Africa On Wall Street Archives - Page 2 of 5

Who’s Investing In Africa Now? Heinz, Medtronic, and More

It’s not necessary to wire money to a far-flung African locale to invest in the rise of the African consumer. Here are five companies that are making big bets on the continent and conveniently trade on the New York Stock Exchange.

H.J. Heinz (HNZ:US)

Our favorite ketchup-maker is bullish on Africa, projecting consumer spending in its Africa and Middle East region will grow from $900 billion to $1.4 trillion over the next eight years.

Heinz operates production facilities in South Africa and Egypt and is making a strong push into Nigeria. The region represents just a tiny percentage of group sales, but it is growing quickly. The company recently disclosed that it enjoys 21% sales growth in Africa excluding South Africa, and 10% growth in South Africa. It attributes this success to a quality product sold in package sizes that are affordable to the region’s brand-loyal, low-income consumers.

Medtronic (MDT:US)

As Africa’s healthcare systems improve, global medical companies are starting to see opportunity. Memphis-based medical device-maker, Medtronic, invested $2 million in Kenya, Rwanda, and Uganda last year to provide spinal devices and training to local surgeons. The company estimates that 2 million people from the region would be candidates for devices manufactured by the company.

It appears that the strategy is beginning to bear fruit. Revenue from its Middle East and Africa segment increased 16% during the most recent quarter. Emerging markets now account for 11% of Medtronic’s sales, and revenue from these fast-growers surged 20% during the fourth quarter of the 2012 fiscal year.

Portugal Telecom (PT:US)

PT has been hard at work in Africa this past year. In Cape Verde, it completed miles of undersea fiber-optic cable and launched 3G networks in the island nations of Cape Verde and Sao Tome & Principe. In Namibia, they paved the way for 4G network service. And in Angola (its most important African asset), they rolled out a fiber-optic backbone that should allow them to better market their 2G and 3G service there.

The company now generates the majority of its revenue overseas. In 2011, its African operations contributed 5.8% of group EBITDA. It’s Angolan unit grew EBITDA at an impressive 16.1% clip during the year.

Syngenta (SYT:US)

This Swiss-based company is the world’s largest agricultural chemical manufacturer. It also produces seed.

Its rival, Dupont recently bought a key South African seed firm that Syngenta also had designs on. With the loss of the deal, CEO Mike Mack essentially conceded South Africa to his competitor. He said his firm is now focused on organic growth instead of a big acquisition. There simply aren’t any more great takeover targets left.

So, Syngenta will hire 700 workers and invest $500 million in order to build a presence in seven other African nations, including Kenya and Nigeria.

The company already derives $500 million in sales from Africa — roughly 4% of the group total. But this modest sum could grow quickly. Analysts believe African demand for herbicide could quadruple to $4 billion in ten years — and the crop seed market is forecast to double during that time frame.

Verifone Systems (PAY:US)

Verifone is a leading supplier of point of sale terminals. The company is in the midst of a big push into emerging markets and the segment now represents 45% of group sales — nearly double what it did eight years ago. It presently has point of sale terminals 110 countries around the world – including Nigeria, where it will install 100,000 payment devices this year. It has its sights set on Ghana and Kenya, too.

During the company’s most recent earnings conference call, CEO Douglas Bergeron said Verifone’s Sub-Saharan Africa operations have been performing “phenomenally well” with growth above 20%.

Cash Out On UEPS?

Johannesburg-based Net 1 UEPS Technologies (UEPS.US and NT1.SJ) reported its third quarter 2012 earnings earlier this month.

Let’s get acquainted with the stock and see whether it represents a compelling opportunity for Africa investors.

Johannesburg-based Net 1 UEPS Technologies (UEPS.US and NT1.SJ) reported its third quarter 2012 earnings earlier this month.

Let’s get acquainted with the stock and see whether it represents a compelling opportunity for Africa investors.

Why Should You Care About UEPS?

Net1 trades on the Nasdaq, making it one of the most accessible South African stocks for US-based investors.

What Do They Do?

Net1 facilitates payments between institutions and individuals who don’t have easy access to banking services. It does this via its patented Universal Electronic Payment System (UEPS).

I’m technologically challenged and thus not entirely clear on how the UEPS works, but I’ll give my best shot at explaining it.

Suppose Thabiso lives in a remote village in South Africa. He is 63-years-old and qualifies for monthly financial assistance from South Africa’s social security agency. The nearest town does not have a bank branch, so it is difficult for him to make the long trek to a bank to cash his grant check each month.

Fortunately for Thabiso, Net1 developed a solution to this problem. Instead of mailing a check, the social security agency issues Thabiso a smart-card. This card accumulates his monthly assistance amount. Now Thabiso need only visit a conveniently located UEPS paypoint, provide his fingerprint to verify his identity, swipe his smart card, and receive his payment in cash. No bank account is needed.

Where Do They Do It?

Net1 operates globally, but it does most of its business at home in South Africa. Nearly 80% of its revenue came from South Africa during the 2011 fiscal year. Almost all of the remaining sales were made in South Korea.

How Did They Perform?

[table id=45 /]Profitability: As you can see in the above chart, Net1 enjoyed a very fat profit margin until 2010. At the end of that year, management wrote down the value of hardware and software assets by $37.8 million due to obsolescence and decreased demand. This took a huge bite out of earnings and squeezed the net margin.

Write downs of this sort are par for the course for a technology company like Net1. They add turbulence to earnings figures, but so long as the company devotes sufficient capital to research and development, it should not cause investors too much worry.

Far more worrisome is the $41.8 m write down that occurred in 2011. This resulted from the loss of a major customer that defected to an alternative payment platform.

Most disturbing of all is Net1’s dependence on its largest customer, the South African Social Security Agency (SASSA). In 2010, the agency announced that it would put its payment delivery service contract, which had previously been awarded to Net1, up for bid. This was a very bad thing for Net1. The company slashed its fees in an effort to retain the SASSA relationship, and profitability suffered. The net margin came in at 15.6% over the past twelve months — less than half its 2009 margin.

[table id=46 /]Growth: In spite of reduced profitability, Net1 has done a reasonable job of growing its revenue base — increasing it at a nearly 12% clip over the past five years. The most recent quarterly results are not as bad as they appear. The loss is due almost entirely to currency fluctuations. Because most of Net1’s sales are done in South African rand, sales figures will suffer when the rand loses strength against the dollar — the currency that Net1 reports its earnings figures in. So, while Net1’s revenue declined 2.3% quarter over quarter, it actually increased 10% in constant rand terms.

[table id=47 /]Balance Sheet: Net1’s balance sheet looks significantly more stable today than it did one year ago. Nine months ago, the company’s total liabilities stood at 1.4x its equity. Management had financed the acquisition of its Korean subsidiary with a $130 million five-year loan. It has since paid off nearly 20% of this debt.

Value: Net1 shares presently trade for 6.5x trailing earnings on the Nasdaq and a P/E of 8.7 on the Johannesburg Stock Exchange.

Dividend Yield: Perhaps ironically for a company that’s in the business of facilitating payments, Net1 does not pay its shareholders a dividend. It reinvests all profit into growing the business. So, income investors best look elsewhere.

Is UEPS a Bargain?

In a word, no. Although, the stock trades at an undemanding earnings multiple, the struggle it had in retaining the SASSA contract suggests that its technology is no longer as unique as it needs to be to prevent further erosion of its profit margin. I’ll be reducing my personal portfolio’s exposure to the stock.

[Disclosure: I am long UEPS.]

Who’s Investing In Africa Now? Marriott, Kraft, Cummins, and More

It’s not necessary to open an African brokerage account to add a bit of the continent to your portfolio. Kraft, Marriott, SPX, American Tower, and Cummins are all making big bets on Africa and conveniently trade on the New York Stock Exchange.

It’s not necessary to open an African brokerage account to add a bit of the continent to your portfolio. Here are five companies that are making big bets on Africa and conveniently trade on the New York Stock Exchange.

Marriott International (MAR.US)

(P/E Ratio: 32.3; P/B Ratio: N/A; Dividend Yield: 1.3%)

Marriott is betting on tourist and business travelers’ continued demand for upscale accommodation across Africa. The hotelier opened a facility in Benin last year and plans to open more in Rwanda, Kenya, Ghana, Nigeria, Cameroon, and South Africa by 2016. This will double its Middle East and African hotel count, bringing it to a total of more than 70.

Marriott earned $19 million from the Middle East and Africa in 2011, representing nearly 10% of the company’s net income.

Kraft Foods (KFT.US)

(P/E Ratio: 16.7; P/B Ratio: 2.1; Dividend Yield: 3.0%)

Banking in Mozambique — Photo by World Bank

Food and beverage purveyor, Kraft Foods, said that it recorded strong sales growth from South Africa during the first quarter of 2012. Unfortunately, it provided no more specifics than that.

But the company is clearly positioned for rapid growth on the continent. It bought the popular Cadbury brand in 2010 and employs 3800 staff in ten African operations. Its geographic reach includes South Africa, Kenya, Zimbabwe, Nigeria, Ghana, Botswana, and Swaziland. It recently constructed a large chocolate factory in South Africa, a chocolate drink facility in Nigeria, and will soon complete a sugar-free gum plant in Botswana.

Kraft’s sub-Saharan revenue has grown more than 10% each year since 2009.

American Tower (AMT.US)

(P/E Ratio: 50.8; P/B Ratio: 7.7; Dividend Yield: 1.2%)

American Tower owns and operates wireless communication towers throughout the world. In the past two years, it’s made a sizable investment in Africa. It started by purchasing a network of towers in South Africa, shortly followed by the acquisition of some more in Ghana, and rounded things out by buying a bunch in Uganda. It now owns more than 4000 wireless towers on the continent.

Thus far, management has shed little light on how profitable these towers have been apart from remarking that they have outpaced expectations. The company anticipates that leasing demand will remain strong as the wireless operators seek to build out their coverage areas. In the first quarter of 2012, African towers constituted almost 13% of the company’s international total. The international segment generated $106 million in operating profits during the quarter, a 51% increase from the prior year.

SPX (SPW.US)

(P/E Ratio: 15.7; P/B Ratio: 1.8; Dividend Yield: 1.3%)

Industrial conglomerate SPX has a long history in South Africa and supplies the country with everything from parts for coal-fired power plants to margarine processors. It employs roughly 400 South African citizens at its manufacturing facility.

The country has performed very well for SPX in recent years. South African sales have doubled to more than $281 million since 2009. That represented 5.2% of group revenue in 2011.

But the company’s African clientele isn’t limited to South Africa. In February, it announced that it had won a contract to supply condensing units for a Kenyan geothermal project.

Cummins (CMI.US)

(P/E Ratio: 11.2; P/B Ratio: 3.4; Dividend Yield: 1.5%)

Engine distributor, Cummins, scored a nice new contract last month to supply Zimbabwe’s second-largest mobile phone operator with 159 generator units. The gensets will power wireless towers.

But the deal came too late to reinforce Cummins first quarter African sales. The company’s profits from the region were depressed by high expansion costs, which narrowed the EBIT margin from 13.9% to 12.1%. Political unrest in Nigeria also put a damper on the segment’s results.

Even so, the company’s African sales totaled $36 million during the quarter — a 24% increase over last year. Cummins’ African sales account for just shy of 5% of its distribution segment’s total revenue.

[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]

The Investing In Africa Index: Tracking Africa’s Most Accessible Stocks

Index investing sure is popular these days. You’ve got your small-cap indexes. Your large-cap indexes. Growth indexes. Value indexes. Country indexes. Bond indexes. Any slight affinity among a group of securities seemingly results in some sort of new index ETF.

It’s got me feeling a little bit left out.

So, today I’m launching the Investing In Africa Index.

It’s got me feeling a little bit left out.

So, today I’m launching the Investing In Africa Index.

Why A New Africa Index?

Numerous African indexes already exist. Do we really need another?

Yes. Because apart from the Market Vectors Africa ETF (AFK), the S&P Emerging Middle East & Africa (GAF), and the MSCI South Africa Index (EZA), no other African equity indexes are accessible to small, retail investors like me.

Moreover, the existing index funds tend to be heavily focused on mining stocks, which I just really don’t like very much.

There is a gap in the market for an index that focuses on the growth of the African middle class — not on the fortunes of foreign mining firms.

Selection Criteria

Here’s the criteria for inclusion in the index.

Headquartered in Sub-Saharan Africa – The IIA Index is comprised solely of companies based in Africa. Why? Companies that call Africa home tend to employ more local people and to re-invest profits within the region.
Trades on a US stock exchange – The Index will include only companies that trade on the NYSE, Nasdaq, or on the OTC Board. This is because it is intended to be easily replicable by US investors. All index constituents must be available for trade through a U.S. discount broker like ETrade or Schwab.
Average daily trade volume exceeds $100,000 over past three months – This limits the index to only the most liquid of African ADRs and shares. Small investors should have no problem buying or selling immediately at market price.
No mining or energy stocks – There are lots of African mining ADRs out there, but in my view, mining companies have not done a great job of sharing the industry’s benefits equitably. The Investing In Africa Index will focus on the rise of the African consumer, not the amount of ore dug up from under the continent’s surface.

Any stock that meets all four of these criteria as of the last trading day of the year will be added to the index. Conversely, any index constituents that fail to measure up will be removed.

What Companies Comprise the IIA Index?

After applying the above criteria, we were left with the nine stocks below.

[table id=24 /]

As you can see, the index is currently over-exposed to the Rainbow Nation. My hope is that, as time goes by, ADRs from other sub-Saharan countries will meet the index’s inclusion criteria.

How Is Index Performance Calculated?

This is an unweighted index. All members of the index carry an equal weight no matter what size they are or what their share price is.

Thus, the index’s performance is calculated as though an equal amount was invested in each member of the index. It is an average of the percentage return of all member stocks.

How Has the Index Performed So Far?

The Investing In Africa Index has already put up some very impressive numbers since the beginning of the year. Here’s how it measures up to the S&P500 and the big Africa-focused ETFs.

[table id=25 /]

Not too shabby, eh?

What Do You Think?

Is this index useful as a way to track the performance of easily accessible African stocks? What are your thoughts on mining stocks? Do they merit inclusion in the index? Let us know your thoughts in the comments!

[Disclosure: I am long on UEPS, AFK, GAF, and EZA.]

Who’s Investing In Africa Now? Yum! Brands, SABMiller, and More

It’s not necessary to wire money to a far-flung African locale to invest in the rise of the African consumer. Here are three companies that are making big bets on the continent and conveniently trade on the New York Stock Exchange and the Pink Sheets.

Olam International (OLMIY.PK)

(P/E Ratio: 12.5; P/B Ratio: 1.8; Dividend Yield: 2.2%)

Singaporean agricultural commodities trader, Olam International, believes African farmland is bargain-priced and has committed to a slew of major African investments in the past three months amounting to nearly half a billion dollars.

In February, it bought the oddly-name Nigerian biscuit and candy maker, Titanium Holdings, for $167 million.

Shortly thereafter it announced the completion of a $55 million wheat mill in Ghana and that it would soon begin construction of a large cashew mill in the north of the country.

Next, it bought a controlling stake in a Gabonese rubber plantation for $183 million. They plan to nearly double the plantation’s existing 69,000 acreage, making it one of the continent’s largest rubber producers.

Then, last week, it shelled out $50 million for a 49% stake of Africa’s largest cotton company, the Zimbabwe-based Aico Africa.

These investments will likely increase Olam’s African exposure. They are already present in 26 African countries, and the continent accounted for 17.1% of group revenue in 2011 and provided 17.6% of its total product.

SABMiller (SBMRY.PK)

(P/E Ratio: 24.9; P/B Ratio: 3.1; Dividend Yield: 2.2%)

Brewery giant, SABMiller, announced last week that it would spend $2.5 billion on new African breweries over the next five years. Management says the expenditure is needed in order to keep pace with rising demand, which it believes could quadruple by 2030. The company’s African sales rose 11% during the last three months of 2011.

Notably, the new investment excludes South Africa, and will involve the construction of two to three new breweries per year. It’s also experimenting with sorghum and cassava-based brews. Both ingredients are widely used in traditional African beers and cheaper than barley.

SABMiller presently operates 31 breweries and 22 bottling plants on the continent and employs over 13,400 people. Its African assets contributed 13% of group EBITA.

Yum! Brands (YUM)

(P/E Ratio: 24.6; P/B Ratio: 15.9; Dividend Yield: 1.5%)

The parent company of KFC and Pizza Hut, Yum! Brands, plans to begin selling the Colonel’s fried chicken in seven new African countries this year. It also intends to introduce South Africans to my guilty pleasure, Pizza Hut. (C’mon, you know you love the stuffed crust, too!) Yum! already operates 656 KFC locations in South Africa and entered Ghana, Zambia, and Kenya in 2011.

The 2012 expansion drive will involve opening 130 stores and will cost roughly$74 million. By next year, Yum! will boast 1,000 African locations.

South Africans bought roughly $1 billion worth of KFC in 2011, equivalent to about 9% of Yum!’s total revenue.