gotten a bit of support from the real estate and hospitality business, making the company record one of the highest margins in the industry.”

READ: The Peace Mass Transit deal explained – C&I Leasing boss

Corroborating Olamide’s bias, Woli broke down the leading downstream company’s balance sheet as he stated;

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“Across the domestic downstream landscape, MOBIL is the least susceptible to earnings volatility due to support from its real estate business. However, earnings took a massive hit in 9M’20 on weaknesses from the core downstream business. For context, rental income contributed about 92.5% of operating profit at the end of 9M’20, compared to its five-year average of 61.2%.

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“In FY’21, we expect a turnaround in fortunes in its core operations, as businesses and travels resume on a commercial scale. Recent improvements in lubricant demand are also likely to be supportive in the near term. Our positive outlook also considers income stability from its real estate business, which has defied frailties in the broad economy.”

READ: How to own your home in 5 years without a mortgage

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Bottom line

Minority shareholders are banking on the NSE delisting rules in earning at least a premium on their investment irrespective of the company’s recent performance and current share value in play.

Olumide Adesina is a France-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment trading. Follow Olumide on Twitter @tokunboadesina. He is a Member of the Chartered Financial Analyst Society.

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Exclusives

The Nigerian economy is increasingly dollarized but there is a way-out

Nigeria’s overdependence on Oil has brought about high dollarization in Africa’s biggest economy.

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For managers of the Nigerian economy, it was a huge sigh of relief when the National Bureau of Statistics reported that the country had surprisingly exited a recession in the 4th quarter of 2020. Contrary to most analyst expectation, the Nigerian economy grew by 0.11% in the 4th quarter of 2020.

Despite the return to growth, albeit tepid, a dark cloud of uncertainty continues to hover over the minds of millions of Nigerians as the broader economy remains in a fragile state. A key factor that remains a bellwether for the economy is the exchange rate, which is always perfectly correlated with the price of oil and the resultant dollar related export earnings.

Data has repeatedly shown that the country of over 200 million people is affected by the volatility of crude oil prices in the international market, particularly in the exchange rate value of the naira. Without oil, the Nigerian economy in its current state will collapse.

Data from Nairalytics, a data-sharing portal, reveals that the oil sector provides for 85% of Nigeria’s export earnings and 55% of its government revenues, making the nation highly dependent on the dollar for its survival. It appears a lot of financially savvy Nigerians now this already and are increasing their dollar positions.

According to Silas Ozoya, Founder/CEO of SUBA Capital LLC, in an exclusive interview with Nairametrics, a growing number of Nigerians are getting more attached to the US dollar due to high inflation and low purchasing power of the naira.

“Many Nigerians are beginning to dollarize their spending, investment and asset holdings to hedge against the ever-increasing inflation rate and our strong economic romance with recession,” Ozoya said.

Nigeria, Africa’s biggest crude oil producer, has been heavily impacted by the plunge in crude oil prices following the outbreak of the COVID-19 pandemic, with the nation’s authorities adjusting the naira twice in the year 2020 to deal with the pressure.

Besides the drop in foreign exchange revenues from crude oil export, diaspora remittances, which made up about 5% of Nigeria’s GDP in the year 2019, also experienced a significant decline in 2020, again due to the impact of the pandemic and the economic challenges faced by many nations across the globe.

Uwa Osadiaye, a financial analyst in a leading merchant bank, in a note to Nairametrics, revealed that the Nigerian apex bank had made great efforts to reduce the country’s high dependence on the dollar. He advised the nation to increase its Agricultural production.

“The central bank has tried to do this with little success but I believe that beyond administrative measures, the key could lie in increased domestic production of things we consume that aren’t commoditized internationally for a start, such as food crops,” Osadiaye said.

Temitope Busari, CFA, in a telephone interview with Nairametrics, said that it was time for Nigeria as a country to diversify.

“One outcome of the diversification of the Nigerian economy, and perhaps the most critical one at this time, is the potential to diversify our foreign exchange earnings as a sovereign state. It will reduce overdependence on crude oil, maximize opportunities in erstwhile neglected sectors and project the country as the destination for top-class value creation in other areas outside being an oil-producing state,” Busari stated.

The financial analyst also spoke on the need for Africa’s leading oil producer to invest more in intellectual property and encourage Nigeria’s talent in the diaspora, saying:

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“We have produced some of the most brilliant minds in the world evidenced by the ground-breaking successes recorded by Nigerians in diaspora (Medical professionals, Software engineers, resilient small business owners to mention a few), and we must begin to drive policies to retain that talent in-country and make the world pay premium dollar for it.”

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Adetayo Teluwo, a scholar at Warwick Business School, said that the narrative seems to be changing as Nigerians are now beginning to embrace homemade goods.

“The Fashion & Style scene continues to boom. From side hustles to globally-competitive websites with options to accept payments from customers all over the globe,” Teluwo said.

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Bottom line

Economic experts believe that the way to solve this growing menace is for Nigeria to promote free markets and support large scale exports from the Agricultural, Mining, and Technology sectors. The country should tap into its raw diamond which is “intellectual services” to develop a knowledge economy.

Nigeria can draw lessons from India, which has performed remarkably well in creating an outsourcing and knowledge-based economy valued at over 150 billion dollars per annum. This has put India on the technology map, as a destination of low-cost but high-quality technical services, helping the densely populated nation to generate sufficient economic ripple effect to drive job and wealth creation.

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Exclusives

Three things Nigerians can learn from Warren Buffet’s latest letter

Three things we learned from Berkshire Hathaway’s (Warren Buffet’s) 2020 letter to shareholders.

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warren-buffett, Young Investors, Here’s why Warren Buffet's $4.6m lunch with Bitcoin entrepreneur is experiencing delay , What Warren Buffet will do if he traded Nigerian stocks

Three things we learned from Berkshire Hathaway’s (Warren Buffet’s) 2020 letter to shareholders.

Warren Buffet (Sage of Omaha) recently released his annual letter to Berkshire Hathaway’s shareholders providing a recap of 2020 performance, as well as, giving his general perspective of his company’s journey.

Investors all around the globe fall over themselves to pay attention to what Mr. Buffet says, as well as how his portfolio of companies are performing. Just to learn as much as possible from one of the world’s most successful investors to date.

We at Nairametrics are no different and in this article, we will share some key business takeaways from the 2020 letter.

READ: Young Investors can learn these tips from Warren Buffet

1. Compounding still makes you rich

Just in case some investors momentarily forget about the power of compounding and consistency in investments, the very first page of Mr. Buffet’s letter serves up a timely reminder.

Specifically, since 1965 to 2020, the market value of Berkshire Hathaway’s stock has grown at a compounded rate of 20%. This is remarkable given that very few companies last that long (55 years) let alone provide such returns in US dollars over such a period of time. Even the S&P 500 with dividends included compounded at 10% (which is no small feat in of itself).

This lesson here is that for Retail investors, SMEs, startups, the power of compounding doesn’t need to be continually reminded, it needs to be a primary focus as you seek to deploy capital.

READ: Analysts pick Nigerian stocks Warren Buffett may likely buy

For context, in 1965 our dear country Nigeria had approximately $240million in external reserves.

  • If only 1% (i.e. $2.4million) had been invested in the S&P500 index and kept in a fund, the value of that fund today will be $56.3billion.
  • Alternatively, if only 0.05% ($1.2million) had been invested in Berkshire Hathaway stock and kept in a fund, the value of that fund today will be worth $67.45billion.

You can learn more about the power of compounding and here also.

2. Always focus on your CORE objectives and Key results

In 2020, Berkshire Hathaway earned USD$45billion of which $21.9b was operating income, $4.9b was unrealized gain, $26.7b was unrealized gain partially offset by $11b loss write-down.

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Despite the huge unrealized gain of $26.7b, Mr. Buffet in his typical style was dismissive of unrealized gains but rather was quick to point out that his core objectives of growing operating income and acquiring good companies were not met in 2020!!!.

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  • “Operating earnings are what count most, even during periods when they are not the largest item in our GAAP total. Our focus at Berkshire is both to increase this segment of our income and to acquire large and favorably-situated businesses. Last year, however, we met neither goal: Berkshire made no sizable acquisitions and operating earnings fell 9%. We did, though, increase Berkshire’s per-share intrinsic value by both retaining earnings and repurchasing about 5% of our shares.”

READ: Why Warren Buffett’s company is buying shares of a gold mining company

Furthermore, Mr. Buffet points out that Berkshire Hathaway’s earnings do NOT factor any portion of the operating earnings of companies which they have stakes in, such that only the dividends due to Berkshire are included in the results.

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In other words, he is keen to avoid clouding actual performance of his CORE investment vehicle by avoiding accounting gimmicks which gross-up earnings.

For Nigerian startups, SMEs, retail investors, the lesson here is that a laser-focused approach to tracking CORE business earnings helps provide business owners with clarity about actual business performance. This persistent clarity keeps owners grounded on what are the key areas of focus for improved business performance whilst avoiding reporting superficial income.

READ: What Warren Buffet will do if he traded Nigerian stocks

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3. Avoid business complexities AND always choose the most profitable business path which offers the least resistance.

We previously mentioned, Mr. Buffet’s preference to tracking income from CORE businesses. In his letter to shareholders, he goes further to discuss his apathy to the traditional Conglomerate.

Specifically, most businesses that are acquired are seldom leaders in their sector and often are underperforming hence the need to be acquired. Consequently “Conglomerates” who focus on fully acquiring other businesses will likely end up with a portfolio of “Sub-optimal” businesses.

Turning around the fortunes of these “acquired’ businesses will require management time and effort whilst distracting from CORE operations and creating business complexities.

Mr. Buffet notes that going forward Berkshire Hathaway’s approach will seek to avoid this option of undue business complexity and focus on path of least resistance to profitability. This will be achieved by continuing to find very good businesses and taking a stake in these well run businesses.

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  • “It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise.
  • “For those reasons, our conglomerate will remain a collection of controlled and non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company’s durable competitive strengths, the capabilities and character of its management, and price.
  • “If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for “degree of difficulty.” Furthermore, as Ronald Reagan cautioned: “It’s said that hard work never killed anyone, but I say why take the chance?”

The lesson here for Nigerian startups, SMEs, retail investors is that rather than always wanting to go alone into new ventures, sometimes you need to seek competent partners to collaborate and execute ventures with. (i.e., successful business isn’t always about who struggled the most).

Finally, (Yeah, I know I said three things, but this is also an important takeaway), one additional point is that consistency pays. We previously stated that Berkshire Hathaway stock has returned 2,810,526% between 1965 to 2020. One way that Mr. Buffet has accomplished this is by being very consistent in his portfolio. Consistency can be seen in the duration of holdings, as well as the general mix of the sectors of interest.

With regards to duration, the three most valuable assets in his portfolio have been held for at least 15years plus.

Holding Duration Sector 
GEICO 1951 to date Financial Services – Insurance 
BHE (Berkshire Hathaway Energy) 1999 to date Utilities – Energy 
BNSF (Burlington Northern Santa Fe, LLC) 2006 to date Utilities – Freight/Transport 

Even if you then look at the top 15 investments in Berkshire’s portfolio, you notice it is comprised largely of Financial Services, Utilities stocks and Large Tech firms.

The lesson here for Nigerian startups, SMEs, retail investors is that if you find something that you are good at, keep doing it and producing consistent results, stay within your area of competence and aim to maximize value.

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