Live To Tell A Tale

August 3, 2021

Here's what we're watching:

The 3M Company

A multinational conglomerate corporation that operates in industrial, health care, and consumer goods segments.

It strives to improve many aspects of daily lives and has created many game-changing products. A huge chunk of its business is in safety and industrial products. This includes respiratory, hearing, and eye protection solutions known for their unparalleled safety.

On Tuesday, the company announced its second-quarter financials. To begin, sales were $8.9 billion for the quarter, up by 24.7% year-over-year. It also returned $1.4 billion to shareholders via dividends and gross share repurchases. 3M delivered a strong quarter this time around, with organic growth across all business groups and geographic areas. The company says it remains focused on investing in growth opportunities coming out of the pandemic.

Enbridge

Energy infrastructure giant Enbridge is a popular dividend stock that has consistently paid dividends for more than 66 years. Furthermore, Enbridge’s dividend has grown at a Compound Annual Growth Rate (CAGR) of 10% since 1995. In December 2020, Enbridge raised its dividend by 3%. Enbridge stock has a Strong Buy analyst rating consensus, and the average Enbridge price target of $44.70 indicates 13.6% upside potential to current levels. Furthermore, stock has an ‘Outperform’ Smart Score of 10. Notably, hedge funds increased their holdings by 81.9K shares in the last quarter.

Walt Disney Company

Disney is a cyclical stock that focuses on mass media and entertainment. The company is known for its film studio division, The Walt Disney Studios which includes household names like Pixar, Marvel Studios, and Lucasfilm. Notably, the company has invested significantly into its Disney+ streaming service and boasts over 100 million global subscribers. What is impressive is that when it had to shutter its resorts and theme parks last year, it capitalized on its streaming services.

In May, the company reported its second-quarter financials for fiscal 2021. Firstly, the company posted revenue of $15.61 billion. This was driven by continued success for its streaming services and also the expansion of its portfolio of multi-year sports rights deals for ESPN and ESPN+. Secondly, it posted a net income from continuing operations of $912 million, up by 95% year-over-year. Dilute earnings per share from continuing operations was $0.50.

Amazon.com Inc

Amazon is a multinational tech company that focuses on e-commerce, artificial intelligence, and digital streaming. It is one of the most valuable companies in the world, offering one of the world’s largest online marketplace and live-streaming platforms. The company distributes a variety of content through its Amazon Prime Video, Amazon Music, Audible, and Twitch subsidiaries. The company also has its own film and television studio Amazon Studios and also a cloud computing subsidiary, Amazon Web Services.

On Thursday, the company announced its second-quarter financials. Firstly, net sales for the quarter increased by 27% year-over-year to $113.1 billion. Secondly, the company posted a net income of $7.8 billion for the quarter or earnings per diluted share of $15.12. Amazon says that its AWS has helped so many businesses and governments maintain business continuity and that AWS continues to enjoy substantial growth as more companies move to the cloud. The company also says that its Prime members in 20 countries shopped more this Prime Day than any previous Prime Day, purchasing more than 250 million items.

We are committed to long term contrarian investing and building portfolios focused on performance and limitation of losses and investing in assets that are diversified across signals and regions within managed risk controlled models.

Nixon Kitimoi,

Chief Investment Officer.

September 16, 2020

Stocks to put on your watchlist—1Stock

Intuitive Surgical Inc (ISRG)

The company’s robotic surgical system, The da Vinci Surgical System, is designed to facilitate surgery using a minimally invasive approach, controlled from a console.

The market for surgical robots specifically is expected to grow from $6.7 billion in 2020 to $11.8 billion by 2025. That’s a CAGR of 12.1% that could directly benefit Intuitive Surgical since it has already established competitive and technological dominance in the market.

For the six months ended 30 June 2020, revenues decreased 6%. Net income decreased 39%. Revenues reflect instruments and accessories segment decrease of 8%. Net income also reflects Research and Development balancing increase of 9%, selling, general and administrative increase of 4%.

The impact of Covid-19 has seen the stock post an average EPS decline of 11% over the past three quarters. But earnings have grown by an average of 15% over the past three years. Profit and sales fell, as the coronavirus pandemic kept people away from elective procedures. There was a 19% year-over-year decrease in the amount of worldwide da Vinci procedures in Q2, which was a leading driver of a 22% year-over-year revenue decrease in Q2.

However, we believe that this stock is worth looking at in your portfolio especially with COVID-19 cases well off their peaks with patients starting to resume doctor visits and elective procedures.

Intevac, Inc (IVAC)

Intevac, Inc. provides vacuum deposition equipment for various thin-film applications, and digital night-vision technologies and products to the defense industry in the United States, Asia, Europe, and internationally. The company operates through two segments, Thin-Film Equipment and Photonics. The Thin-Film Equipment segment designs and develops thin-film processing systems that are applied in hard disk drive media, display cover panel, and solar photovoltaic markets. The Photonics segment develops high-sensitivity digital sensors, cameras, and system that are applied in defense industry. It also provides integrated digital night-vision imaging systems. The company sells its products through direct sales force and distributors.

Intevac is a major world supplier of magnetic media, with a 60% market share in the industry’s production systems. The company is the sole supplier of digital imaging systems for the US military’s night vision equipment.

Intevac saw revenue and earnings dip sharply in the first quarter, during the coronavirus crisis and associated economic downturn, but have quickly turned positive in the second quarter. Revenues gained 53% sequentially to reach $28.8 million, for a 29% year-over-year gain, while EPS moved from a 5-cent loss to a 6-cent gain. The EPS number beat the forecasts by 135%.

Taiwan Semiconductor Manufacturing Company Limited (TSM)

Taiwan Semiconductor Manufacturing Company Limited manufactures and sells integrated circuits and semiconductors. It also offers customer service, account management, and engineering services. The company serves customers in computer, communications, consumer, and industrial and standard segments in North America, Europe, Japan, China, and South Korea.

TSM mass produces chips at a scale of 5 nanometers, and is now developing chips at a scale of 3 nanometers. In comparison, rival Intel (INTC) is making chips at 10 nanometers. Smaller circuits result in faster, more power-efficient processors.
TSM plans to start producing 3-nanometer chips in low volumes next year, with sizable production set for the second half of 2022.

September 2, 2020

AFRICAN HEDGE FUND INDUSTRY INSIGHTS

Volatility and uncertainty in Africa creates investment opportunities for hedge funds. However, investors are incredulous in these opportunities because of the lack of capital market development and lack of liquidity.

Investors should look to lock in capital for a longer term than what’s perceived conventional, say, three to five year lock up periods which will help alleviate illiquidity and redemptions.

I would recommend activist investing where investors use influence gotten in various companies in order to effect significant changes in the companies. The cost of capital in Africa is high and limited when compared to other parts of the world so it makes sense to invest in companies that can generate free cash flow after capital expenditure.

WHICH INDUSTRIES OFFER INVESTMENT OPPORTUNITIES FOR HEDGE FUNDS IN AFRICA?

Financial Services

Since the reformation of financial sectors throughout Africa in the 1990s, there has been a focus on economic development in Sub-Saharan Africa through the expansion of financial services. More recently, the introduction of digital financial services has spurred further growth in the industry; traditional retail banks have adapted to provide more robust services, while innovations like mobile money have emerged.

Additionally, global insurers, such as Allianz, have begun expanding in haste into markets in Sub-Saharan Africa due to the potential seen in the growing consumer class, the high percentage of youths, and the increase in infrastructure projects by both national and foreign parties — Geopoll Survey Report 2019

Oil and Gas

Africa’s oil & gas industry holds the potential for further growth, mainly driven by an increase in investor appetite and a rebound in prices.

New oil & gas finds off the coast of Africa have led to an increase in investment in infrastructure, technological advances, updates in regulation and improved governance, as well as the development of new skills — PwC’s annual Africa oil & gas review 2019

Agriculture

Nearly a quarter of Sub-Saharan Africa’s GDP comes from agriculture and yet the full potential of the industry remains unexploited.

Sub-Saharan Africa needs about eight times more fertilizer, about six times more improved seed, at least $8 billion of investment in basic storage (not including cold-chain investments for horticulture or animal products), and as much as $65 billion in irrigation. Investment will also be needed in infrastructure.

Sub-Saharan Africa has a competitive advantage in cash crops such as cashews, coffee, processed horticulture, and tea in East Africa and cocoa in West Africa. For some of these crops, such as cocoa, Africa has the lowest cost of production in the world.

Metals and Mining

The mineral industry of Africa is the largest mineral industries in the world.

Mineral exploration and production constitutes significant parts of several African economies and remains a key aspect to economic growth.

African mineral reserves rank first or second for bauxite, cobalt, diamonds, phosphate rocks, platinum-group metals (PGM), vermiculite and zirconium. Many other minerals are present in quantity.

Real Estate, Hospitality and Land

Africa’s Real Estate industry has evolved and become more liquid. Development is inconsistent across Africa but there’s a growing proclivity for developers and lenders.

Rapid urbanisation, a wealthier population and a rapidly growing middle class, re-location of businesses, and travel to Africa for business and tourism are driving demand for new and modern offices, hotels and retail malls.

Real estate financing across Sub-Saharan Africa is typically dollar denominated. An ability to denominate facilities in dollars, and to repatriate loaned amounts, offers and advantage to many international hedge funds and lenders.

A few of the most prominent companies and funds are; Centum Real Estate, Growthpoint Investec African Properties Investment Fund and Grit Real Estate Income Group.

HEDGING

Hedging is generally impractical in African markets but I’d recommend hedging using African currencies using Extreme Value Theory (EVT).

EVT will help deal with behaviour of "Extreme Events" found in the tails of probability distributions. Extreme Events in the case of investment opportunities in Africa are political risks. EVT is useful in assessing the relative extent of political risk and can be used to model tail-related risk measures such as Value-at-Risk.

Hedging using Exchange Traded Funds (ETFs) offers a cost-effective alternative and investment diversification across different sectors and asset classes.

A few of the noteworthy ones are:

•The Market Vectors Africa Index ETF (AFK), which tracks some of the largest and most liquid stocks in Africa. It holds about 114 stocks and has a country allocation of Egypt (21.4%), South Africa (20.7%), Nigeria (15%), United Kingdom (12.6%) and Morocco (6.6%).

•The SPDR S&P Middle East & Africa ETF (GAF) is allocated 78.39% to South Africa, followed by the United Arab Emirates (8.23%), Qatar (7.72%), Egypt (3.97%) and Morocco (1.61%).

•The iShares MSCI South Africa Index (EZA) is allocated 99.5% to mid-sized and large companies in South Africa in the financial, consumer discretionary and telecommunication services sectors.

•The Market Vectors Egypt Index ETF (EGPT) gives access to Egypt, the third-largest economy in Africa, with an allocation of around 85%. The remainder is spread to geographically diversify across Luxembourg, Canada, and Ireland.

•The Global X Nigeria Index ETF (NGE) concentrates on Nigeria with financials, consumer staples, energy, materials, and industrials as the top sectors.

•The Cloud Atlas Big50 ex-SA ETF (AMIB50:SJ) is an ETF domiciled in South Africa. The exchange-traded fund invests in 50 representative companies across the African continent, excluding South Africa, through 15 African stock exchanges.

COVID-19

The slump in tourism, oil prices and a reduction in demand of agricultural exports have led to a decline of economic growth throughout the continent.

According to the World Bank biannual Africa’s Pulse report, as a result of the pandemic, economic growth in Sub-Saharan Africa will decline from 2.4% in 2019 to between -2.1% and -5.1% in 2020, depending on the success of measures taken to mitigate the pandemic’s effects.

Growth in Sub-Saharan Africa is expected to gradually recover if the pandemic slows down in the second half of 2020 with the IMF forecasting a return to 3.4% growth next year (it previously projected 4% growth). One of the reasons for Africa’s “shallower” growth than the global 2021 forecast of 5.4% is that Sub-Saharan Africa countries have fewer and smaller policy options than more advanced economies. This is why the region’s largest economies Angola, Nigeria and South Africa will not see real GDP growth return to pre-crisis levels till 2023 or 2024.

I strongly believe that the pandemic has provided remarkable investment opportunities for the hedge fund industry in Africa.

This pandemic offers an opportunity for African economies to appreciate the African Continental Free Trade Area and existing treaties such as the African Growth and Opportunity Act.

Additionally, it is climacteric for African economies to further diversify and to embrace the digital technologies.

Nixon Kitimoi,

Chief Investment Officer.