Africa

Rich rewards will come to those who invest early

NICOLAS CLAVEL, CIO, SCIPION CAPITAL

We are in a period of major re-assessment of the values by which we live. The value of the US dollar is plummeting, inflation is rearing its ugly head in developed markets and more and more investors are seeking protection from those events by investing in what they feel will keep its value such as commodities. The result is that gold is trading at an all time high over US$1,000 per ounce, oil is above US$100barrel and prices of agriculture commodities, from wheat to sugar and coffee are soaring. Whether this is due to investors’ sentiment, or a major shift due to higher purchasing power in the major emerging markets such as China and India can be debated, but this is going to have a major positive effect on African economies which are large producers of both mineral and agricultural commodities for years to come.

Rich in resources

Africa produces more oil every day than Saudi Arabia, Qatar and Oman put together. It produces nearly twelve times more gold than Brazil and 150 more times than India. Nearly 80% of platinum reserves are in Southern Africa and two-thirds of diamond production comes from Africa. Kenya is the largest exporter of tea in the world (not the largest producer but the largest exporter). Large quantities of coffee, tea, rubber, coco, tobacco, sugar, pepper, vanilla, flowers, fruits and vegetables that we consume in Europe originate from Africa. On the mineral front, gold, platinum, copper, cobalt, uranium, coal and iron ore resources are vast. Equally vast are the resources of minerals, oil and gas that remain un-tapped, essentially as a result of previous instability in many African countries. Gradually, democracy is making in-roads in Africa and more stability and high commodity prices have encouraged investors to look at opportunities that they would have dismissed ten or even five years ago.

The easiest way to invest in mineral resources in Africa remains via companies quoted on stock markets outside the countries in which those companies are physically located, usually the stock markets ofCanada, UK, Australia, France or South Africa, but opportunities do exist via private equity investments in specific projects which by nature are more risky and volatile, but can bring much larger rewards.

On the agricultural side, investing in quoted companies is less obvious. Companies in that sector with good liquidity on the stock exchange are few and far between. A few names which are worth mentioning are Illovo Sugar in Malawi, Dangote Sugar in Nigeria, SAPH (Palm Oil) on the Ivory Coast and a couple of tea related stocks in Kenya. Direct involvement in an agricultural or agri-business related project in Africa requires specific skills to avoid the pitfalls that can occur as well as the sensitive issue of land ownership in Africa.

Before we look into ways of reaping the rewards, it is worth remembering that the GDP per capita of Africa outside of South Africa remains 15% above that of India as a whole (and that’s whilst still including the richest 40 families in India who, between them, control more than a third of India’s GDP).The increased prices of all commodities do trickle through to the population. As a result, there are an increasing number of families with discretionary income.

Where does the money go?

Whilst the initial money earned goes into food, the next available amount of money is often spent in the formal sector. A country like the Democratic Republic of Congo, which ranks amongst the poorest in the GDP league table in spite of being one of the richest in mineral wealth, is adding some 550,000 new mobile telecom subscribers every month out of a population of 80 million people! The story is the same across the continent. Fixed line infrastructure is the luxury of the business districts of the main commercial centres, and everyone else relies on mobile telecom systems. The market penetration of those still has some way to go in terms of growth, and whilst many markets have more than one operator, it is not going to be a mature and saturated market any time soon.

Going out on a Friday night in an African city in popular districts is an experience to be had at least once! The night is alive with loud music and plenty of beer. Increased purchasing power may not affect the decibel level, but clearly affects the consumption numbers, and there are a number of breweries, usually with a strong parent company, quoted on most African exchanges.

Likewise, many people in Africa still build their own house and use spare cash to improve it, to such an extent over the last two to three years many cement producers, such as Lafarge, have decided that after decades of keeping production levels stable, it was time to add capacity. Lafarge, which can be bought locally via for eg. Lafarge Maroc, West African Portland Cement, Nigeria, Bamburi Cement, Kenya, Chilanga Cement, Zambia, is adding three cement plants to its portfolio of African investments. A cement plant costs roughly US$100 million, so building three of them is not a decision one takes lightly without proper market research. All these companies are of course prime clients of banks. Therefore the cash that they generate (and all three are cash businesses, so little debtor risk) finds its way into the banking sector, increasing the ability of the banks to lend to new projects, and improving their margins.

Whether one talks about a bank, telecom company, a cement factory, or a brewery (listed on a stock exchange or not) they all form part of the formal sector of the economy. The formal sector of most African economies was shrinking until the recent sustained bout of growth in African economies, and as the main provider of tax income to their respective governments their improved financial health has a beneficial effect on governments’ tax receipts creating a snowball effect and ensuring the sustainability of the economic recovery we are witnessing in most African countries.

When one takes into account the extra factor that many African countries have benefited from HIPC debt relief, one can see thatthe overall economic picture of Africa is bright indeed. Indeed, HIPC initiative has essentially cancelled or drastically reduced the official debt (Paris Club type) owed by numerous African to G8 governments thus easing the debt servicing requirement of those governments and giving them a fiscal surplus that can be used to improve the country’s infrastructure. Several of the companies currently listed on African stock exchanges have the best opportunities they have had in a generation to achieve phenomenal growth.

Outside of South Africa, the equity market is not deep enough or structured enough to enable long/short opportunities. For those long/short fanatics, it is possible to do economic pairing (for example to go long on Maroc Telecom or Sonatel with their great exposure to emerging African economies and short Swisscom a company in a mature market with no emerging market exposure and pressure on margins). Sub Sahara Africa is in its early phase of growth, whilst Europe is fast entering recession with portfolio managers exiting growth stocks for defensive stocks.

Until five to seven years ago, most new projects in Africa were funded by government sponsored entities such as the World Bank and IFC, Proparco in France, DEG in Germany and similar organisations. The picture is now entirely different and in a very short period of time, the shift has moved to private equity firms, hedge funds, and private investors which are funding new ventures. This shift is beneficial to the continent not only because it removes political bias in investment decision, but has drastically increased the amount of money available to projects on the Continent. The main limitation becomes the capacity to manage a new venture more than availability of capital. We are at the beginning of the growth cycle where Brazil and India were in the early nineties. The early investors will be rewarded in Africa as elsewhere.

Scipion Capital is the Investment Manager of Scipion African Opportunities Fund SPC, the Africa Specialist Hedge Fund