You may still be afraid to invest in Africa. Maybe because it just seems too ‘exotic’ or you believe it is really only a commodity story. It could be that you have been too busy with the BRICs and the other large emerging markets or maybe because you can’t seem to shake off that ‘Live Aid’ image that may have been installed in your mind during the eighties and the nineties. You may even still live in the belief that there is far more political risk in Africa than anywhere else in the world. Or worst of all, you may be entirely convinced of the opportunity, but you are not allowed to invest!
There are many possible reasons that are still keeping most international investors away from Africa, even if it were for allocating only a small proportion of their portfolios. However, most of the excuses are not justified when compared to reality.
The truth is that many large international companies are not afraid to invest in Africa! In fact, it is rather the opposite, they are trying hard to get a foothold in these markets. If you take a close look, you will see that many multi-nationals have been there for years, enjoying fantastic results by tapping into genuine growth markets!
We are referring to very large and respectable companies such as Heineken, Lafarge, Barclays, Unilever, Nestlé, Cadbury, Guinness, etc.
Have you noticed that many of the companies stated above are from the food industry? This makes sense because the real opportunity for growth essentially lies in the gradual shift of an enormous population towards better life standards.
We are not trying to convince you that there will shortly be a middle class similar to ours, but we would like to draw your attention to the fact that the roughly one billion people who are living in this continent are increasingly purchasing basic products and services such as food and beverages. They are using mobile phones, opening bank accounts and are upgrading to better housing as GDP per capita continues to rise. There is little doubt about the fact that food comes first in the ranking of basic consumer needs.
Just have a look at the below chart that plots the rise in GDP/Capita and the drop of poverty for Sub-Saharan Africa. There is an undeniable trend in place.
The good news is that you may not have entirely missed out on all this as some of these companies could well be core holdings in your existing portfolios or even have a place in your pension fund.
The corporates that have been successful are the ones that recognized and understood the opportunity for growth and had the wisdom to invest in a local entity. Not only does this approach provide the required license to operate in the territory and the pricing power in order to be competitive, but it also allows for the local perspective needed to successfully provide the goods and services that are in demand.
Did you know that the main global accounting and audit firms such as KPMG, Deloitte and Accenture, etc all have offices in most African countries? There must be a good reason for that… there is business to be done.
Have a look at the recent growth of foreign direct investment (FDI) and you will clearly see that the amounts invested in Africa have multiplied many times over the past few years. FDI typically takes the shape of long term investment and is not only about infrastructure. A large portion can be attributed to corporate investments.
As you may know, Silk Invest also has a local strategy which allows us to recognize the opportunities as they are seen on the ground. This week, Funmi Aklinluyi, our Investment Director for Sub-Saharan Africa, who is from Nigeria, provides us with a focus on Nestlé.
Food comes first!
Nestlé Nigeria Plc is a subsidiary of Nestlé S.A Switzerland which started its operations in Nigeria as far back as 1961. The company’s principal business lies in the manufacturing, marketing and distribution of food products. Its food product range includes food seasoning, family cereal, infant cereal, milk, beverages and filtered water. Many of these products use locally sources raw materials such as maize and sorghum.
Nestlé has grown to be Nigeria’s largest food company by turnover and is regarded as one of the most successful companies in the country by having achieved an average annual growth rate of 25% over the past nine financial years. Nestlé has even weathered the recent economic ‘storm’, with a 32% growth in turnover while many of its rivals suffered from losses as a result of the poor economic climate.
The 2 key products that keep Nestlé ahead of its rivals are the Food seasoning brand – Maggi and Beverage brand – Milo. These products currently hold 40% and 35% market share in the food seasoning and beverages sector. Nestlé’s strategy and its ability to continue to introduce new products to its leading brands, along with its 50 years experience in the market, effective product distribution and control of suppliers are helping to keep Nestlé ahead of the game.
The products that Nestlé offers give it access to a large number of the population in Nigeria which currently stands at 160mn. Their product ranges has customers across all the age brackets which gives Nestlé good and balanced access to the rising population in Nigeria. It is our view that there is still immense growth potential for Nestlé since it has been able to operate profitably despite the overall lack of infrastructure and poor regulation in the country. We believe that, once some key social infrastructure issues such as power generation and efficient road networks improve, we will see even better results from Nestlé.
The growing middle class in Nigeria with its improving trend in disposable income feeds into the ambitious turnover forecast for the coming years. In addition, the Economic Community of West African States Treaty (ECOWAS) even allows for further regional expansion for Nestlé. ECOWAS is a regional group of 15 West African Countries. It was founded in 1975 with the objective to achieve collective self-sufficiency for the member states by means of economic and monetary union creating a single large trading bloc. Initially progress towards this aim was slow and thus the treaty was revised in 1993 in order to make it more feasible though a looser collaboration.
The company seems to be very conscious of the growth potential that exists in this market and is continuing to expand its production capacity in Nigeria. It expects to continue to increase market share and to achieve sustainable growth.
Nestlé’s stock price which is currently trading at a forward PE of 18x remains, in our view, one of the more interesting names on the Nigerian Stock exchange. The share price has appreciated by 124% over the past 12 months and remains one of the stocks preferred by many of the local investors particularly because of the company’s consistent high dividend payout ratio which ranges from 90% – 99% of Profit. Nestlé continues to outshine its rivals with a its return on equity for the FYE 2009 stands at 100% averaging 108% for the last 4 years while industry average in 2010 stands at 26%.
We believe the current drive by the Acting President to improve infrastructure in Nigeria will prove beneficial to Nestlé. We believe we will see much better returns for this resilient company which continues to outperform even in the most turbulent times.
In conclusion, this is yet another of many amazing examples that illustrate the economic dynamics that are at play in Africa. There are many more stories like this to be told and I hope they will allow you to better understand the long term growth opportunities and that any prodigious global investment strategy is running out of excuses for not allocating, albeit a small portion of the portfolio, to these markets for the long term.
We look forward to keeping you updated.
With kind regards from the Silk Invest Team
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