Africa’s consumers are its real gold, says Nielsen
IR teams should tell investors about their plans to grow in Africa, because the continent’s consumers will enjoy significant increases in income before the end of 2020. As consumer income rises over the coming years, consumer spending will also rise, leading companies to produce more cash and pay higher dividends.
These are the key insights from Thomas Nielsen, manager of Lloyd George Management’s Frontier Markets Fund, who adds that the fund’s dividend yield, trailing over 12 months, is 5.4 percent.
Why should investors expect Africa to be the next place to make significant returns?
Sub-Saharan African consumers with middle incomes will increase by 78.1 percent by 2020, according to ‘Unearthing Africa’s consumer gold’, a report by SBG Securities, a stock broker operating in South Africa.
The analysts based their figures on research published by the OECD, the body that studies productivity and international flows of trade and investment. SBG said the 78.1 percent increase in consumers on middle incomes would support strong growth in consumer spending in the sub-Saharan African region.
The stock broker supported this forecast by citing the examples set by other emerging economies, such as South Africa, Latin America and Eastern Europe, where this process has played out.
Which companies have shown by action, not talk, that they expect big returns in Africa?
Major international consumer groups and local players have acknowledged the increase in consumer spending and distinguished Africa as a separate market in their expansion strategies.
Nestlé, Unilever, Carlsberg, Diageo, SABMiller and Heineken are all very active in Africa. It’s not that the companies are new in the continent, but consumer spending is picking up momentum. Africa has therefore become more prominent and strategically important in terms of growing consumer purchasing power and untapped consumer potential.
Which African companies are likely to benefit from consumer spending?
Juhayna Food Industries and Eastern Tobacco are both dominant in their sectors in Egypt, which has a very favorable demographic structure for consumption growth, as the majority of the population is young.
Juhayna is by far the biggest player in Egypt’s dairy market, with a developed distribution network and the strongest brands. It is well set to benefit as consumers convert from loose milk ‒ which still dominates the market ‒ to packaged milk and higher-value-added products such as yoghurts. We expect Juhayna to capture the lion’s share of this conversion.
Eastern has good cash flow, generates dividends and is the monopoly cigarette producer and distributor in Egypt, competing only with an illicit tobacco trade. Monopolies are very bad, but only until you own one. In addition, Eastern’s valuation is among the lowest (if not the lowest) in its peer group.
Which other companies are set to gain from consumers?
Herfy, a Saudi fast food chain, competes well with McDonald’s and Burger King and has actually gained some market share in the last five years without sacrificing margins.
It has consistently generated a return on invested capital above 40 percent in the last five years, and has a clean balance sheet and a generous dividend policy. We visited the company in July and increased our confidence that it has a proven management team and a focused strategy for expansion.
Cadbury Nigeria, a subsidiary of Kraft, has about 25 percent net cash to market capitalization, and we met its competitors in March in Nigeria. We invested in this business, along with Juhayna and three others, in the first half of the year.
Why did you buy and hold Delta Corporation?
Our single holding in Zimbabwe is a dominant player in a beer market with a huge growth potential. Delta is coping very well with infrastructure, utilities and electricity problems. We consider it a long-term holding even though we are aware of the country’s risks. Let’s not forget its compelling valuation.
Is African growth fuelled only by commodities demand from Asia and the developed world?
Yes, to some extent. Let’s not forget that African countries have undergone a major shift in the last couple of decades: they have suffered unrest, civil wars, common starvation and dependence on humanitarian aid, but have become functioning democracies with thriving economies. After that, it would be very hard to believe things could turn out for the worse, although we do not rule out the possibility.
Let’s not forget that the debt level in African economies is low, which gives a good cushion for fuelling growth if necessary, unlike the developed world, which is choking with debt. [But] make no mistake, Africa has its own problems: corruption, bad governance, expropriation, currency risk and bad infrastructure – and we as investors are aware of them.
