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| Thursday, 15 May 2008 |
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Home  Dar Guide Investing in Dar Series Cement or Beer |
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Cement or…Beer?
This month’s title poses a question we will try to answer as we
complete our series on ‘Fundamentals of Investing in the Dar es Salaam
Stock Exchange (DSE)’. In answering the question, we look beyond the
company’s financial statements and into the company’s external
marketplace - its competitors, customers, and products – all key
ingredients in determining its opportunities for growth.
One rule of thumb many investors use to decide whether or not a company
represents a good growth opportunity, and therefore a good opportunity
for investment, is whether or not they use the company’s products
themselves (on the theory that something you like will probably be
liked by others as well). By this standard, I might be led to consider
Tanzania Breweries (TBL). But using a product isn’t quite the same as
determining whether there is the potential for market growth. To answer that question, we need to ask if the conditions are right for more people to consume more beer.
As a luxury item, beer drinking requires that ‘expendable income’ be on
the rise. The most recent UN study finds that while poverty in Tanzania
continues to grow, that growth is primarily among the rural poor. The
urban population (read: beer drinkers), continues to do well. Given the
number of articles in the local papers dealing with the rate of pub
attendance among middle class Tanzanian men, it might be a fair bet
that - as this class continues to expand - TBL should also do quite
well.
But changes in tastes and technologies can make large differences as
well. Let’s take Tanga Cement (SIMBA) for example. Judging by the
number of big building going up around the capital, one might guess
that cement use is on the rise. In fact, sales at Tanzanian’s three
major cement companies (Tanga, Mbaya, and Portland) have all indeed
been on the rise. And with a 25% increase expected in World Bank donor
funds, and that increase largely earmarked for ‘infrastructure’, we
might anticipate that cement sales will experience continued growth.
Add to that the recent articles in the press saying that cement roads –
which are more expensive to construct, but which offer substantial
savings over time – are increasingly being seen as a good idea, and the
cement industry may be ready to explode. How much do you want to bet?
But growth potential (the key ingredient in the stock you want to pick)
can be constrained by outside factors as well. For example, another
publicly traded company, Dar es Salaam Airport Handling Company
(DAHACO) might at first appear to have limited their market by their
name alone. Fortunately, they did not constrain themselves to the
airport in Dar as their name suggests (their business has grown to
include Arusha and Zanzibar as well), but one might be tempted to ask
where they expect to find growth after that? A partial answer may be
found in an announcement the company made last week. They are seeking
shareholder agreement to change their name from DAHACO to Swissport,
which has the obvious advantage of neither limiting them to Dar or
even, for that matter, to handling only airports.
And finally, there is the all-important issue of product placement and
marketing. Some years ago, a very creative marketing strategy had US
consumers jostling one another to get the last boxes of the ‘must have’
item of the day – Pet Rocks. I kid you not, these were just plain old
ordinary rocks in boxes which included instructions on how to care for
them as ‘pets’. More proof of the concept that anything can be sold if
you just sell it well come in the form of bottled water (which, in much
of the world comes out of the tap essentially for free). So, who knows,
Tanzanian Oxygen (TOL) may have an amazing idea, backed by a terrific
marketing campaign, but - I mean – I’m still having a little trouble
with the concept that they will convince people to buy…what? Tanzania’s
finest bottled…air?
So, in summary, as potential investors we need to objectively assess
the marketplace. We need to take into consideration the economy, public
tastes, changing technology, and corporate vision for expansion and
growth. And then, when we find something that we think is really ready
to explode, we need to buy it while the price is low. And with that, as
we come to the end of our ‘Investing’ tour, I bid you good luck and
offer you this final key - sell high!
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