Annual Highlights: December 2013

•  The Fund generated a positive return in December to cap a strong year of outperformance
•  Annual performance attribution led by gains across West Africa
•  Optimistic with respect to the long-term earnings potential of our underlying portfolio holdings
•  Transnational Corporation of Nigeria - Playing Power Sector Privatisation in Nigeria
•  Juhayna Food Industries - Long-Term Positioning for an Economic Recovery in Egypt
•  National Microfinance Bank - Accessing Long-Term Growth at Compelling Valuations
 

The Fund generated a positive return in December to cap a strong year of outperformance

We anticipate 2014 will be another strong year for the companies in our portfolio as Africa is well positioned to benefit from structural progress, fiscal prudence and above average growth. Capital flows are improving amid greater visibility and our management teams are displaying greater optimism as local confidence returns. We remain encouraged by the resilience of our portfolio companies, and are particularly impressed by management’s success in contending with higher-than-expected operating and input costs. Although the valuation multiples which define our portfolio are slightly more expensive when compared to last year, it is should come as no surprise that the volatility surrounding our forward-looking estimates declined as diminished macro uncertainty has led to a more stable operating environment for many of our underlying portfolio companies.

As fundamental value-driven investors, we seek to develop and maintain a strong understanding of the industries in which our portfolio companies are operating in. If we can be reasonably certain that a company’s earnings will materialize and express a high level of confidence around our forecasts of three-to-five year earnings growth, our portfolio will consistently deliver risk-adjusted absolute returns and outperform relevant benchmarks over time. Although our portfolio companies have yet to release 4Q13 results, we have thus far been rewarded for our efforts as 32 of the 36 holdings in our portfolio are expected to generate record revenue and/or earnings. Despite the fact that our holdings’ financial years expire over several different month-ends, our estimates through the first three quarters of FY13 have been exceeded and we expect 4Q13 results to reflect continued improvement in operating conditions.

Looking ahead, we believe that Africa is still in the very early stages of what will eventually be viewed as a long-term, multi-year cycle of productivity growth. Improvements across the telecom and financial sector are commonly cited examples which have leveled the playing field for companies operating across the region while greatly improving the individual standard of living as measured by income, employment, class disparity and rate of poverty, among other factors. Yet the potential for companies to realise even greater cost efficiencies over the coming years is significant as advancements in infrastructure and electricity begin to take hold.

Annual performance attribution led by gains across West Africa

Much of this year’s positive attribution can be traced to our holdings in West Africa as Nigeria, Ghana and the Francophone region were significant contributors in FY13. We remain overweight West Africa as the region is predominantly comprised of export-driven economies that are, for the most part, technically superior from a balance of payments perspective. Similarly, we remain underweight nations with deteriorating current accounts and high fiscal imbalances as these economies appear most vulnerable as tapering subsides and credible tightening policies are required. Yet because country fundamentals are highly asymmetric, assessing value to a local company’s future earnings potential requires a healthy sense of local preferences and strong visibility with respect to the underlying forces which shape market demand. Individual countries suffer from localized capacity constraints and management’s ability to deliver is often critical when determining position size. Our portfolio will therefore remain country-agnostic and one should expect the level of exposure to reflect our medium-term projections for individual company performance.

Looking ahead, we believe stock market liquidity will continue to improve as daily average trading volumes for Sub-Sahara Africa ex-South Africa (SSA ex-ZA) rose by nearly 64% y/y to US$38.5 million per day in FY13. Although volumes declined across the North African region, conditions below the Maghreb improved significantly with Nigeria (+58.3%), Kenya (+71.8%) and Zimbabwe (+23.1%) attracting greater interest. As securities market infrastructure evolves across Africa, we expect liquidity conditions to continue their ascent and are encouraged by the extent of improvement in periphery nations such as Uganda (+894.7%), Tanzania (+389.8%) and Ghana (+321.8%). Although new issuance has been slow to accelerate, conditions appear to be improving and we will continue to monitor opportunities as they arise.

Positive attribution was primarily driven by our holdings in the financials and consumer staples sectors. Earlier in the year, we were rewarded for our conviction in Nigerian banks as continued earnings growth helped fuel the industry’s overall outperformance. In consumer staples, our decision to stay away from many of the large multinational-owned consumer companies on back of deteriorating fundamentals (i.e. flat-to-low turnover growth, deteriorating margins, rising debt levels, etc.) proved adept as the sector re-rated amid generally poor operational performance.

We believe that valuations across the financial sector remain attractive on both an absolute and relative basis. As we enter 2014, the sector appears well positioned to outperform as credit expands, leverage declines, margins improve and asset prices rise. Yet while the portfolio remains overweight financials, we have significantly reduced our exposure to Nigerian banks as greater regulation (i.e. transaction commissions, minimum deposit rates, public-sector CRR requirements, AMCON levy, etc.) has resulted in margin compression while the sluggish pace of new innovation (i.e. mobile banking, insurance, etc.) has failed to drive a meaningful increase in financial inclusion amongst Nigeria’s unbanked population. We have identified interesting opportunities in different regions and are looking to access private credit growth and margin expansion in relatively underappreciated countries such as Tanzania, Uganda and Mozambique, among others.

Although the majority of our returns are expected to come from core holdings, we have identified a number of highly attractive opportunities across the energy and materials sectors as softening commodity prices have driven the majors to either sell assets or delay future capex plans. This has opened the door for a number of early-stage companies led by strong and experienced management teams to acquire local assets and licenses at attractive prices. Although such investments are highly cyclical and therefore subject to large swings in operating margins and return on equity, we believe that appropriately-sized resource holdings offer the potential for significant medium-term upside as assets are de-risked and new production comes online.

Optimistic with respect to the long-term earnings potential of our underlying portfolio holdings

Looking to 2014, we are optimistic with respect to the earnings potential of our underlying portfolio companies as this drives business valuations over the long-term. We remain mindful of political uncertainty as Egypt, Malawi, Mozambique, Namibia, South Africa and Tunisia are all facing presidential elections in 2014. It should however be noted that political change in Africa can no longer be viewed as a red flag, and in many places (e.g. Nigeria), the run-up to presidential elections is often accompanied by a high degree of spending and investment.

Three of the primary drivers driving Africa’s long-term outlook are volume growth, efficiency gains and margin expansion. For example, the ongoing liberalisation of public sector utilities and elimination of energy tariffs in West Africa should reduce the costs for companies operating across the region. Similarly, improved supply chain reliability across East Africa has the potential to reduce slippage, enhance long-term earnings quality and drive capex acceleration into nations such as Kenya, Uganda and Tanzania. Although trends in foreign direct investment (FDI) are notoriously difficult to forecast, we believe that Africa’s share relative to other developing regions remains untenably low. If one views FDI as the sum of all investment opportunities which cannot be financed domestically, than future inflows will be highly correlated to the estimated IRRs which fuel them. It should be noted that projected IRRs are rising across Africa as improved business conditions and enhanced policy transparency reduce slippage and risk of loss. In addition, credible policy has kept inflation at bay while reducing the capital costs required for project viability. As a result, we believe FDI to Africa will continue to rise over the coming years and would not be surprised to see annual inflows double by 2018.

We share the outlook for three individual holdings, namely Transnational Corporation of Nigeria, Juhayna Food Industries and National Microfinance Bank. Transnational Corporation of Nigeria and Juhayna Food Industries were two of our best performing positions in 2013, and although these companies are not inexpensive, we are extremely excited about their long-term potential. National Microfinance Bank is a relatively new addition to the portfolio and we believe the company is well positioned to outperform given its industry leadership and current market positioning.

Transnational Corporation of Nigeria - Playing Power Sector Privatisation in Nigeria

Transnational Corporation of Nigeria plc (“Transcorp”) is a Nigerian holding company comprised of world-class enterprises, under strong local management and leadership. The company’s portfolio includes strategic investments across the hospitality, agriculture and energy sectors; most notably, Transcorp Hilton Hotel (5-star hotel in Abuja), Transcorp Hotels (premier destination hotel in Calabar), Teragro Commodities Limited (operator of world-class fruit concentrate production plant), Transcorp Ughelli Power Limited (operator of recently privatised 972MW power plant in Delta State) and Transcorp Energy Limited (operator of OPL 281 oil block). At the time of investment, we felt that the underlying share price did not accurately depict the forward-looking potential of Transcorp’s Ughelli acquisition. At the time of investment, Transcorp was trading at 10.1x FY13 earnings and 2.7x FY13 EV/EBITDA. We first invested in September 2013 and the company’s shares have subsequently returned +217.2% in USD terms.

Our investment thesis is grounded in recent measures aimed at privatising Nigeria’s power industry in conjunction with inadequate domestic hotel room supply. Nigeria is the sixth most densely populated nation in the world and the most populous in Africa with over 170 million individuals. Yet with installed generating capacity of 10,400MW and only 6,000MW available for consumption, roughly 76 million Nigerians do not presently have access to power and the country’s per capita electricity consumption ranks among the lowest in the world at 150kWh per person. Nigeria’s power sector is characterised by woefully inadequate generation capabilities, unreliable transmission, irregular maintenance, outdated dispatch facilities and vandalism. Furthermore, Nigeria suffers from a fragile and overloaded distribution network marked by high technical losses, inaccurate billing, poor revenue collection and lack of proper system planning. As a result, demand for electricity must be satisfied by costly self-generation as Nigeria presently accounts for more than 40% of Africa’s diesel generator imports (c.US$152 million p.a.). Private and commercial sector businesses are faced operating costs that are roughly 10 - 20% higher than neighboring countries and Nigeria’s manufacturing sector is regionally uncompetitive.

In order to reform the nation’s power sector, the Federal Government embarked upon an extraordinary privatisation programme designed to improve the efficiency, affordability, reliability and overall quality of electricity services delivered across Nigeria. It established the National Electricity Regulatory Commission and implemented a tariff structure designed to promote private sector investment into Nigeria’s power sector. This resulted in a highly competitive bidding process whereby eighteen business units (6 generating companies, 11 distribution companies, 1 transmission company) were unbundled from the Power Holding Company of Nigeria. Transcorp successfully won the bid for Ughelli Power Plc, operator of the 972MW Ughelli Power Plant in Delta State. Given the plant itself was commissioned in 1998, roughly 75% of Ughelli’s 972MW in installed capacity was unsuitable for evacuation and so many felt Transcorp was acquiring a poor and unwelcome asset. Yet for those familiar with the asset’s underlying potential, as well as the nuances of Nigeria’s power sector reform programme, specifically: the Multi-Year Tariff Order, associated counterparties (i.e. NBET, TCN, GACN, etc.) and governing agreements (i.e. GSAA, GTA, PPA, PCOA, etc.), Transcorp’s US$300 million Ughelli acquisition was transformative for both the company and its shareholders. We will be monitoring Ughelli’s progress as management plans on expanding the plant’s generating capacity to 1,600MW over the next 3 - 5 years. We have been pleased with the company’s progress to date as output from Ughelli has risen from 160MW at acquisition to 360MW today with 700MW targeted by year-end. Looking ahead, we are increasingly confident in management’s ability to execute and it should be noted that Transcorp has engaged General Electric to assist with the Ughelli expansion.

Although our investment in Transcorp did not occur until September 2013, we have kept the company on our radar since its successful acquisition of the Nicon Hilton Hotel for US$105 million in 2005. At the time, the company appeared well positioned to develop luxury properties for Nigeria’s immensely underserviced hospitality industry. It should be noted that management has successfully cultivated a strong working relationship with Hilton Worldwide, Africa’s largest luxury hotel chain, with whom Transcorp has selected to manage the Transcorp Hilton Hotel (Abuja). Moreover, the company has recently agreed to develop the Transcorp Hilton Hotel (Ikoyi) as it seeks to capitalize on Lagos’ attractive fundamentals, specifically its high average daily room rate (US$275) and strong occupancy rates (>65%). Looking ahead, the Nigerian hospitality industry’s medium-term prospects are extremely compelling and we believe Transcorp is well positioned to capitalise on future growth.

Our interest in the company was revived when Obinna Ufudo was named Chief Executive Officer in 2011. Our confidence in management grew, and we began monitoring corporate developments closely. By the time Transcorp took physical acquisition of Ughelli Power Plc, we had completed our due diligence of the company and were acutely familiar with the underlying asset and its forward-looking growth potential. It should be noted that we have been monitoring the pace of privatisation within Nigeria’s power industry for some time and saw the potential for significant medium-term earnings growth following Transcorp’s successful acquisition of Ughelli Power Plc. We were also attracted to the company’s hospitality business and viewed this as a highly attractive source of future revenue. Yet in addition to the company’s emerging power and hospitality businesses, Transcorp owns other interesting assets which provide a certain degree of optionality, specifically its 60% ownership stake in OPL 281, an onshore block located in Delta State and consisting of 100MMboe in gross contingent resources with additional potential in two further prospects. At present, interpretation of existing seismic and well data has been completed, evidence of the anomalies and potential deeper prospects have been confirmed, modeling and 3D seismic reprocessing has concluded, and the feasibility study of an EWT has been completed. Should progress move ahead as planned, we could see drilling of OPL 281 begin in FY15.

Our valuation approach to Transcorp employs both Discounted Cash Flow (DCF) and Sum of the Parts (SoTP) methodologies. In our DCF model, we discount free cash flow over the three-year period 2014 - 16 based on internal projections of corporate earnings. We then apply a decelerating growth rate from 2019 - 20 before applying a terminal growth rate in perpetuity. Our SoTP model evaluates each individual business segment to arrive at a total enterprise value of the company. Segment data is further developed through industry channels, guidance from management and various other sources. We then arrive at the company’s equity value by deducting net debt and accounting for cash and equivalents. As shares of Transcorp are relatively expensive at 12.3x forward 12mo earnings and 3.6x forward 12mo EV/EBITDA, we have taken profits and reduced our position size accordingly. Nevertheless, we remain enamored with the company’s long-term potential and will look to re-engage at more attractive valuations.

Juhayna Food Industries - Long-Term Positioning for an Economic Recovery in Egypt

Juhayna Food Industries is the leading dairy, yogurt and juice producer and distributor in Egypt with over 220 products across 9 brands, namely: Juhayna, Pure, Bekhero, Mix, Jino, Foam, Acti-life, Zabado and Rayeb. The company operates across three distinct, but integrated lines of business: manufacturing, commercial & distribution and agriculture & dairy farming. Juhayna’s manufacturing segment is comprised of six state-of-the-art production facilities in Egypt’s 6th of October City’s industrial zone. The company’s commercial & distribution segment is represented by Tiba for Trade & Distribution, a distribution fleet consisting of over 1,000 vehicles capable of transporting both refrigerated and non-refrigerated products to more than 45,000 retailers per day. Juhayna’s agriculture & dairy farming segment is represented by Al-Enmaa for Agriculture Development & Livestock, and comprised of: Enmaa Livestock Company, Enmaa Company for Agriculture Cultivation and Milky’s for Milk Production. Al-Enmaa consists over 2,300 ha of reclaimed and cultivated land producing potatoes, corn, wheat, clover and oranges, among other crops. Milky’s consists over 3,200 cattle and provides roughly 10% of the company’s existing raw milk requirements. Although Juhayna presently relies on external producers for much of its input supply, it is in the process of rolling out its first fully-owned dairy farm (4,000 cattle) as this should satisfy most of the company’s raw milk requirements. We first invested in August 2011 and Juhayna shares have subsequently returned +171.6% in USD terms.

Our investment thesis is reflective of Juhayna’s brand leadership, supported by Egypt’s strong fundamentals and strengthened by recent progress aimed at removing the political overhang which has impeded per capita income growth and held back consumer spending. Egyptians have been consuming milk for generations and it has long been accepted as a source of nutrition for children and adults alike. Today, Egypt is the third most populous country in Africa and largest in the Arab world with roughly 85 million individuals. Yet while Egypt boasts a youthful population whereby 70% of its citizens are less than 30 years of age, unemployment and urbanisation remain persistently high. These conditions have fuelled the rise of Egypt’s “informal” milk market and help illustrate why the nation’s per capita milk consumption and milk production efficiency presently rank among the lowest in the world.

The emergence of Egypt’s informal milk market can be traced to the poor conditions faced by Egyptians who migrate from rural to urban areas in search of a higher standard of living. Such migrants often struggle to find employment and are thus forced to cope with inadequate health and nutritional resources. They turn to small-scale dairy farmers who milk their own cows and set out in small vehicles to deliver loose milk to homes. Because most small-scale dairy farmers in Egypt are severely impoverished, they cannot afford portable refrigeration and will often add adulterating substances (i.e. formaldehyde, hydrogen peroxide, etc.) to maintain loose milk’s relative sterility during transportation. Yet many Egyptians have little choice other than to deal with the accompanying side effects (i.e. nausea, diarrhoea, stunted growth, etc.) as they cannot afford packaged milk and related dairy products such as those produced by Juhayna. Apart from the cost barrier, a number of Egyptians remain conflicted with regard to packaged dairy products as traditional folklore frowns upon the consumption of processed foods and beverages. In fact, the elderly often look down on those who buy ready-to-consume goods under claims that the “natural” product is healthier. Although Juhayna has participated in a number of highly successful marketing campaigns aimed at breaking the social stigma attributed to processed foods and beverages, dispelling cultural myths is no easy task. Indeed, the Food & Agriculture Policy Research Institute estimates that Egypt’s informal milk market accounted for nearly 70% of the nation’s total milk consumption in FY12. Yet as demographics shift, economic conditions improve and consumer tastes evolve, increased demand for Juhayna’s range of packaged milk and dairy products will fuel significant acceleration in top-line growth.

Although shares of Juhayna did not publicly list until June 2010, we have been following the company for years as it serves as the local supplier to many of Egypt’s leading food franchises, including: McDonald’s, PepsiCo and Yum! Brands. It should be noted that food franchises have developed extensively across Egypt and popular chains such as McDonald’s, Pizza Hut, KFC and Baskin Robins are widely accepted by local consumers. Yet as Juhayna looks to gain additional market share, the company must prove adept at servicing Egypt’s highly fragmented retail market which is largely dominated by family-run shops and traditional markets of which there are currently more than 65,000 nationwide. We believe Juhayna is well positioned to build upon its industry-leading distribution capabilities as this will prove critical when attempting to penetrate low income households. Yet in our opinion, Juhayna’s success in gaining market share from Egypt’s low income households is primarily a function of: (i) its vertical integration strategy, i.e. the success with which management is able to roll out more cost effective products, and (ii) its marketing strategy, i.e. the successful elimination of any negative stigma attached to the consumption of processed foods and beverages.

Juhayna’s vertical integration strategy is centred on the recent acquisition of 7,500 ha for the purpose of constructing a new dairy farm. Phase 1 began in 2010, and 1,700 ha are presently being cultivated to accommodate a herd size of 4,000 cattle. It should be noted that the farm will be constructed over four phases and is expected to accommodate 14,000 cattle when fully developed. Upon completion, management expects the company’s daily milk productivity will reach 35kg per cow. This will result in improved operating margins as the company’s dependence on costly inputs is mitigated. Furthermore, by increasing its access to less expensive inputs, the company will be able to introduce more affordable milk and dairy products to cost-constrained low income households. It should be noted that the farm will also supply fruits for the concentrate factories which in turn fuel the juice factory with fruit concentrate. Again, we are forecasting improved operating margins and the flexibility to roll out more affordable juices and beverages. Juhayna’s marketing strategy has focused on education and branding. The company has partnered with the Ministry of Health and Alexandra University in an effort aimed at eradicating misperceptions surrounding the nutritional shortcomings of processed foods and beverages. Similarly, it has focused on building brands that cater to traditional cultural values, such as Juhayna’s “Pure” range of 100% natural fruit juices and “Bekhero” range of full cream rich milk.

Our valuation approach to Juhayna employs both Discounted Cash Flow (DCF) and Sum of the Parts (SoTP) methodologies. In our DCF model, we discount free cash flow over the three-year period 2014 - 16 based on internal projections of corporate earnings. We then apply a decelerating growth rate from 2017 - 19 before applying a terminal growth rate in perpetuity. Our SoTP model evaluates each individual business segment to arrive at a total enterprise value of the company. Segment data is further developed through industry channels, guidance from management and various other sources. We then arrive at the company’s equity value by deducting net debt and accounting for cash and equivalents. At present, we view Juhayna as a core holding and the company’s shares are currently trading at 20.6x forward 12mo earnings and 1.2x forward 12mo EV/EBITDA.

National Microfinance Bank - Accessing Long-Term Growth at Compelling Valuations

National Microfinance Bank (NMB) is one of the leading commercial banks in Tanzania and one of the nation’s most profitable financial institutions. Founded in 1997 following the break-up of the old National Bank of Commerce, NMB was privatised in 2005 when the Government of Tanzania sold part of its shareholding to Rabobank (Netherlands). In terms of current ownership, NMB is 34.9% owned by Rabobank, 31.8% owned by the Government of Tanzania and 33.3% owned by public shareholders. NMB has emerged as an industry leader in retail banking and the bank’s emerging SME business has benefited from a broad geographic footprint consisting of 160 branches and 500 ATMs throughout the country. At present, NMB serves over 1.8 million retail customers and more than 50,000 SME clients across the country. Given the low rate of bank penetration in Tanzania, we believe NMB has significant potential to grow its retail business over the coming years. In addition, we believe NMB is extremely well positioned to benefit from high rates of future GDP growth by leveraging its cheap deposit base and growing its wholesale and SME banking franchise. We initiated our position back in October 2013, and the company’s shares returned +39.5% in USD terms since investment.

Our investment thesis is supported by the sector’s strong fundamentals and fuelled by the bank’s structural advantages. Tanzania possesses a large, unbanked population with extraordinary retail growth potential. Despite its status as the sixth most populous nation in Africa with over 46 million individuals, more than 45% of Tanzanians are under 15 years of age and less than 15% of adults have bank accounts. Although the agricultural sector’s contribution to GDP has declined steadily in recent years, the industry’s overall health remains of paramount importance as it presently employs more than 60% of Tanzania’s total labour force. Given the challenges which accompany delivery of formal banking services to rural areas in developing nations, it should therefore come as no surprise that the overall level of financial intermediation in Tanzania remains low. Nevertheless, retail penetration continues to rise and NMB’s strategy of focusing on low to middle-income households has proven hugely successful as it is widely perceived as the “people’s bank” (i.e. affordable financial services, broad-based footprint, etc.). We believe this is critical to NMB’s future success as it provides the bank with access to relatively inexpensive funding when viewed in comparison to its peers. Yet while retail banking remains the primary source of NMB’s future growth potential, we also view wholesale banking (i.e. trade finance, transaction services, etc.) and SME banking as additional drivers of medium-term outperformance.

The Tanzanian financial sector consists of over 40 licensed commercial banks and over 650 non-bank financial institutions (i.e. savings & credit cooperatives, microfinance lenders, etc.). Although licensed operators vary greatly in terms of size, the commercial banking sector is dominated by eight financial institutions, four of which are domestic and four of which are international subsidiaries of large global banks. The four large domestic banks are CRDB Bank (CRDB), ExIm Bank Tanzania (ExIm), National Bank of Commerce (NBC) and National Microfinance Bank (NMB). The four large international banking subsidiaries are Barclays Bank (Barclays), Citigroup (Citi) Standard Bank (Stanbic) and Standard Chartered Bank (SCB). When viewed in terms of market size, NMB ranks second in terms of total assets, customer deposits and gross loans. Yet when viewed in terms of profitability, NMB is the undisputed industry leader with return on average assets (ROAA) and return on average equity (ROAE) of 4.2% and 31.1% respectively, based on actual results through 9M13 (annualised). In terms of asset quality, NMB has consistently established itself as best in class when viewed in terms of regulatory capital to assets and non-performing loans to gross loans. Furthermore, NMB is one of the most efficient operators in Tanzania with a cost-to-income ratio that is well below the industry average.

We have been following National Microfinance Bank for some time although our interest gained momentum when Mark Wiessing replaced Ben Christiaanse as CEO in January 2011. It should be noted that Mark previously served as Chief Executive Officer of Zambia National Commercial Bank where we were able to successfully foster a close working relationship. We felt that Mark brought significant corporate banking experience to NMB, having served as Director of Wholesale Banking whilst at Standard Bank of South Africa in the mid-2000s. At the time of Mark’s hire, NMB needed to focus on stabilising its banking operations post global credit crisis. We believed that Mark would eventually be tasked with the responsibility of growing NMB’s wholesale and SME banking businesses as they presently account for 50% of the bank’s loan book. It should be noted that NMB’s public sector roots have positioned it as the medium of choice for salary and wage payment processing to government employees throughout the country. As a result, NMB benefits from net interest margins that are roughly 200 basis points wider than the competition. Looking ahead, we believe the emergence of NMB’s wholesale and SME banking businesses will enable it to more effectively leverage its cheap deposit base by offering attractive financing solutions to companies operating within Tanzania’s burgeoning economy, specifically the energy, mining, transportation and agricultural sectors. In addition, NMB will seek to benefit from recent technological advancements (e.g. mobile banking) as the bank looks to expand its retail footprint. It should be noted that NMB has successfully integrated with Vodacom M-Pesa, giving its customers seamless access to over 40,000 cash-in/cash-out points. Furthermore, NMB has launched a biometric-enabled current account that can be opened offsite by direct sales agents operating away from the local branch.

We initiated an investment in NMB in October 2013 as the bank’s shares traded on 9.9x trailing 12mo earnings and 2.7x trailing 12mo book value. Our valuation approach to NMB employs both the Gordon Growth Model (GGM) and Dividend Discount Model (DDM) in our analysis. In our GGM, we calculate return on average equity (ROAE) using both historical and implied data over the past five years. We then derive an implied price-to-book (P/B) multiple for valuation purposes. In our DDM, we incorporate explicit earnings forecasts over the three-year period 2014 - 16, a decelerating growth rate from 2017 - 19 and perpetual growth thereafter. At present, we view NMB as a core holding and the bank’s shares are currently valued at 10.2x forward 12mo earnings, 2.9x forward 12mo book value and FY13 ROAE of 32.7%.