Smaller Companies: Hot on the asset trail in Africa

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The Independent Online
Analysts were a little disappointed with the recently announced interim figures from component distributor Electrocomponents, and the shares have fallen from a peak of 428.5p to 410p. They should be snapped up. A prospective price earnings multiple in the low 20s is not unreasonable for such a high-quality growth company which is just beginning to exploit a massive opportunity to replicate its operations overseas. Those who prefer special situations with more risk, but greater short-term potential, might look at Trans Zambezi Industries (TZI) at 130p. They could well double their money in two years.

Luxembourg-quoted TZI has been put together to use funds from blue-chip City institutions such as Mercury Asset Management and the Rockefeller Foundation to acquire cheap assets in Africa. It aims to gain a London quotation shortly.

At a time when war is breaking out in Zaire and Rwanda, investing in Africa may appear absurdly risky. But TZI's investments are directed at the so-called Anglophone group of countries north of the Limpopo river, which marks the boundary with South Africa - for instance, Zimbabwe and Zambia. The timing looks good as African markets deregulate and embrace capitalism.

As well as cash, TZI has sophisticated management led by former bankers, Edwin Wulfsohn and Hilary Duckworth, both with extensive African experience. Advisers and brokers are Deutsche Morgan Grenfell with ING Barings and JP Jenkins also making a market in the shares. They are quoting them at $2 to sell, $2.25 to buy in 25,000 shares, implying a middle-market sterling equivalent price of 130p. Would-be buyers should aim not to pay more.

So far, the company has raised $63m in three tranches (the last and biggest fund raising was at $2.25), of which it retains $26m in cash. The rest has been invested to create three trading divisions - financial services, industrial and agricultural. The main business activities are discounting, paper and packaging and cattle raising, as well as insurance, forestry and crop-growing.

The attraction of Africa is that acquisitions can be made cheaply. Exit multiples on the businesses acquired by TZI range between 5.5 and just over one. Against a market capitalisation of $96m, the group is expected to report after-tax profits of around $10m for the year to end September 1996, rising to $17m for 1997, implying a prospective PE in middle single figures.

The group has just announced plans for share listings in January in London, Zimbabwe and Zambia. There is also likely to be a small share placing. The theory is that a wider public would happily buy the shares on a prospective PE of 10 or better, leaving scope for buyers at current prices to double their money. The shares are risky and illiquid, but look an interesting speculation.

For readers who like to build wealth more slowly but surely, Electrocomponents has compelling attractions as befits one of the highest quality growth shares quoted in London. The latest interim results showed sales and earnings per share up by 13.9 and 15.2 per cent respectively.

Adjusted for scrip issues, the shares have risen from 1.05p since 1975, a gain of 38,948 per cent which rises to a stupendous 74,000 per cent assuming reinvestment of dividends. This means pounds 1,000 invested in 1975 has compounded to around pounds 750,000.

Further progress is on the cards. The group is bucking the trend both by widening the product range in its catalogues and improving service levels.

Profits are being held back short term as cash is poured into building infrastructure across continental Europe and in centres such as Australasia, Singapore and Hong Kong. Because it is highly cash-generative, the group can easily finance this expansion, and the pounds 60m cost of a new UK warehouse at Nuneaton to double capacity, from its own resources. As a lockaway investment for a single-company PEP, Electrocomponents looks hard to beat.

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