Africa, the Promised Land
Over recent weeks, so many South African companies have again affirmed their commitment to African expansion and growth. It is no surprise considering that sub-Saharan Africa has been one of the highest economic growth areas over recent years, the consumption market is growing at leaps and bounds and product penetration is low. Africa has become the Promised Land for companies that are looking for the next growth area and South African companies are leading the charge.
I became involved in the investment world in 1999 when I joined Investec Securities and have been fascinated at how perceptions have changed over the subsequent years (which I spent at Investec, BJM, Bank of America Merrill Lynch and now at MLAX Consulting). In the earlier years, South African companies were scrambling to get out of SA or at least diversify their exposure. There were dual listings on the London Stock Exchange and SA companies bought international businesses including retailers in Australia, asset managers in the US, Banks in Argentina, Property companies in the UK, breweries in North America, etc. So many of these expansion plans were failures and led to subsequent disinvestment.
Today, the focus is much different for most companies. Instead of looking abroad, increasingly eyes are affixed on countries north of our border in sub-Saharan Africa. This type of investment in sub-Saharan Africa is not new, but in the past, it was largely focused on mining and industries that could support mining operations (e.g. corporate banking). This has changed meaningfully and today, the focus is increasingly on the retail consumer. SA property developers are building shopping malls, SA retailers are opening stores, logistics companies are ensuring product pipelines, mobile providers are providing unprecedented cover, pay TV is being distributed to homes, banks are targeting retail clients, insurers are offering short-term and life assurance cover, healthcare providers are selling medical aid products, asset managers are investing in local businesses and investment banks are helping to develop capital markets.
Over recent weeks, a number of companies showed strong results from their African operations and affirmed their commitment to African expansion and growth. Shoprite highlighted 16% growth in their non-SA (mostly sub-Saharan Africa) earnings growth (vs. 12% in SA) with this source making up 12.5% of total profit. The company aims to grow its number of African stores by 25% over the next 2 years and has another 50% store growth in the pipeline after 2016.
Standard Bank announced that 28% of its headline earnings from its Rest of Africa businesses, with these businesses having achieved 37% average yearly growth in earnings over the past 5 years. The company aims to continue strong growth in these businesses, driven in part by the strong economic growth it expects from the region.
In Sanlam’s results, it showed 12% of its earnings coming from its Rest of Africa businesses and earmarked another R2bn for acquisitions here and in other emerging markets. The company aims to improve its share of new business volumes coming from its Rest of African businesses from the current 11% to 20% over time.
MTN has 4 times as many subscribers in the rest of Africa than it has in SA and earns 3 times more revenue from these businesses. The company makes less than 20% of its profits from its SA businesses with most of the rest coming from its operations north of the border.
The new “scramble for Africa” is driven by the strong economic growth in the region, the increasing pool of consumers and the low product penetration rates. These trends have been possible with the help of the relative stability that most countries in the region are experiencing. The large investments in infrastructure made by China have also been an important contributor to the development of the African retail market.
Over the past 7 years, the average GDP growth rate in sub-Saharan Africa (excluding SA) was 5.7%, which is well above the average for all developing countries (excluding China) at 4.1%. The World Bank forecasts an average GDP growth for the region of 5.8% over the next 3 years, which is well ahead of the 4.1% forecast for all developing countries (ex China), 2.6% forecast for SA and 2.3% forecast for developed countries. The forecast GDP growth in sub-Saharan Africa would have been even higher were it not for the decline in oil prices and the impact of Ebola. As these trends reverse, we may see even higher growth for the region.
In addition, private consumption and domestic demand are expected to continue growing in the region, supported by sustained infrastructure investment, increased agricultural production, expanding service sectors and relatively low interest rates. The main internal risks to GDP growth and growing private consumption are conflicts (South Sudan, Central African Republic, northern Nigeria) and the spread of Ebola. The main external risks are sustained low commodity prices, a slowdown in the world economy (especially China) and volatility in global financial markets.
The potential for further growth in private consumption and domestic demand in sub-Saharan Africa is great due to the low product penetration rates. According to KPMG, 75% of adults in the region (including SA) used no formal financial services in 2012 (compared with 10% in developed countries). According to the World Bank, in 2010 there were less than 90 bank loans per 1000 people in the region compared with over 700 in developed countries. Insurance penetration in Africa (excluding SA) is the lowest in the world with insurance premiums as a percentage of GDP of only 1% compared with 2.7% for other developing markets and 8.3% for developed markets. Media penetration has picked up in the region, with more than 85% average access to mobile phones in 2012 according to Nielsen. However, Internet penetration remains low at 25%.
According to Accenture, sub-Saharan Africa’s consumer spending will reach $1trillion by 2020, with poverty reducing to 20% (30% in 2008) and by 2050, 60% of people will live in cities. By 2010, the region already had more than 850million consumers and this is forecast to increase to 1.3trillion by 2030.
We live in a very exciting part of the world with a great deal of growth potential. Even if our growth in SA is relatively slow compared with the rest of the region, this does not mean that we cannot benefit from the positive trends of our neighbours. SA companies that have exposure to sub-Saharan Africa have the potential to achieve better earnings growth than companies that are simply exposed to the slower-growing SA economy. By investing in such companies, we can also benefit from these higher growth rates. On top of this, the SA economy benefits from increased exports to these countries and dividend flows back to SA (although we are currently in an investing phase and dividends are typically reinvested in the region).
Furthermore, the positive trends that are occurring in the neighbourhood are also positive from a stability point of view. If they continue, we as a country are less likely to have to become involved in conflicts in the region and are less likely to have to accommodate economic refugees.
What do you think of sub-Saharan Africa’s potential? Are you one of those people that still see the region as a basket case or do you give credit for the positive developments in recent decades? Is your company operating in sub-Saharan Africa or do you have plans to get involved there? I would love to see your feedback.
In the mean time, keep your talking straight!