Making chocolate can give Ghana a taste of success

Making chocolate can give Ghana a taste of success

Financial Times, 4 June 2021, AFRICA

By David Pilling

What would happen if Ghana, the second-biggest cocoa producer, refused to ship the raw material to Switzerland, one of the biggest manufacturers of chocolate? We may be about to find out.

During a state visit to Switzerland last year, Ghana’s president Nana Akufo-Addo visibly stunned his hosts by declaring that henceforth Ghana would cease raw cocoa exports to the country. “There can be no future prosperity for the Ghanaian people in the short, medium or long term if we continue to maintain economic structures that are dependent on the production and export of raw materials,” he said.

Akufo-Addo may have been exaggerating for effect. Ghana, second only to Ivory Coast in production, is responsible for about a fifth of global cocoa exports. These have not stopped overnight.

But the point he was making was spot on. Of the $130bn global chocolate industry, less than $2bn goes to Ghana. Many farmers live in penury. Some employ children or extend their farms by cutting down forest to make ends meet. Farmers get at most 7 per cent of the chocolate value chain. Those who make, sell and market chocolate grab more than 80 per cent.

Akufo-Addo has set his country the challenge of producing chocolate bars on a commercial scale. Is this realistic? The short answer is yes, though it is maddeningly difficult. The obstacles, from shoddy infrastructure to lack of manufacturing and market knowhow, are formidable. Yet unless Ghana can crack the problem, many Ghanaians will be condemned to poverty in perpetuity.

People have been making chocolate in Ghana for two decades. Several domestic companies make bars for Ghana’s growing domestic market, though much of this is not of high enough quality to be attractive to European consumers. Two Ghanaian sisters run ’57 Chocolate, one of several artisanal manufacturers producing high-end chocolate in small quantities.

Fairafric, a German-Ghanaian company, is trying to break the mould by producing export-quality chocolate in large quantities. It has built a $10m factory north of Accra, the capital, that will produce 50m bars a year, rising to 100m. That is still modest by the standards of automated European contract manufacturers, which can churn out 10 times that amount for global brands.

Hendrik Reimers, fairafric’s founder, says that by turning beans into bars domestically, five times more value stays in Ghana. The problem, he says, is not that cocoa beans are sold too cheaply. In Europe 200 years ago, most people were smallholder subsistence farmers. “I don’t think Germany would have developed any faster if there were better prices for potatoes,” he says. The remedy is not to raise the price of cocoa but to process it.

Ghana starts off at a disadvantage. It has no dairy industry, so milk powder must be imported. Its packaging does not compare for cost or sophistication with the west. Energy is more expensive and less reliable. Ghana is hot, which means you need more power to keep the chocolate from melting. It is further from global markets and so less attuned to consumer tastes and less close to big retailers such as supermarkets.

None of this is insurmountable, says Reimers. True, Ghana cannot yet compete on price with robotised western factories. But made-in-Ghana chocolate does well in a premium market. It can also tap a growing segment of western consumers, especially millennials, who respond to stories about supply chains that create decently paid jobs.

The discussion goes well beyond chocolate. In Asia, almost no economy of any size clambered out of poverty without manufacturing. As economists including Dani Rodrik and Ha-Joon Chang have argued, Asian economies from Japan and South Korea to Taiwan and China clawed their way on to the development escalator by training their workforce in factories.

Manufacturing often begins at a basic level and at a scale that invites mockery. One of South Korea’s first big industries was wig-making from human hair. Hyundai started out in the 1960s making a few cars a week from knockdown kits.

Most African economies, as Ghana’s president says, are locked in neocolonial trading relationships. They supply raw materials from bauxite and copper to coffee and cashew nuts. Few manage to capture much of the value. Thus dirt-poor Congolese miners dig cobalt for the billion-dollar battery industry and Nigeria exports crude oil only to reimport refined fuel and heating oil from Europe.

Breaking those patterns is incredibly hard. For countries aspiring to lift their people out of poverty, it is also essential.

While the country cannot yet compete on price with the west, Ghanaian bars do well in a premium market.



Valuation By The Numbers Outline

1) Research

…a) Latest 10K and 10Q, annual and quarterly reports, respectively

…b) Quarterly earnings release

…c) Broker reports

……i) Company and industry specific details

…d) News articles

…e) Company Website

……i) Investor relations

……ii) Presentations

……iii) Press releases

…f) Competitors

2) Spread Financial Statements: Income statements, Balance sheets, Cash flows

…a) Check for one-time adjustments

……i) Cash and non-cash items

……ii) Management’s discussion and analysis

……iii) Company quarterly earnings release

3) Valuation

…a) Comparable companies

…b) Weighted Average Cost of Capital (WACC)

……i) Beta (unlevered)

……ii) Cost of Equity (COE)

……iii) Cost of debt (COD)

…c) Base assumptions

……i) Revenues

……ii) EBITDA

……iii) Earnings

……iv) Tax Rate

……v) Working Capital

……vi) Capital Expenditures

……vii) Depreciation

……viii) Debt (cost of)

……ix) Net Operating Losses

……x) Share count

4) Investment Memo

…a) Company

…b) Recommendation

…c) General

…d) Strategic

…e) Financial

…f) Operational

…g) Valuation

…h) SWOT

…i) Risk & Mitigating factors

The goal is to communicate why or why not to invest in the company.

This should be viewed from the perspective of how the company creates value and why it will be worth more tomorrow. Bear in mind revenues are price times volumes (R = P x V).

Is the industry liked?

How will the company grow and improve operations and cash flows?

How does the company finance itself?

What catalysts exist to accelerate or unlock value?

Above is a basic outline for consideration.

Greater due diligence must be undertaken to make a reasonable investment consideration.

For definitions of any kind visit

We have valuation templates and can help with valuations. We can help better articulate above.

Think Different

It is always good to have variety in life. Years ago I studied the coffee industry for six weeks out of curiosity. It is worthy of learning, as it has been the second largest commodity next to oil.

Variety in reading and knowledge helps in discerning underlying value. Being a generalist is good. Having inclinations toward certain interests helps an investor invest.

Reading is an excellent way to absorb facts and information to optimize thinking through whether a company of any kind is worthy of an investment.

The following is an article of interest for coffee lovers and those who may simply enjoy science.

“How Does Caffeine Wake You Up?:”

Sasol is Great

Sasol is one of the most creative companies in the world with regard to international energy and chemical products and services. Which other company takes coal and converts it into petrol and diesel?

Sasol for a while had in the United Arab Emirates (U. A. E.) region a joint-venture with Chevron on a large energy project. In recent years Sasol started the development of a Louisiana, U. S. A.-based operation.

What can hold a candle to Sasol’s South African burning flame in Sasolburg, Secunda and other locations, such as Rosebank head offices? It is a crown jewel for the republic helping build and maintain the nation.

Sasol’s coal to energy production is cleverly engineered beyond compare. When the world relied on oil and gas, South Africa turned to its wealth in coal. Rich in coal, South Africa produces diesel, petrol and energy.

Diversifying beyond energy products, Sasol has a wide array of product lines. Specialty chemicals are a part of its make. The variety of products are listed on the company’s site:

Albeit South Africa’s domestic economy buys much of its products, Sasol does sell across borders. Sasol well manages and serves its home-base first and far beyond. Pricing is marked at international rates.

Sasol’s stock was beaten down due to problems with costs and cash constraints in Louisiana coupled with political unrest, pandemic circumstances and questionable management decisions made in South Africa.

The underlying intrinsic value of Sasol’s stock remained in parallel to its prior glory days. In recent days the stock price has gradually and then significantly rebounded in part due to global energy demand.

Sasol is a company worthy of following. Buying on a dip in the stock price and indefinitely holding the shares could be to anyone’s advantage. Keep eyes on Sasol. When the stock price drops, it may be a worthy buy.

Three Ways to Consider Worthiness of Investing in a Company Share

The following are three (3) different ways of considering whether an equity investment is worthy.

When combining all three ways, there could be greater worthiness of the prospective equity investment.

I. The Greenblatt Way
  • Third, does the company have a history of dividends over 5 years? If yes, it may be worthy.

II. The Graham Way
  • Third, ensure the current ratio > 2.

The above screening tactics look for margins of safety.

III. The Tweedy Browne Way

Reduced Alphas

The alphas of the stock exchanges are lesser in movement, and hedge fund managers are not being able to see as clearly on the horizon to apply their prior logical investment principles to earn capital gains and other cash flows. “Hedge funds are losing their ‘secret sauce’” by Laurence Fletcher. Published in Financial Times on 1 May 2021.

Saturday, 1 May 2021

Hedge funds are losing their ‘secret sauce’

By Laurence Fletcher

Hedge funds have posted their best start to a calendar year since before the financial crisis. But, behind the strong headline numbers, managers are struggling to cope with some confusing moves in markets.

Funds gained a tidy 6 per cent in the first quarter, according to data group HFR, helped by rising stock markets and a sharp rally in beaten-down so-called “value” areas of the equity and credit markets that some funds favour.

Some returns have been eye-popping. Senvest, helped by a well-timed position in GameStop, has gained 67 per cent.

Crispin Odey’s Odey European fund, one of the sector’s most volatile funds, is up 56 per cent, and Lee Ainslie’s Maverick Capital, which latched on to the value rally, is up more than 40 per cent.

But, those figures aside, most investors in hedge funds have not enjoyed such strong gains, and many managers’ returns have been far more mundane.

For instance, equity hedge funds gained 7.1 per cent in the first quarter, based on performance averaged by the number of funds. But that figure is skewed by strong gains from smaller funds. When performance is weighted by assets instead, then funds were up a more modest 2.8 per cent on average.

And for every chart-topping manager, there is a fund languishing deep in the red. HFR data shows the gap between the best and worst-performing funds is higher than at any point in the two years before the coronavirus crisis.

“Hedge fund performance in the first quarter has been like the [equity] market — the indices are very good but some underlying strategies, or sectors, have underperformed,” said Cedric Vuignier, head of liquid alternative managed funds and research at Syz Capital.

A major problem for many managers is that markets are not really functioning in the way they would normally expect them to. Trillions of dollars of central bank stimulus, as well as the surge in retail investor activity during the pandemic, have broken some of the tried and trusted relationships between news and price movements that managers have based their systems on.

Take London-based Sandbar Asset Management, which has lost 3.9 per cent in its $2.4bn Global Equity Market Neutral fund this year. It highlights the relationship between share prices and changes in earnings expectations.

Normally, and intuitively, an improvement in expectations about a company’s earnings should mean that its share price rises while greater pessimism should send the shares lower.

Instead, this correlation has dropped sharply in recent months “to levels not seen in the last decade”, Sandbar said in a presentation to investors. And in sectors such as aerospace it has turned negative, meaning that improving earnings expectations have actually pushed share prices lower.

Swedish hedge fund firm IPM has been another victim of a change in market relationships. Once regarded as one of Europe’s best computer-driven macro managers trading currencies, bonds and stocks, it has fallen foul of a change in the market correlations that it relies on. Its assets have slumped from $8bn to $1bn and the firm, owned by finance group Catella, is now shutting down, noting that the investing environment has been tough “for strategies focusing on economic fundamentals”.

What this all adds up to is a loss of what industry insiders call “alpha” — jargon for the industry’s “secret sauce”, or the highly prized extra value that managers supposedly add through their bets on stocks and other securities.

Alpha matters because it is the main justification hedge funds use for charging clients their high fees. Beating markets is hard and therefore alpha is scarce and valuable. If a hedge fund’s returns just come from the market’s gains, rather than from a manager’s skill, then why not just buy a cheap index tracker instead?

Sandbar, which admitted its own alpha has been “poor”, cites data from Morgan Stanley showing large negative alpha among its global equity long-short hedge fund clients this year. In other words, making these highly researched bets lost them money.

The data also shows that funds’ alpha in the first quarter was far below the average generated over the past decade and well below difficult years for hedge funds’ bets such as 2016 and 2018.

Hedge funds performed well in 2020’s chaos and are still on average in the black this year. But some managers will be worried. If they cannot convincingly show that their well-researched and carefully placed bets add any value, then clients will question why they need to be invested with them at all.