J#36 – We are looking after our investors. We have invested in a bank with a net yield of 11%, purchased Egypt’s Eastern Company with a 11.2% net yield, and are transferring NMB Bonds with a 12.5% return to the Fund.

We achieved an important milestone on April 14, 2021: The Fund has started investing.

We have bought our first two positions for the Double Digit Dividends Fund.  Eastern Company (EC), which I discussed in depth in my previous journal. As you will see, with an average purchase price of EGP11.39 for EC, that provides a yield, net of withholding taxes, of 11.2%. Our second investment was in Credit Agricole Egypt (CIEB).  Both trades were executed by our broker,  EFG Hermes.  Copies of the trade confirmations are provided below.  

Credit Agricole Egypt (ticker: CIEB) is listed on the Egyptian Exchange.  As the name implies, the majority shareholder is a well-known large main street French bank.  We love this set-up.  It reminds me of Twiga Cement.  Credit Agricole owns 60.38% of Credit Agricole Egypt.  Global management expertise for this bank, if required, is therefore accessible.  Our dividend objectives are also strongly aligned – it is in Credit Agricole’s interest to repatriate as much of ‘their’ profits back to the parent company by declaring a rich annual dividend.

Shareholding Structure:

Credit Agricole Egypt Shareholding Structure
Source: https://www.ca-egypt.com/en/investor-relation/company-structure/shareholders-structure/?bank_segment=personal-banking

CIEB has consistently paid at least 45% of their earnings back to shareholders over the last 3 years (2018 to 2020) with the exception of this year, where the Egyptian Central Bank has directed in 2021 that no dividends were to be paid.  The Central Bank’s directive was due to the uncertainties of the Covid pandemic to the Egyptian economy and they thought it prudent to increase the banking system’s capital adequacy by prohibiting dividend outflows from banks.

The table below provides CIEB’s history of dividends per share (‘DPS’), Earnings Per Share (‘EPS’) and Payout Ratios.

Credit Agricole Egypt Dividend History v2
Source: CIEB’s website and FinBox

2020’s EPS fell to EGP4.41 from EGP7.59.  This decline was due to a weak Egyptian economy (Egypt’s tourism industry is one of the most important sectors in the economy, in terms of generating employment and foreign currency inflows).  Margin pressure, weak fee income, higher provisioning and a rise in tax rate (a new tax regime for banks introduced in 2019) have also contributed to 2020’s weak EPS.

Based on 2020’s earnings per share (‘EPS’) of EGP4.41, a 50% payout ratio and our purchase price of EGP22, that would provide us with a dividend yield 9.0% net of withholding taxes.  Would there be a catch-up special dividend to be paid in 2021 once the central bank reverses their directive?  Who knows, but we are NOT relying on this as the catalyst for us to invest today.

As the world gets greater clarity (i.e. less fear and panic) in managing the covid pandemic, we are banking on a trailing dividend yield of 11.0% net of withholding taxes to be paid in 2022 for this bank.  This yield is computed based on an EPS forecast of EGP5.37 by EFM Hermes’s analyst Elena Sanchez-Cabezudo whom we spoke at length to by a zoom call.  With the potential of a 10% catch up dividend, followed by another potential dividend in 2021 of 11%, we have decided to buy CIEB.  We shall monitor CIEB and incrementally build on this position – if CIEB can return to their 2019 earnings level, we are looking at a 14% yield net of withholding taxes.    

Closing the Circle on 2 important Lessons

The purchase by EFG Hermes of EC and CIEB “closes the circle” to 2 important lessons I spoke about in my J#7 journal at the start of our Double Digit Dividends journey in July 2020.  The lessons were:

  • Act decisively. 

“Once you have reached your decision, ACT! 

You don’t earn money unless you cross that starting line!  If I did not go to that shophouse auction and put my hand up when the price was called by the auctioneer, it would be just an academic experience. “

Our purchase of EC and CIEB demonstrates Double Digit Dividends is no longer just an academic exercise.  We have now acted by putting our money to work. 

  • Build the Infrastructure. 

“Our recommendations are world-wide. Ensure that you have one or more brokers, or online platforms that can invest in many markets. Have those accounts funded and communication lines established so that when you do have to place your order, there is one less hurdle.”

Our account with EFG Hermes is just the start.  I will have more to say about the “infrastructure” the Fund plans to build in the coming weeks. 

The Advantages of Using Our Fund Rather Than Investing By Yourself

As discussed in our prior journal, establishing a brokerage account with EFG Hermes is a time consuming, but important, exercise.  The Fund has taken out all the hard work for our investors.  Other advantages of letting us do the heavy-lifting are:

  • The Fund has access to EFG Hermes Middle Eastern and African research publications and analysts. We are also invited to Companies’ results presentations and are provided an opportunity to ask questions to management (mainly by Zoom). 

These exclusive services are provided as our Fund (under the ST Fund Management Limited umbrella) particularly via my business partner, Tim Staermose, has built an AUM of sufficient size through his African Lions Fund

I have met Eastern Company’s (EC) management (by Zoom), reviewed EFG Hermes’s written research, and spoken with EFG’s analysts to supplement our own due diligence for both EC and Credit Agricole, which again, yields 11% (net of WHT).

  • EFG Hermes provides reasonable brokerage/commission rates. As you can work out from the trade confirmations above, EFG charges 0.35% for the ‘buy’ side trade.  This is the “all-in” fee that includes stamp duties, the bourse’s levy etc. In comparison, should you have used a private bank in Singapore, for instance, charges are likely to be north of 1% (and that is IF they can even service Egypt as a market!).      
  • We check the fx rates our brokers use. The goal of our Fund is not to be fleeced by fx spreads.  Being personally invested in Double Digits Dividends Fund, any expenses the Fund incurs directly affect my own personal investment returns. So, I am incentivised to watch them like a hawk.

The standard operating practice before placing a trade and converting our Northern Trust Bank USD cash remitted to a broker is to ask and confirm with them their fx rates.  Reproduced below are my most recent emails with EFG Hermes together with a screen-shot from XE.com of the current mid-market rate.  EFG Hermes’ fx rate prices provided to the Fund, so far, are competitive.  USD/EGP of 15.6750 versus xe.com’s midpoint rate of 15.6813.

USD to EGP conversion
Source: www.XE.com

I am buying more NMB Bonds for the Fund

I wrote about NMB bonds (par 100, coupon 10% pa, maturity 22/7/2022) that are traded on the Dar es Salaam Stock Exchange.  They then offered an annualised yield-to-maturity of 12.5%.  NMB is a safe bank and details of my yield analysis can be read at J#33:  What’s in A Name When A bond Delivers You a SAFE 12.5% Yield?

Although it is an illiquid bond, Orbit Securities (our trusted local broker in Tanzania) has been quietly searching for sellers for me and I have personally accumulated TZS 118,550,000 (face value) of these bonds.  At a purchase price of 95 (face value is 100), this equates to nearly USD50,000.  I bought these bonds under my own name, as the Fund’s custodian account (NMB Bank) and brokerage account (Orbit Securities) are yet to be opened … it is a time and paper consuming exercise. 

Upon maturity, the annualized return of these bonds would be 12.9%.  The maths for the return is provided in the table below.

Bond prices should gravitate towards par value as you get closer to maturity value, after all the maturity price (par value of 100) is payable then and there are no more coupons to be priced into the current bond price.  In short, these bonds should be priced for more than 95.

We are currently in the process of transferring these bonds to the Double Digit Dividends Fund at my personal expense. The transfer shall be done at the COST price when I purchased the bonds (i.e. 95 per bond).  The transfer price is at a DISCOUNT to the bonds intrinsic value and therefore is for the benefit of all investors of the Double Digit Dividends Fund.  The transfer shall be under the independent purview and operations of the Fund’s Manager, Circle Partners and it should hopefully be completed by the next reporting quarter for the Fund (1 June 2021), assuming the fund gets its Tanzanian custody account up and running.  

In the meantime, I have left standing instructions with Orbit Securities to find whether we can buy more NMB bonds at 95 – way below its intrinsic value.  Let’s see what we can get!