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Arbitrage opportunities on dual-listed stocks

Sasha Planting looks at how investors can benefit.

CAPE TOWN – Astute investors have noticed that across stock exchanges in Africa, selected arbitrage opportunities exist on dual listed stocks.

Shoprite (JSE:SHP) is the most recent stock to be exploited, earning those who invested early on a tidy 100% return on funds invested. Francis Daniels, of Africa Opportunity Fund began acquiring Shoprite shares in Lusaka, Zambia in late 2009. At the – and into 2010 – time they were trading at a 56% discount to the SA share.

On Monday the share was trading at 60,000 Zambian Kwacha per share, equivalent to R83.24. In comparison, on the JSE (JSE:JSE) the same share was trading at R103.45, revealing that the discount has narrowed to 20%.

Discounts like this usually emerge when separate share registers exist for the same share on different exchanges. This prevents investors from moving their shares from one country to another. Separate share registers are usually put in place as part of an exchange control regime, says Daniels. “It’s to prevent forex leakage.” For instance, before Ashanti was acquired by Anglo it had listings in Ghana, Zimbabwe, London and New York. All the shares were on a common register except for those on the Zim stock exchange.

This is not the case with Shoprite – there is a common register for the shares which are listed in SA, Zambia and Namibia. While the Namibian and SA shares trade at the same price, the Zambian shares trade at a discount.

The explanation requires a little history. When Shoprite listed 2,7m shares on the Lusaka Stock Exchange in 2003 the offering was not fully taken up. “The share price was quite high by local, Zambian standards,” says Daniels. “This meant Shoprite accumulated a chunk of its own shares which it has slowly been releasing into the market.”

At the time of the listing Shoprite committed to maintain 1m shares on the Lusaka share register. As a result the registrar of shares in SA will not allow the transfer of shares from Lusaka to SA. “This gives the shares the characteristic of separate registers,” says Daniels.

This, and the lack of liquidity on the Zambian stock exchange means that Daniels might not easily sell the Shoprite shares the Africa Opportunity Fund has accumulated since 2009. The fund is now one of the largest shareholders in Zambia, but in terms of group wide holdings it remains small.

Daniels is not concerned. “What is there to dislike?  People get frightened by illiquidity, but the value is there. We are buying an excellent company in the early stages of African expansion, and instead of paying 18x earnings, the fund is paying 9x earnings. The company generates a return on equity of 40% and has little debt, it’s worth holding. Asset managers go through contortions to deliver annual returns over 20%, so Shoprite is doing the work for us.”

Until recently Daniels was often a lone buyer, but he is facing increasing competition. “In last two to three months there has been a definite increase in activity around this share. For the first time I am being beaten on some trades.”

There are other pan-African opportunities, he says. AngloGold Ashanti (JSE:ANG) is one. It is listed in Ghana, SA and New York.  The price in SA was 50% higher than that in Ghana. “It was a function of illiquidity,” says Daniels. In New York and SA the share trades at $42, in Ghana it trades at $22.

The way he identifies the arbitrage opportunity is to convert both shares into USD. Once in a common currency the price discrepancies, if they exist, become obvious.

At the moment he is watching the stock exchanges in West and East Africa. In the East companies are often listed on two or three exchanges – Kampala in Uganda, Nairobi in Kenya and Dar es Salaam in Tanzania. The companies to watch he says, are East African Breweries and Jubilee Insurance.

In West Africa, companies like Ecobank Transnational is listed in Cote d’ Ivoire, Ghana and Nigeria and is worth watching. Another is Tullow Oil, which listed in Ghana last week. Its primary listing is in London.

But, Daniels adds, “The discrepancies are narrowing. They stem from the imperfections that exist among African markets – lingering effects of exchange controls or inadequate demand for the shares or illiquidity.” What African markets often lack, he says, is market makers. “Local brokers don’t have the capital to perform the function. They are willing to facilitate trades but will not hold an inventory of securities like an Absa Securities or Nedbank (JSE:NED) will do here.”

This type of investing is often left to specialist fund managers, but retail investors can also participate. It requires that one sets up an account with a broker in the specific country. They will then perform trades on the investor’s behalf.


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