Finding value is the new global investor’s gold rush as equity hunters become more concerned about underlying corporate earnings than just riding price bubbles. Global equity markets were high on energy juice in 2023 as the US Dow Jones rose 13.7% and the tech-heavy Nasdaq climbed 43.4%. In Europe, the German DAX glided up by 20.3%, and the French CAC rose 16.5%, but the British FT100 bellwether Index rose by a modest 3.8%.
The Japanese Nikkei Index increased by 28.2% in Asia as the Indian BSE Sensex grew by 18.7%. The Singapore Straits Times Index fell 0.3%, while the Chinese Shanghai Composite Index dropped 3.7%.
The NGX All Shares Index (ASI) increased by 45.9% in Nigeria as domestic investors protected asset values against a sustained rise in inflation, which topped off at 28.9% in November 2023. The global equities market may continue its rise in 2024 as US yields fall steadily. However, unlike other markets that will see equities rise as US bond yields fall, the Nigerian market rise will respond to narrow portfolio diversification opportunities in the local financial market despite an expected rise in short-term interest rates.
With over 60% of local trading on the Nigerian bourse from domestic portfolio investors, investors will want to take a flight to value as interest rates rise and bond prices fall. Enter the era of value-seeking, high-net-worth investors; enter the age of Femi Otedola.
Otedola is a man of many parts, viewed differently by various people. In the main, he is seen as a sharp businessman with useful contacts and a daring capitalist who makes bold decisions, but he is also seen as one of the smartest value investors on the bloc (see illustration 1 below).
In recent years, Otedola has moulded himself into an African version of the American corporate raider Carl Icahn. Like Icahn in the 1980s and early 1990s, Otedola, over the last half-decade, has pushed Nigerian companies to reveal their hidden corporate values and improve shareholders’ return on equity. In October 2021, the raider king (as some now call him) took an interest in Nigeria’s oldest commercial banking group, FBNH, and bought slightly over 5% of the entity, making him the largest publicly known individual shareholder of the lending institution off the back of a massive struggle by entrenched core investor interest to shut him out.
Apart from owning a large slice of FBNH, Otedola is believed to have nominated some Holdco’s board members. His goal, as articulated in our October 25, 2021 piece titled, The Phoenix: Matters Arising as Otedola Acquires 5% Interest in FBNH, was to nudge the institution towards improved internal cost processes, better risk management, sound corporate governance, and improved shareholder value. He was of the view that the institution could do operationally better, and he was right. Nevertheless, those close to the Geregu Power company chairman are no strangers to his skill at business stratagem.
The investment in FBNH, from our read, will not be satisfying to him if he is unable to push upward the Holdco’s investor value proposition, given the trajectory it is on, having seen its market value rise from N12.10 in October 2021 to N24.01 as of January 30, 2024 (see chart 1 below).
Chart 1:
The rise in share price is equivalent to a 92.24% increase in market value. Since Otedola’s involvement in FBNH, many investors have taken a long position in the company’s stock, and the lender has moved up from a tier 2 bank in Proshare’s Bank Strength Index (PBSI) for 2021 to a tier 1 bank in the 2022 evaluation of the commercial money lender. Critical factors in the improvement were the reduction in the Holdco’s cost-to-income ratio (CIR), a fall in its non-performing loans ratio (NPLR), and a rise in its net income margin (NIM), a credit to the Sola Adeduntan-led management.
Otedola Beyond Banking
Otedola has taken more than an interest in banking and financial services; he has taken a keen look at the power sector beyond his own company, Geregu, to dip his fingers into the businesses of potential rivals like Transcorp. In a raid that surprised everybody in 2023, Otedola aggressively raised equity interest in the Transcorp group, which owns the Ughelli and Afam power plants and the flagship Transcorp Hotel. The raid was swift, clandestine, and successful. Details of the narrative of the acquisition were fashioned out in a hush-hush meeting in London between Otedola and the chairman of an Ikoyi Lagos-based investment finance group who had initially offered the bloc of shares to Mr. Tony Elemelu, the Transcorp group chairman who declined the offer. A mistake he is unlikely to repeat. On seeing the opportunities to broaden his power sector interests and place a finger on the pulse of a corporate competitor, Otedola jumped at the offer. The consequence has been a noticeable rise in Transcorp’s market value.
Added to the fact that this was an opportunity for a comeuppance on Elumelu, who had replaced Otedola as the chairman of Transcorp, the deal was all shades of great for one of Nigeria’s wiliest business buccaneers. In a report (Femi Otedola’s Maverick Moves: Probing the Mind of a Business Strategist – Matters Arising), Proshare narrated how Elumelu and Otedola came to a share ownership truce, with Elumelu buying back the shares from Otedola at a price both parties preferred to keep out of the public purview. Again, the Otedola foray saw another NGX-listed company’s share price rise by 752.10% from N1.69 when the Otedola acquisition took place to a more recent price of N14.4 as of Tuesday, January 30, 2024 (see chart 2 below).
Chart 2:
Riding on the back of Otedola’s maverick move the Transcorp group is likely to benefit from two emerging trends: the first is a rise in medical tourism to Nigeria if the government takes advantage of top-rated medical personnel in the country and encourages investment in the sector. Medical tourism is expected to improve hotel occupancy rates. Analysts believe Transcorp hotels could be a significant beneficiary of medical tourism from Europe and Canada. The second trend is the new power law that allows states to generate and distribute power. Afam and Ughelli power plants should see significant growth in output with steadier gas feedstock.
Bonding with Dangote
The friendship between Aliko Dangote and Femi Otedola is well known. However, Otedola’s alleged statement about investment growth opportunities in the Dangote group goes beyond a friend hyping a friend. The Dangote group has shown profitability, resilience, and sustainability; even as the group has not been without headwinds.
The recent political difficulties in Ethiopia (ethnic conflict) and Niger Republic (military takeover) reflect geopolitical uncertainties in two countries where Dangote has investment interests. However, analysts have noted that no obvious operational difficulties have occurred, and the cement maker is expected to carry on its business as usual.
Since Otedola’s favourable statements concerning his purchase of Dangote Cement shares (the said purchases are not reflected in traded market volumes), the group’s share price has rocketed (see chart 3 below).
Chart 3:
Given that Aliko Dangote overwhelmingly owns the largest chunk of outstanding shares in the cement company and remains the biggest shareholder in Dangote Industries Limited (DIL), the Dangote group’s holding company, an Otedola equity purchase flurry can only influence share market price and not board positions or operational performance.
Illustration 2:
Closing Thoughts
The Femi Otedola phenomenon has several benefits but equally a fair share of pain. Otedola’s involvement in high-value share purchases has had its most beneficial impact on a sleepy and politics-riddled institution like the erstwhile FBNH.
However, the value addition with respect to the corporate fundamentals of other institutions is less clear. While return on equity values have gone up for the three institutions Otedola has intervened in, whether the rise in equity prices aligns with underlying free corporate cash flows discounted at an inflation-adjusted rate remains mute. In other words, do recent price increases of companies reflect their earnings fundamentals?
To answer the question may require a fireside conversation with the man at the centre of recent corporate equity raids, and we look forward to that; but what is clear so far is that where Otedola goes, the clanging sound of bank vaults being opened follows.
Femi Otedola’s power company, Geregu has, as usual, led the way in corporate results announcements, and the 2023 FYE results analyses gives an insight into whether Otedola is just as good a business owner as a strategic value-pursuing investor (see chart 4 and 5 below).
