Business trip to Morocco: Investment analyst shares her notes

Casablanca, Morocco

By Sanaa Zarif, Africa Analyst at Old Mutual Equities

Casablanca is like a chameleon, forever changing and adapting to a new environment. Last week, when I arrived in this city that was my home for the first 30 years of my life, the traffic was a breeze as the suspended bridge connecting the highway to the city centre had just opened a few weeks ago. This opening of the bridge had initially been planned for end 2018 but was delayed several times. Nonetheless, traffic jams have now apparently become something of the past.

Breaking the fast

My trip was in the middle of Ramadan, a period during which the economy seems to come to a standstill. However, that is not the case for consumer companies, especially food and beverage manufacturers! Even though there is no eating or drinking from sunrise to sunset, these companies still thrive over this time of the year. I walked into a branch of the listed food retailer, Label Vie, near my mother’s house and there were hundreds of people in the aisles filling up their shopping trolleys with all sorts of goods, from freshly baked croissants and juice to fresh fish, milk and water. They were getting ready for the fast break.

Label Vie is one of our most important investments in the Moroccan market. The retailer has been delivering remarkable growth since it started rolling out a consistent number of new stores each year, and its operating margin is now showing the positive impact from economies of scale. The company’s earnings in FY2018 were up 20%, with 17 new stores opened. I expect this growth trend to continue as organised retail expands and gains share from traditional shopping in the kingdom. As a reminder, modern retail only represents 15% of the total and Label Vie as the second largest retailer in the country has 95 stores – compared to Shoprite that runs over 2,000 stores in South Africa alone.

A promising newcomer

While I was there, I met with Mr Adil Douiri – the founder of Mutandis, our newest investment in Morocco. My first job as a young engineer was in the public sector and I worked under the same Mr Adil Douiri when he was Minister of Tourism. Being an engineer himself, he is a very structured person and so our meetings always flow logically and one always leaves having understood exactly how the company is managed. Some of the local investors envision Mutandis as a new Unilever in the making. The company operates in four industries: the largest is detergents, followed by canned fish, the PET bottles, and most recently juice.

After listing in December 2018, the company reported a net income jump of 40% to the year ended December. Growth will be a little tougher to achieve in 2019 as the extra shares from the listing will lead to some dilution. Still, I have confidence that Mutandis will add positively to the portfolio. There are very few business managers that inspire me like Mr Adil Douiri does.

Building under pressure

The Casablanca Stock Exchange (BVC) has a number of listed home builders and when I first joined Old Mutual in 2014 these shares were stock exchange darlings. Morocco’s ruler, King Mohammed was pushing his idea of cities without slums and these companies were incentivised to roll out as many social houses as possible. It now seems that the housing industry is slowing down, especially in the social sector. Driving through the outskirts of the city, I saw fields of empty buildings. And the two big social housing developers listed on the BVC, Addoha and Dar Saada, have been reporting depressed results over the last few years. One of the possible reasons for this downturn is risk that the tax incentive that developers benefitted from could be scraped this year. The other obstacle is that the selling price of social houses is fixed at MAD250 000 (approx. $25 000), while the costs have risen, leading to a margin squeeze.

This slowdown in housing demand means that cement consumption has been on a downward trend for the last several years as well. This followed the euphoria period after the government and developers agreed on the tax incentive to absorb the deficit in affordable housing. Since the beginning of 2019 to end of April, there has been a little recovery, with consumption growing 6%, however this is not expected to last without the tax incentives for social housing. The bourse has two listed cement companies, LafargeHolcim and Ciments du Maroc (controlled by Germany’s Heidelberg cement). If there is any pick-up in demand, we expect Ciments du Maroc to outperform as its location is better positioned to serve the less developed south of the country.

In Morocco, during Ramadan life shifts towards the night. In the daytime, people go to work and leave earlier to be able to prepare food for the sunset feast. Thereafter, the most devote go to mosque for the evening prayer (which is longer during the holy month) while others meet friends and family for a coffee or tea in the numerous cafes around the city.

Alcohol is completely prohibited for the holy month, this includes three days before Ramadan starts and three days after Eid Al Fitr – which marks the end of the fast. During this time Brasseries, the country’s sole brewer, closes its factory for maintenance. For this reason we couldn’t meet the brewer’s management and had to rely on local analysts for an update. From their reports, import tariffs on beer are being gradually removed to reach 0% by end 2021. This reduced competitiveness is likely to put some pressure on margins. The strategy has held Brasseries for the last few years, a period when margins have been improving and consumption has recovered, however imports have been gaining share, so we will need to monitor this. It must however also be noted that this coincided with Ramadan moving away from the summer season, which had a positive impact on volumes in general and on SBM market share that only lost 2.5% market share, mostly on premium beer that represents 15% of the company’s revenues.

It is very seldom that the BVC screens attractively using our investment process – especially when compared to the other African alternatives on offer. It just seems that despite reasonable GDP growth of around 4 % each year, very few of the local listed companies have been able to deliver strong earnings growth. With that said, the PE ratio is the lowest it has been in the last two years and we are now monitoring it more closely.

This article was first published by Old Mutual Equities.