Sefalana: Glass Half Full?

A rather hectic MBA schedule is once again putting a damper on my blogging.  Bear with me for a few more weeks.  In the meantime, my April contribution to Business Diary Botswana:

After a relatively nondescript start to 2010, Botswana’s domestic companies index (DCI) rose by nearly 5% in February, making it the month’s best performing market in the Sub Saharan region according to Silk Invest, a London-based, frontier market oriented asset manager.  Key standouts during the period included Sefalana Holding Company Limited (+19.40%) and FSG Limited (+14.29%), the former of which flourished notwithstanding what one commentator aptly described as a “challenging macroeconomic environment” that resulted in “lower spending and squeezed volumes and margins.”  Despite its status as a diversified holding company—Sefalana’s operations include the likes of Foods Botswana, which mills and produces sorghum, soya and maize based extruded products, malt and diastatic malt; Sefalana Cash & Carry Limited (Sefcash), a distributor of consumer goods and an 88% contributor to the firm’s total revenue in the second half of 2009; MF Holdings (Pty) Limited, which is engaged in heavy construction and farming equipment; and KSI Holdings (Pty) Limited, which produces toilet soaps, laundry soaps, cooking oils and dishwashing liquid soap—none of its subsidiaries, save for Sefalana Properties, proved resilient to consumption contraction.  For instance, Motswedi Securities, a local broker, lamented Sefcash’s 4% turnover decline (likely a result of the government’s 30% alcohol levy), as well as its sizeable reduction in cross border trade with both Zimbabwe and Zambia) as reasons behind lackluster reporting.  Yet amidst such gloom many analysts remain bullish on Sefalana as a proxy on both demand recovery and future economic growth, a prospect that some observers forecast returning sooner rather than later.  To this extent, February’s demand ramp up may have been the market’s collective, psychological embrace of risk in anticipation of a more V-shaped recovery. 

Adding credibility to the specter of imminent economic revival, the Bank of Botswana released a report in January touting the fact that the country’s overall business confidence had increased and that businesses were increasingly confident in both impending domestic and international economic conditions.  The release validated a Reuters poll taken last fall of nine economists who predicted that Botswana’s economy would grow by 5-6% in 2010 (after an approximate 11% contraction in 2009), and also provided the impetus to those industries, such as consumer goods and agriculture, most sensitive to an economic rebound.  For example, in its latest equity research piece, Imara, a regional investment bank and asset management firm, concluded that “Sefalana’s subsidiaries are expected to perform better in the second half of the year,” noting an increase in vehicle sales (through the firm’s Commercial Motors arm) to the public sector, as well as increased production capacity at Foods Botswana.  Perhaps most promising to future revenue forecasts, it noted, were Sefcash’s openings of two ‘Shoppers’ supermarkets in 2009—a fraction of the 19 total openings planned over the next three years—as well as its recently established distribution agency in Zambia.  Coupled with Sefalana’s modest use of leverage (debt to equity is slated to remain around 5.2%) and strong net cash position (latest figure was P46.16 million), Imara projected that the firm’s net income could be expected to continue its ascent (it doubled from 2008) and allow management to concurrently grow (19% anticipated revenue growth over the next two years) while also paying dividends (6.8% forecast for 2011), a rare recipe in any macro climate. 

Distilled to its essence, however, Sefalana’s core business revolves around Sefcash, a wholesale distributor in the fast moving consumer goods (FMCG) industry (and a relatively recent entrant into the retail market through its wholly-owned, Shoppers supermarkets) whose ship Stockbrokers Botswana commented last summer the company had finally righted following a rancorous legal spat in 2006 over management control with its former partner, Met Cash of South Africa.  Since then, observers note, Sefalana has overseen the brand’s complete overhaul, boosting profits while branching out to over two dozen outlets, as well as two hyper stores.  Yet to the extent that its fortunes are tied to the overall economy’s, Sefcash’s biggest asset in the near term may not be so much in its operations per se, but rather in its geographic diversity and by extension its ability to smooth earnings across varying consumer environments.  According to Dr. Keith Jefferis, Managing Director at Econsult Botswana and former deputy governor of the Bank of Botswana, “risks remain,” both internationally and domestically, that could cause demand recovery across a variety of goods and throughout much of the world to become derailed.  Pointing to Botswana specifically, he wrote in a Botswana Insurance Fund Management newsletter last December, “much of the [then] recovery in the demand for rough diamonds represents demand from re-stocking rather than buoyant retail demand, and may therefore be short-lived.”  Moreover the apparent rebound both in Botswana and across asset markets abroad in 2009 was more a response to debt-driven, government-orchestrated, artificial manipulation than to bona fide health.  “[But] at some point the growth rate of government spending will have to slow down, especially with revenues under pressure, reserves declining and debt mounting,” he noted.  Finally, of equal importance to the hitherto revival has been household spending.  “In contrast to consumers in other countries who are saving more and spending less in response to the global recession, Botswana consumers have been saving less and spending more,” Jefferis lamented.  “This cannot go on forever, and as savings decline and the debt burden mounts consumers will eventually have to cut back on their spending.”  To Sefcash and its consumption driven business-model, such a pronouncement should warrant pause.

Distribution agencies throughout Zimbabwe and Zambia would at least theoretically help assuage such concerns over future cash flows, though growth prospects in Zambia are admittedly as heavily tied to minerals (copper accounts for one-third of the country’s GDP and 80% of its foreign earnings) as are Botswana’s, while distribution of wealth measurements (two-thirds of the 12m plus population live below the poverty line) and overall quality of living standards seem hopelessly mired in comparison.  Zimbabwe, on the other hand, is still riding a crest of economic optimism on the back of finance minister Tendai Biti’s vision for 7% growth in 2010 and beyond based on predicted improved performance in agriculture, mining, manufacturing and tourism.  While many pundits point to the nation’s still unresolved political stalemate—The Economist referred in early March to a “power-sharing government plainly going nowhere”—Biti sings the praises of the economy’s untapped potential.  “Those who are sitting on the sidelines waiting for politics to completely resolve itself, waiting for what I call the landmine period to blow over, I think they will miss the boat.  I think South African capital is ready to move and to move very quickly.  We’ve got keen interest from business people in Botswana, in Mozambique and so forth,” he proclaimed last May.  Interestingly, however, Biti’s buoyancy isn’t shared by Prime Minister Morgan Tsvangirai, who allegedly “shares” control of the country’s governance with President Robert Mugabe.  In an interview with BusinessWeek from late January, Tsvangirai warned that Zimbabwe’s economy had shrunk by more than half in the past decade and probably wouldn’t “come out of the trough” in the next five years.  Weak political leadership, a lack of capacity to effectively use development funds and the failure to include affected communities in planning are key reasons why African economies are slow to develop, said Tsvangirai.  “It’s not the absence of money.  It’s the absence of absorptive capacity.”  To that extent, historically-shaky relations between the two countries leaves the solidity of future unfettered trade in limbo, especially when coupled with Zimbabwe’s yet-to-be finalized political landscape.  A recent kerfuffle surrounding the detention of three wildlife officials who inadvertently strayed into Zimbabwe while tracking a lion pride ended with exasperated Botswana officials recalling diplomats, while tensions between the two parties are said to still be strained following President Mugabe accusation several years ago that Botswana was training and harboring a secret militia aimed to overthrow him.  That said, with over $500 million of IMF aid to be allocated, Zimbabwe is on the mend, literally and figuratively, for the near term at least.  And Zambia, while still poverty-ridden, is better situated to improve its lot now than at any other time in its history, argue many economists.  If intra-continental trade, rather than the one-time gain that stems from simply exporting resources abroad, is Africa’s optimal outcome, then Sefcash’s realization of a Botswana-Zambia-Zimbabwe triangle of revenue could be a microcosm of grander things to come.