By now you know we like to speak about the companies seeking growth through domestic and regional expansion across the territories of our frontier market investment focus.
As investors we are always seeking to harness the growth opportunities by investing in those businesses that can grow by positioning themselves to successfully offer the goods and services that are in demand by the more than 1 billion people across Africa, the Middle East and Central Asia. Often, we uncover companies that can even compete on a more global basis thanks to their competitive advantages.
In this week’s update we will highlight a couple of developments that have taken place in 2 of Africa’s major economies: Nigeria and Morocco. They are both stories of industry leaders assertively positioning themselves for exponential growth.
Most international investors have not been focused on these markets and their economies due to other major concerns on global markets that have blurred many of the ‘little big’ developments in the frontier economies. We are not saying that investors have been oblivious to these kinds of opportunities given that most have already invested in the larger emerging economies in their portfolios, hence the raving success of the BRICs. There are many smaller versions of similar opportunities waiting to be discovered, understood and embraced.
Today’s insight is comes from Youssef Lahlou, and Funmi Akinluyi, both members of our investment team focused on the Maghreb and Sub-Saharan Africa, respectively.
Deep value nirvana?
Let’s start with Morocco. As we have pointed out before, the Kingdom has been executing a pragmatic regional expansion strategy for some time now. We have already witnessed the execution of aggressive territorial expansion across western Africa by Morocco’s leading players in the banking and telecom industries. This will ensure high levels of future growth but there is still much potential to be tapped within the country itself.
One of the latest developments to put in perspective is Banque Centrale Populaire’s (BCP) merger with Banque Populaire Regionale de Casablanca (BPRC). It is a significant marriage of synergies. This is not a merger for the purpose of survival as we have grown accustomed seeing in Europe or the USA, but rather a effort to tool up for much ‘heavier lifting’.
BCP is entirely focused on investment and corporate banking , part of the Crédit Populaire group, it is the biggest state-owned bank in Morocco. It is a universal bank and one of the country’s most important lenders, focused on financing the Kingdom’s main infrastructural projects and corporate lending. The bank operates through its several subsidiaries in Morocco, including Media Finance, Chaabi-LLD and Maroc Assistance Internationale, among others. Banque Centrale Populaire also operates through subsidiaries in Africa, including Banque Populaire Marocco-Centrafricaine in Central African Republic and Banque Populaire Marocco-Guineenne in Guinea and just recently acquired jointly with Attijariwafa bank a 60% stake in BNP Paribas Mauritania. The bank also has a presence in Europe that banks to the countries’ large Diaspora.
BPRC is a successful savings bank and a provider of credit to households and SME’s in all the regions of the kingdom. There are 11 regional banks based in Morocco’s biggest cities. Casablanca’s regional Banque Populaire has 159 branches (15% of the total in the Metropolitan area) and market shares of 11.3% in loans and 11% in deposits. Always to be considered is that there are 31.2 million Moroccans in the country with a median age of around 25 years of age, this means that there are still lots of people who will be opening bank accounts in the generations to come!
The rationale behind the merger is simple: it will allow the bank to play an even bigger role in the greater Casablanca market, home to around 40% of deposits and 63% of loans. It will benefit from the economies of scale of almost doubling in size, be able to offer a wider product range and a centralized support platform.
Here comes the best part: The merger will take the form of a MAD 100million (US$ 12.5!) increase in BCP’s capital. Shareholders in BPC will get 10 BCP shares for every 32 BPC shares, and the swap will take place on November 4. BCP shareholders are getting an amazing deal at 0.22x and a price to book value of 0.06x.
And in case you are frowning, no, these are not typos, the decimal number are correct. Looks like $12.5 million dollars can still go a long way in Morocco!
Value investor nirvana!
Making the stuff that things are made of
Further south in the hustly-bustly republic of Nigeria, we are seeing a similar development, albeit in an entirely different industry.
Dangote Cement Plc (DCP) has notified the public of its intention to merge with and delist its existing subsidiary Benue Cement Company from the Nigerian Stock market and then list as Dangote Cement Plc (DCP). This is a long awaited listing and is getting the whole market excited. Dangote Cement Plc is expected to list with a market capitalization NGN2.13trn ($14bn) on 05 November 2010. The listing of DCP will boost the Nigerian Stock Exchange, which currently has a capitalization of $37bn, by at least 35% as the new entity becomes the most capitalized stock on the exchange.
The merger with Benue Cement will consolidate all the Dangote cement businesses into one single entity making DCP Sub Saharan Africa’s largest cement producer. DCP’s plants in Nigeria, which are expected to have a combined capacity of 20million mtpa by 2011, are in strategic location in North, South and Central regions in Nigeria to enable DCP reach its local markets and raw materials.
Making cement is pretty much as close to the core of a rising economy as you can be when considering all the construction that is going to take place in both infrastructure and the private spaces. The group’s core focus has been to harness the growth potential seen as a result of the development needs of the country and the growing middle class in Nigeria which makes up 30% of the total population in Nigeria. The major sectors the Dangote group focuses on are Cement, food, real estate and transportation. It could well be regarded as are the quintessential proxy for Nigeria’s massive growth opportunity.
Again, this is a very simple and straight forward story. There are around 150 million Nigerians and with just over 40% of them younger than 14 years old, you can safely expect that there will be lots of cement mixing to be done in long term!
The opportunity even goes beyond Nigeria. DCP currently holds over 60% of the total market share in Nigeria, is looking to expand across the region. DCP is looking at greenfield projects in Sierra Leone, Senegal and Zambia. It has also recently increased its holding in Sephaku Cement from 19.76% to 64% to enable it increase its presence in the South African market. DCP’s aggressive expansion into the various markets is to enable it emerge as the largest cement producer in Africa by 2014.
The advantages DCP has over its peers are likely to keep it ahead of many of its competitors. Amongst others, we point out a strong experienced management team that has extensive experience in the various regions of operations for the group and the fact that it has invested in state of the art machinery that will allow capacity utilization of close to 90% in 2010. Add to that that these investments have not been financed through debt ad you have a very competitive proposition.
DCP aims to meet the growing demand of cement which has come as a result of the construction boom in Nigeria. Nigeria’s cement consumption is set to soar when considered that it currently stands at 108kg per capita, one of the lowest in the world compared to the global average of 450kg per capita. In addition, the Nigerian government is currently making space for increased local production as it has recently increased the import duty on bulk cement importation from 5% to 35% and has also cancelled stale import licenses.
The numerous ‘little-big’ developments may be occurring below the radar for most global investors but they are real and they are certainly creating a lot of value for those who are willing to venture out beyond the boundaries of common perception…
With kind regards from the Silk Invest team
Comments on this entry are closed.