20 Year Investment as envisaged in 2013
I have been trying to replay the scenario in my mind over and over, at-least few thousand times in the past 1-2 months as to what should be one’s biggest financial investment, all debt free and leaders for over 25 years in their region.
Unilever Nepal (9% div yield, 10 PE), GSK Bangladesh (2-3% Div Yield, 25PE), Crown Paints Kenya (3% Div Yield, 10 PE), Steamships Trading (4% Yield, 17 PE). There is Gillette Pakistan where it is hard to open SCRA (Special Convertible Rupee Account) for non-institutions. Akzo Nobel (Worlds largest Paint Company http://www.wpcia.org/news/2012report.html) is selling for a song at just 10 times earnings in Pakistan too.
Based on adjusted population I feel the maximum potential to expand is with GSK Bangladesh followed by Akzo Nobel Pakistan. Chances of lowest loss are with Unilever Nepal and GSK Bangladesh.
Many random probabilities run through the mind making final choice harder. Bangladesh has a precarious balance with sea level but 2.5% of worlds population offering a global 130 Billion USD company at 800 Crores INR. This is cheap on global average by about 31 times. Seemingly cheap Unilever Nepal is only 7 times undervalued. If Bangladesh merely reaches mid point/average of world price appreciation can be 31 fold over next 20 years. Nepal has no such issues with rising sea level snowballed by global warming but is home to only 0.5% of worlds population. (Am I the the brutal Capitalist silently praying for increased fertility rate ?)
130 Billion USD (GSK) * 2.5% Bangladesh population = 25,000 crores. (Current market cap 800 Crores INR) (Remember we are not expecting Bangladesh, Nepal, Pakistan, India to become economic equivalent of West but just world average). 31 times undervalued
Some companies may have exhausted their easy potential. eg: Unilever India.
120 Billion USD (Global Unilever) * 17% India population = 122,000 crores (Current market cap 122,000 Crores INR), i.e. already at world average. Not undervalued
206 Billion USD (Global Nestle) * 17% India population = 210,000 crores ( Current market cap of 52,000 crores INR). 4 times undervalued
One would tend to think that at this rate Nestle globally at 206 Billion USD is relatively cheaper (in India at 52,000 Crores) to Unilever in terms of its potential.
120 Billion USD (Global Unilever) * 0.5% Nepal population = 3600 Crores (Current market cap 500 Crores INR). 7 times undervalued
Some companies may quite look expensive at 45 times earnings but need not necessarily be. eg: RECKITT BENCKISER Bangladesh is undervalued on population adjusted metric by 30 times as well. I believe it to have greater latent potential but not much growth as yet . I prefer consumer brands to prescription pharma – natural tendency to consume for a life time vs fickleness of regulator and lawsuits. GSK has made it clear that it would operate only 6-7 large brands whereas RECKITT is building more muscle in consumer category with 19 power brands. Interesting interview http://businesstoday.intoday.in/story/reckitt-benckiser-global-ceo-rakesh-kapoor-interview/1/191047.html
RECKITT is actually growing much rapidly in rest of the world relative to GSK but Bangladesh is not yet its focus.
Number of times undervalued is only one part of the equation. Others are:
Absence of other leaders that have not yet entered the market
Seriousness of company to expand
Dividend Yield, prefer 70-100% payout ratio, small countries should be marketing outlets
Royalty (In India Unilever extracts profit in two ways, by dividend and royalty, not so in Nepal, all profits are extracted via Dividends !! Hence if you become a co-owner you get Royalty + Dividends in Dividend Payout, hence the 21% NPM of Unilever Nepal more than anywhere else)
Nestle or Agro Tech like food companies do not translate into like for like comparison due to varying foods habits of India vs West.
Tendency of company to acquire smaller companies and build assets
Market Cap / Sales (GSK Pharma India 9 times, GSK Consumer India 6 times, GSK Global 4 times, GSK Bangladesh 1.5 times)
Then, there are googlies like Press Corp Malawi with a very diversified portfolio but dividend payout ratio is only 10% http://www.presscorp.com/
Although Malawi Kawach has depreciated 50% against USD in the last one year,results are astounding
They have tripled this year alone, still available at 10 times earnings. Inflation has reached 20%
Only 11 banks have a licence to operate in Malawi opposed to 100s of them in similar sized countries
Nice to have a problem of plenty for a change. Mind yearns for what isn’t yet owned. I want Akzo Nobel just because account has not yet opened in Pakistan. A story comes to mind. Its about a young boy’s interest for an ugly dog belonging to a neighbour. He kept demanding for it despite offers of other pets with better appearance from his parents. Moral in his own words: ’Attachment is blinding. It lends an imaginary halo of attractiveness to the object of desire’