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London-based Silk Invest, which recently won the Africa investor Agribusiness Investment Initiative of the Year in Durban for its African Food Fund, underscores in its latest blog post exactly what it envisions to be the driving catalysts behind the private equity vehicle it launched earlier this year.
First, the food industry is a principal pillar underpinning African consumption, and it should only continue to grow both in size and scope as output grows to service increasing demand. “There will be 500 million new consumers in Africa in the next 15 years and…even today, already 50-60% of disposable household income in many African countries is spent on food,” the group notes. Moreover, as incomes and tastes rise, one can expect a convergence between Sub-Saharhan countries and the rest of the continent in terms of food sales channels and specifically the supermarket penetration rate (see graph, right). That in turn is likely to fuel the continuing acceleration of branded and packaged products. “Moving to packaged sugar, milk or flour is a big driver of growth. In most African countries, food is still pre-dominantly sold through non-branded items,” chief executive Zin Bekkali told Reuters in April.
Second, many African food companies cannot obtain financing in spite of high ROE which theoretically would indicate efficiency, creating a bevy of opportunities for investors. Per Silk, “the smaller, privately owned food companies are equally benefitting from strong demand dynamics but are faced with challenges of obtaining the capital needed to effect the capital expenditure required to grow in line with demand. The banks are not lending the capital needed to grow, probably because they are also mostly focused on capturing the growth of the consumer by targeting more retail customers, at the expense of not fully developing their corporate banking activities.”
Linked herein an interesting McKinsey video from the 2010 Fortune Global Forum in Cape Town, South Africa where McKinsey Publishing’s Rik Kirkland spoke with Absa’s Maria Ramos, Coca-Cola’s Bill Egbe, and McKinsey’s Norbert Dörr about the sustainability of African growth and its related, underpinning fundamentals. One primary founding factor supporting output remains the African consumer; 80 million households earn at least the equivalent of $5,000 annually, the point where discretionary spending commences—an increase of 60 percent in eight years and trending towards an eventual target of 125 million. Moreover, continued urbanization will see an increase from 40 to 50 percent of Africans living in big cities by 2030.
Ramos, for one, pointed out the poential depth of the continent’s untapped potenial:
“There are 20 companies in Africa with revenues of over $3 billion. For the size of our continent, we need many more companies with revenues of $3 billion or more. Additionally, there are millions more small- and medium-sized entrepreneurs. They, too, need access to finance. Now, if we are able to do that and to open up those markets, you unlock economic value and entrepreneurship. And Africa is a place of entrepreneurship.”
These points fit in nicely with some of those made by Manoj Kohli, head of Bharti Airtel Ltd’s international operations, in a recent intervuew. Looking forward, he said, the African population will double to two billion people whereas India will go up to 1.6 billion and China, up to 1.4 billion. Moreover, “[Africa] has consumer spending of $1.4 trillion, which is far higher than India’s; a middle class of half a billion. T he median age is 17-18 (which is much lower than the Indian median age of around 24-25); and 25% of global youth will be in Africa.
Boston Consulting Group’s recent piece on Africa’s economic expansion over the past decade highlights forty companies in particular that it calls its “African Challengers”, chosen following a vetting process that included minimum annual revenue, growth rates, cash flow, leverage ratios, exports and foreign-based employees, assets, acquisitions and partnerships. While admittedly “top-heavy” (the five largest firms represent over half of the list’s sales), smaller companies earned recognition based in part on their degree of international presence. Tunisia’s Groupe Elloumi, for instance, owns Coficab, mentioned in this space earlier in the week and the second largest supplier of automotive wires in the Euro-Mediterranean region (as well as one of the top five globally). Coficab has operations in Morocco, Portugal, Romania and Turkey, and a subsidiary is planning further expansion in Germany.
In a recent interview with The Wall Street Transcript, fund manager Larry Seruma, founder of New York City-based Nile Capital Management, LLC, extolled four reasons for investing in Africa:
“First, let’s talk about an objective that motivates almost all investors – potential returns. Over the last five years, African markets as a whole have returned about 12% annualized. This is comparable to the return of the broader index of emerging markets (MSCI Emerging Markets), which has been about 13% annualized over the same period. So Africa has performed about as well as emerging markets on the whole. But when you compare that performance with developed markets, it looks even more attractive.
Most major developed market indices have produced flat to negative total returns over the last five years. Over a 10-year horizon, the performance gap between Africa and developed markets is even greater. Second, African markets have produced low correlation with other emerging markets as well as developed markets. This means that adding Africa to a core portfolio has the potential to increase portfolio diversification. The third reason is Africa’s growth story. Increasingly, global GDP growth is being driven by emerging and frontier markets, and Africa’s GDP is projected to grow by 6% annually over the next few years. This matches the average annual increase in Africa’s GDP over the last decade. The fourth reason is a surge in money flows to emerging investment markets.”
McKinsey Quarterly has a slew of great articles under the header “Doing Business in Africa” that really deserve attention. I’ll try to mix in some of the main points in subsequent posts over the next week or so, but in the meantime, registration there is free so go ahead and peruse at will if you’re so inclined.
Some nuggets for now, gleaned from this week’s Economist:
- The natural-resource sector accounts for only about a third of the continent’s growth. Africa is producing a growing number of world-class companies outside the resource industry, from South African giants such as SABMiller, the world’s second-largest brewer, and Aspen Pharmacare, the largest generic-drugmaker in the southern hemisphere, to niche players such as Tunisia’s Coficab, one of the world’s most successful suppliers of wiring for cars.
- As to the poor, thanks to rising living standards, some 200m Africans will enter the market for consumer goods in the next five years. Moreover, the continent’s working-age population will double from 500m today to 1.1 billion in 2040. Consumer-goods companies ranging from Western giants such as Procter & Gamble to emerging-market car companies such as China’s Great Wall and India’s Tata Motors are pouring into Africa. Foreign firms are likely to start using Africa as a base for manufacturing as well, as Europe’s population shrinks and labour costs in India and China rise.
Interesting comment by S&P Fund Services lead analyst Alison Cratchley, made to Business Intelligence Middle-East, on the possibility of an impending correction across MENA markets:
“Relative to other emerging markets, the MENA region significantly underperformed (12.7% rise compared with 37.8%) in the six months to the end of June 2009. This probably reflects investors’ perception that the MENA region is highly leveraged to a U.S. recovery due to its dependence on oil revenues, whereas other emerging markets are supported by robust domestic demand.”
Several fund managers quoted, including Shakeel Sarwar, Head of Asset Management at the Manama (Bahrain)-based SICO, an investment bank, as well as Mashreq Bank’s Ibrahim Masood, concurred with this cautious sentiment, citing the region’s potentially unsustainable rally to date, low liquidity levels, as well as its perceived correlation with U.S. equity markets, which are considered equally overbought by many estimates. Last Friday, for example, the equity-only put/call ratio saw its most-stretched level since December 20, 2007, with more than twice as many call options being traded as put options–a possible sign of institutions’ collective desire to reduce risk.
In a speech given to mining investors while in Johannesburg earlier this year, Frontier Advisory CEO Dr. Martyn Davies reiterated the case for frontier, and specifically, Africa-centric investment:
“If you believe in the long-term urbanization success story of China and India, you buy Africa, because that’s where the commodities are going to come from,” Davies told the audience.
Endowed with 30% of the world’s minerals, the African continent is experiencing continued attention and capital from Chinese and Indian firms which, according to McKinsey’s sub-Saharan Africa principal Dr. Heinz Pley, will concurrently provide growth to those economies as well as those in Africa itself:
“The Chinese have a long way to go to reach the personal income levels that Europeans and Japanese had. There is a lot of room left for growth in China and there is India in the wings and actually also Africa, in the long-term, will create significant demand for commodities, and no longer merely produce commodities for the rest of the world,” Pley said.
While global mining projects had been hit just as hard as global banks, Pley remarked, the turnaround–predicated presumptively on domestic stimulus and a lending surge–has been even more dramatic. Yet some observers note that China’s commodity appetite has far exceeded the mere arbitraging of raw material spot and futures prices and instead gone into the risky realm of inflated, speculative inventory building. Back in June, Macro Man, a London-based manager, penned an interesting post on what he called “The China Syndrome” that infers whatever Chinese buyers are now giving to the commodity cycle, they will ultimately take away in terms of rate of change:
“While overall [Chinese] imports have barely started to recover in value terms, many commodity imports have absolutely skyrocketed in volume terms. And at the end of the day, the inputs to China’s industrial and investment complex are based on volume, not value,” he wrote.
For reference, China’s coal and iron ore imports by volume through 2008 are shown below:
According to its Assistant Chief Executive for Business Development and Government Relations Barrak al-Subeih, Zain’s possible decision to sell its African operations would be made in order to “look for expansion opportunities in other areas with higher growth rates, such as the Middle East or the Far East.” Hitherto, the Kuwait telecom firm has spent upwards of US$12 billion in Africa since 2005 (when it purchased Celtel International), including roughly $3b in Nigeria alone, the continent’s most populous nation, while continuing to expand and operate in 23 countries across the Middle East and Africa. Per Bloomberg, Zain has around 40.1 million subscribers in Africa, a figure that constitutes nearly 62% of its client base. Additionally, more than half of its $7.4 billion of annual sales in 2008 came from Africa.
The strategy of chasing higher growth rates is not without concern, however. A study published last year by Booz & Company, a global management consultancy, concluded that most markets in the GCC were quickly reaching “saturation levels”. Further growth, it noted, would thus have to adopt strategies that address both the scale and scope of their services. In terms of scope and growing revenues, operators must extend and diversify their business to include offerings that go beyond basic telecom services. “As for extending scale, operators must acquire and/or pursue strategic alliances, either with local or international players, to create a much sought-after critical mass,” remarked Ghassan Hasbani, a Booz VP. And as for scope, he continued, operators must extend and diversify their business to include offerings that go beyond basic telecom services.
Yet as of late, at least, Zain has shown a propensity for both. Two months ago it expanded its scale in West Bank and Gaza (a region with a paltry 35% penetration rate) through a 56% ownership stake in Paltel. And several weeks ago the company announced the implementation of ZAP–a new service allowing customers to make cross-border payments and transfers between Kenya, Tanzania and Uganda with no extra charge.
Interesting piece on the challenges facing Middle East telecoms in light of a recent study that forecasts average revenue per user (ARPU) in sub-Saharan Africa and South Asia–regions where future market share lies–to drop by half by 2013.
For Middle East mobile telecom firms such as Zain, Qtel, STC and Etisalat, most of their recent growth has come from emerging markets with high population and relatively low rates of penetration, such as sub-Saharan Africa and South Asia. But these operators are now challenged to boost profitability, as average revenue per user (ARPU) levels in such markets have been dramatically decreasing, because of increasing competition, price reductions, and a second wave of customers who are predominantly lower-income.
Much like uber-competition among German banks turned out to be a bad thing, one wonders if consolidation in the Arab telecom market will ultimately not only be inevitable, but also beneficial.
Some interesting quotes in Monday’s Financial Times (“The lure of Africa’s long term story”) from Dr. Ayo Salami (right), head of the Duet Victoire Africa Index fund–which tracks a market cap-weighted index measuring the composite performance of large companies listed on stock exchanges in sub-Saharan Africa excluding South Africa–as well as of the newly launched Africa Opportunities fund (formerly New Star’s Heart of Africa fund), a long-only vehicle that also focuses on the sub-Saharan region.
While Dr. Salami’s index was down 40% last year, for instance, few investors have jumped ship. Moreover, he is not having any trouble securing new capital, at least from the Scandinavian and Benelux countries, [where] “the risk appetite is much higher than among Anglo-Saxon investors,” and from high net-worth individuals (as opposed to institutions) who may especially value extra alpha. To this extent, “there are some investors who get the long-term nature of [Africa’s] story.” And, he notes, companies in the index grew their earnings per share by 32%.
Dr. Salami predicts continuing growth in consumer demand as the underpinning for the continent’s imminent rise. “Africa has not seen demand destruction like in the developed world. For this reason, I like companies like brewers, cement [and] food companies.” Finally, he mentions that Duet may seek to add a private equity fund in the near future.
JGW
Frontier Markets 
