“The investment environment greatly influences outcomes. To wring high returns from a low-return environment requires the ability to swim against the tide and find the relatively few winners. This must be based on some combination of exceptional skill, high risk bearing and good luck.” —Howard Marks
"I do not feel that selling at very low prices is a remedy for having failed to sell at high ones…I would say that it is from time to the duty of the serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself."—John Maynard Keynes
“In many instances, value investing proves fundamentally uncomfortable, as the mostattractive opportunities frequently lurk in unattractive or even frightening places.” —David Swensen
Meeting the CEO of CRDB Fellow Braveheart Investors:
After a long absence, I visited Tanzania again and was amazed by the growth and (relative) prosperity in the country. The GDP grew ten fold in the last twenty years, and the per capita income tripled. Those kind of statistics are seldomly reported in the context of Africa. While there, I bought CRDB Bank, one of the two leading banks in Tanzania. This very profitable bank (ROE 26%) trades at a P/E ratio of 3 and sports a 10% dividend yield. Despite paying large dividends, CRDB was able to grow its book value per share from US $0.11 to $0.27 in the last decade. The market capitalization is today about what it was in 2014, despite the earnings having grown from US $57 million to $176 million. A compounder that many investors are lusting for at three times earnings. Growth stock? Value stock? What is it?
I sold Indonesian clothing retailer Matahari Department Stores. I bought the shares last year after visiting the company as a cheap turnaround story. Well, the story is not turning around, so I sold the shares at a loss. I like value but I hate value traps.
According to Investopedia.com: “What Is a Value Trap? A value trap is a stock that appears attractively priced because it has been trading at low valuation metrics for an extended period. A value trap persuades investors because the trade appears inexpensive relative to historical valuation multiples of the stock, industry peers, or the prevailing market multiple. A value trap can drop further after an investor buys into the company.”
Yes, I have purchased many value traps over the years. KenyaRe comes to mind: a cheap reinsurance company that I bought many years ago at three times earnings. Today, KenyaRe trades at 1.5 times earnings and a price to book ratio of 0.3. Add some currency depreciation and you will find the quintessential value trap in our portfolio.
I sold out a stake or stakes in the Exxon Mobile refining business in France. I bought the shares in June 2022 for 60 Euros. The investing premise was that they would pay large dividends. After waiting for a year and a half, only two euros per share in dividends materialized. As bad luck would have it, two months after I sold the shares a 15 Euro dividend was announced and the share price doubled to Euros 125. Great analysis, disastrous execution. Why did I sell? I thought it might be a value trap…
The Indonesian sporting goods retailer Map Aktif is still our biggest holding. The share prices have gone up five fold since buying the shares in 2020. Operationally, the company is doing very well, moving from strength to strength. Net revenue for the full year 2023 was Rp13.6 trillion, growing by 38% from Rp9.8 trillion in 2022. GPM improved to 49% from 48%. Operating profit rose to Rp2 trillion from Rp1.6 trillion, with a margin of 15%. EBITDA increased from Rp2.3 trillion to Rp3.0 trillion, while net profit grew to Rp1.4 trillion from Rp1.2 trillion in the previous year.
In January I met with EnVVeno (NVNO US), an Orange County, California based medical device company. Envveno is developing a valve for the veins. The human trials are promising and if the valve is approved it would dramatically improve the lives of millions of Americans with chronic venous insufficiency. Since the product is not approved by the FDA, there is no revenue yet. The cash on hand is sufficient to last until the end of 2025. By then, the company will either be worth a whole lot more, or nothing at all.
In Georgia we bought the leading bank, TBC Bank Group, with operations in Georgia and a small but growing business in Uzbekistan. I have visited and met with TBC Bank a few times over the years. I should have invested earlier, but did not. Though the stock is up dramatically from its lows, because of substantial growth in top and bottom line, the stock still trades at a very undemanding valuation (PE 5, 6% dividend yield).
The Paris listed subsidiary of TotalEnergies Gabon, announced another healthy dividend. Since buying shares in November 2021 for Euro 150, Euro 100 in dividends per share have been declared/paid. Nobody else seems to care, since the stock price barely moved. I love clipping coupons. Dividends don’t lie.
Our consumer goods companies in Ghana are all seeing the fortunes turn around for the better. This change is not reflected in the stock prices yet. If this current direction continues, it will be hard for investors to ignore these companies at the current valuations.
Guinness Ghana Breweries released its unaudited 2Q2023/24 financial results and recovered from a loss of GHS 10 million in 2Q2022/23 to a profit after tax of GHS 28 million. The significant improvement in bottom-line was hinged on substantial revenue growth and decline in finance charges despite the spike in input cost and rise in operational expense. GGBL’s earnings performance was driven by a 55% y/y growth in revenue.
• Guinness Ghana is trading at a EV/EBITDA ratio of 3.
• 80% of the shares are held by Diageo, PLC.
• For comparison: Diageo PLC: EV/EBITDA ratio of 16.
Unilever Ghana earnings significantly improved from a profit of GHS 15 million in FY2022 to GHS 179 million in FY2023, grounded on enhanced revenue, stringent cost controls, and investment in demand-generating and brand-building activities. The profit outturn was firmly secured on a 44% y/y surge in revenue to GHS 908 million, underpinned by upward price adjustments and increased sales implemented in FY2023. The stock trades at a PE ratio of 4. Should the business continue to improve, this valuation will be too cheap to ignore.
• Unilever Ghana is trading EV/EBITDA ratio of 3.
• 51% of shares by Unilever PLC.
• For comparison: Unilever PLC EV/EBITDA ratio of 12.
Fan Milk Plc released its unaudited FY2023 financial results, reporting impressive profit outturn. The large ice cream producer pumped out a net profit of GHS 27 million, a strong. improvement from a loss of GHS 42 million in the prior year.
• Fan Milk trading at EV/Sales 0.6
• 62% of shares held by Danone SA.
• Danone is trading at a EV/Sales ratio 1.8.
The companies below are listed in order of their position size in the portfolio on March 31, 2023, with 12 months trailing P/E ratio and dividend yield.
Company
Country
Industry
P/E ratio
Dividend yield
MAP Aktif
Indonesia
Specialty Retail
20
1%
Unilever Ghana
Ghana
Consumer staples
4
0%
Guinness Ghana
Ghana
Brewery
18
0 %
Total Gabon
Gabon
Oil
2
13%
Fan Milk
Ghana
Ice cream
n/a
0 %
Society Ivorienne de Banque
Ivory Coast
Bank
7
8%
Bank of Africa Senegal
Senegal
Bank
3
23%
Cosco Capital
Philippines
Retail
5
4%
Capital Appreciation
South Africa
Holding company
20
7%
Hartadinata Abadi
Indonesia
Retail (gold)
6
3%
Source: Bloomberg (all numbers are based on trailing reported numbers)
Year
Krohne Fund, net
IShares MSCI
Emerging Markets
Index (EEM US)
Krohne Fund,
annual return
2024-31-Mar
574
238
2.5%
2023-31-Dec
560
233
17%
2022-31-Dec
479
214
-23%
2021-31-Dec
622
279
43.73%
2020-31-Dec
429
291
3.65%
2019-31-Dec
413
249
-0.54%
2018-31-Dec
417
211
-19.93%
2017-31-Dec
521
248
22.63%
2016-31-Dec
428
181
19.7%
2015-31-Dec
358
163
-7.94%
2014-31-Dec
387
196
0.79%
2013-31-Dec
377
207
13.5%
2012-31-Dec
336
218
19.59%
2011-31-Dec
281
189
-20.3%
2010-31-Dec
360
237
47.9%
2009-31-Dec
239
204
10.64%
2008-31-Dec
205
117
-32.49%
2007-31-Dec
305
255
68.1%
2006-31-Dec
193
188
38.59%
2005-31-Dec
139
146
14.18%
2004-31-Dec
122
112
21.95%
2004-01-Mar
100
100
---
Krohne Fund, LP gained 2.5% net of fees in the first quarter of 2024. Since its inception 20 years ago, Krohne Fund had, net of fees, a compounded annual growth rate of 9.5%.
Sincerely,
Axel Krohne, CFA
The companies mentioned in this report are not a complete list of the portfolio and will change without notification.
Unfortunately, I do not believe that there is an index that would serve as a good benchmark for making a performance comparison. Comparison of Krohne Fund, L.P.’s performance with the MSCI Emerging Markets Index is merely provided as a convenient reference point. The MSCI Emerging Markets Index includes a large number of large companies and has less risk than Krohne Fund, L.P.’s investments. Many of the applicable risks are described in Krohne Fund, L.P.’s Offering Circular. Certain statements contained in this letter contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions about the future that are subject to risks and uncertainties. Certain of these risks and uncertainties are discussed in more detail in the private placement memorandum for Krohne Fund, L.P. In addition, these forward-looking statements are intended to speak only as of the time of this letter and no undertaking is made to update or revise them as more information becomes available.
Past performance is not a guarantee or indication of future returns.
