Views on Life & on Equity Investing

Wonder, Wealth & Abundance

RED STAR EXPRESS NIGERIA

with 16 comments

It is hard to find companies (at the right price) that have extremely high barriers to entry, with un-leveraged balance sheet,  good corporate governance, decent dividend payouts, low risk of technological obsolescence coupled with great growth potential.

If all the qualitative attributes check the box, then price would be in such astronomical multiples, that would make it hard to choose between a very prosaic commodity business at significantly cheaper multiples versus a high quality business at 60 times earnings. 

In frothy times that we are in, it is easy to imitate the lemmings and drop the standards and stay out of the market. Or one could venture into frontier markets which is what I have chosen, and play the mis-calculated game of high uncertainty in politically troubled countries with a few bargains.

We are invested in Nigeria in an outstanding company called Red Star Express. An ex-employee has written a book which is a must read for every potential business man, or investor in Nigeria.

http://www.amazon.com/Inspiring-Growth-History-Star-Express/dp/1494886618

Unfortunately the book is only available in paper copy, and I forgot the book in India during recent travel, with all important ideas highlighted or dog-eared.




One of the most important idea is that running business in Nigeria without a 10-15 year plan will send you back packing home penniless. That is the fate of most Multinationals. Running business in Nigeria is like being a Politician cum Finance Minister of a small country with CEO responsibilities added in. You have to secure your own fuel, ensure own power generation, ensure safety of employees, have transport fleet on cratered roads, and much more. 

In the United States UPS (90 Billion USD) and FEDEX (50 Billion USD) punched so hard at DHL ( 50 Billion USD), forced it bleed 9 Billion dollars by 2008 before the company pulled plug. That is right 9 with B. That is the power of network effect ! that a mega 50 Billion USD company could not make a dent. Courier networks, planes in conjunction with value added logistics and support services are one of the hardest to assail economic forts.

Imagine establishing a network in a country (Nigeria) where your courier delivery boys could be killed on the streets. Red Star Express has lost a few to Boko Haram. The company founded by ex-DHL employees in 1990s, turned the game back on DHL, hired the brightest, paid 2X the salary, established strongest brand in the industry. The list of innovation and failures goes on that allowed the company to compound @ 68% in revenues over a period of 15 years such as incentive for employee to buyback the vehicle used for delivery, to minimize repairs. The spirit of camaraderia and teamwork has been unmatched. The book is a packed thriller with tragic challenges that threatened the very survival of the company and eventual triumph in any entrepreneurs life. While DHL publicly does not speak about market share. I can tell you that DHL Nigeria has 800 employees and Red Star Express has close to 1700 associates. DHL Nigeria is much weaker in domestic business and dominates in export/import. Other competitors are UPS (also formed by acquisition of local company), TNT and local companies.

In the recent year when GSK, Nestle, Unilever, Cadbury in Nigeria either suffered losses or major revenue shrinkage, understandably due to violence in Nigeria, Boko Haram etc, Red Star has kept its profitability intact. We think very highly of the company and its management.

Red Star is the franchisee of FedEx which is among the highest barriers-to-entry businesses anywhere in the world, and we believe that “moat” will be much wider/deeper in future. Courier  is less likely to be price regulated compared to other high barriers-to-entry oligopoly network industries such as rail, gas, electricity.

We love the tough on ground economic environment in Nigeria and we adore the 22%ROE, 6% dividend yield and 6PE ratio that the share trades at. We believe this is the stuff that 20, 30 or 50 baggers are made of. Nigerian entrepreneurs on the whole are responsible for low levels of corporate governance and the multiples. We expect the company which has not missed a dividend in decade to be an aberration and at par with MNCs and expect sharp re-rating.

It may take a while but the bloody headlines will eventually change for Nigeria. There is a lot of room for positive surprises !  We expect a very remarkable performance in revenue growth and significantly more in share price than revenue growth over the coming decade. Courier business, logistics, internet penetration, portals, online shopping are at similar levels of maturity as India and are ripe for an exponential take off. 

In my opinion the challenge will not come from any MNCs, it cannot, its another Vietnam jungle battle for a Western CEO, given that CEO’s role is that of a Prime Minister, but the local Amazons of Nigeria, ( KONGA, JUMIA which are their Flipkarts) setting up their own courier business could challenge the exponential growth that I envisage.



Written by amitdipsite

May 16, 2015 at 12:54 am

Posted in Uncategorized

16 Responses

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  1. Hi Amit,

    Photoquip is quoting around Rs.25 and they are back to their original business of Photographic goods having snapped up the LED business.
    What is your view?

    totalview

    May 16, 2015 at 6:01 am

  2. Hi Amit,

    Have you looked at the last frontier remaining “Iran”?
    With talks of sanctions being lifted does it looks interesting?
    Any idea as to how can one get exposure to that country?

    Regards,
    Mungerilal

    excel_monkey

    May 16, 2015 at 7:07 pm

  3. Hello Excel

    Not yet. Do you know a place where I can get hold of the annual reports from ? Tehran Stock Exchange does not point to websites of the companies.

    Thanks !

    Amit Arora

    May 16, 2015 at 11:40 pm

  4. Hi Amit,

    Ricoh India Ltd. only listed subsidiary of Ricoh Ltd., Japan in the world is quoting around 750+ !! Robust business plans for the next three years with revenue likely to be around $ 1 Billion and they are more into IT services now. How do you view and like it particularly keeping in view that two delisting attempts have failed and it looks unlikely that parent will make third attempt. Likely to come on dividend list also in 2014-15.

    totalview

    May 17, 2015 at 4:23 am

  5. Hi Amit,

    Getting recent annual reports is a task.
    However, I have some basic details on the top companies.
    If you wish can mail you the same?

    Regards,
    Mungeri

    excel_monkey

    May 17, 2015 at 10:54 am

  6. Hi Amit,
    Wanted to know your opinion on the hot destination ov Vietnam, even biggies like Jim Rogers is swearing by the potential of that country for next couple of years. Did you had a chance to look into that market. I made my first investment in that country last week.

    Prasad

    May 20, 2015 at 3:39 pm

  7. Dear Prasad

    Do not have an opinion on Vietnam. Please share your ideas on Vietnam if possible or any investments

    Thanks

    Amit Arora

    May 20, 2015 at 7:22 pm

  8. Hi Amit,

    Gulshan Polyols is quoting around 350 levels. Do you see a possibility of it being a multi-bagger from these levels. Since you have studied this stock very well your valuable comments will be of immense importance.

    totalview

    totalview

    May 24, 2015 at 2:55 am

  9. Hello Totalview

    I am not aiming for multibaggers anymore. 15-20% is actually more than enough for me. Some stocks may end up becoming multibaggers.

    I feel Gulshan Polyols is still not a discovered stock and I have not yet sold anything since past 4 years that I have been holding. There is less room for disappointment and more for positive surprise. Biased and invested.

    Amit Arora

    May 24, 2015 at 4:56 am

  10. Hi Amit,

    Thanks for your response. I am also invested at 60 levels for the past two years or so. I agree that Gulshan may surprise on the positive side by 2016-17 and has got a potential to be in four figures with three-years' timeframe.

    totalview

    totalview

    May 24, 2015 at 7:10 am

  11. Hi Amit, can Pantaloon fashion and retail become the next page industries, can it become a big multibagger like page in the future, kindly provide your valueable comments, thanks shailesh

    hrithik

    May 24, 2015 at 10:13 am

  12. I would also like to know your view on this?

    Sanyam Jain

    May 25, 2015 at 4:12 pm

  13. Hi Amit,

    Ricoh India's quarterly results are excellent. Topline is compounding more than 50% CAGR and bottomline for the quarter has trebled. CEO says that they will continue to compound topline at more than 50% CAGR with operating margins around 10%. Don't you think that counter is still trading at attractive levels?

    totalview

    totalview

    May 26, 2015 at 12:43 pm

  14. Gulshan Polyols announces it's quarterly as well as annual performance. In view of substantially higher depreciation and higher tax EPS for the year has come down to Rs.27.57 as against Rs.30.97. However, Company has built up a very healthy cash chest of around Rs.70 crores which is just equal to it's long and short term borrowings. In other words it's a debt free company as on date. However, Company is undergoing implementation of two important Capex programmes totalling around Rs.120 crores – One grain based ENA distillery of 60 KLPD and other trebbling of capacity of recently completed grain based project at Muzaffarnagar. Dividend increased to 70% (35% + 35% ) as against 50%. Very substantially improved working both on topline and bottomline will be seen during 2016-17.

    totalview

    totalview

    May 30, 2015 at 5:17 pm

  15. PAT is lower also due to depreciation charges and change in accounting, see notes.

    http://www.bseindia.com/xml-data/corpfiling/AttachLive/D3481609_396A_4328_B57D_492F6A6538A8_140601.pdf

    Yes, four figures is not a problem, or even more once a couple of more funds evince interest in it. Once it breaks the 500 Crore market cap club, it will take no time to go past 1000 Crores. So, don't sell in a hurry after 4 digits🙂

    All the best

    Amit Arora

    June 1, 2015 at 9:27 am

  16. Hi Amit,

    Sitting very very tight on the counter🙂 !!! No intention to sell even at higher levels. Met top management guys and they are technocrats who know their job of execution very well. In the meantime, this correction is again providing a buying opportunity !!!!

    totalview

    totalview

    June 2, 2015 at 11:33 am


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