The New ‘Back to Africa’ Movement
Larry Seruma, chief investment officer, managing principal, and founder of New York-based Nile Capital Management L.L.C. creator of the first actively managed mutual fund to focus exclusively on Africa, makes the case for investing in the motherland.
By now, nearly every American investor knows about the potential opportunities in the emerging markets of BRIC countries (Brazil, Russia, India, and China) and Latin America. What’s driving the growth potential, economists argue, is that countries with large populations and abundant natural resources are generating economic growth and nurturing consumer advancement toward the middle class. That movement, in turn, feeds outsized economic expansion. The very same dynamics are unfolding on the African continent, but rarely—if ever—are African countries mentioned as a place for U.S. investment. Larry Seruma wants to change that.
Should Africa be on every investor’s radar screen?
We believe so. Here’s the reason: Brazil, Russia, India, China, were once where Africa is now. A lot of investors who may have missed out on the opportunity to invest in those countries 10 years ago are beginning to realize this is the time to do it for Africa. It’s the last frontier in terWs of investment destinations. We believe that investors can look at Africa as a way to deepen their emerging market allocations without increasing risk.
What’s the best case for investing in Africa now?
Look at returns. Over the last 10 years, the returns for emerging markets have been about 7.3%. If you look at Africa, the returns have been 13.8%. African markets have performed just as well as other emerging markets. In the first quarter of 2010, Africa’s return has been between 20% and 25%. When you look at developed markets in the first quarter, they were about 4.87% (S&P).
What are your criteria for the African companies you look to invest in?
We look for good corporate governance, dominant market share, good solid management, the ability to execute, companies that have a good shareholder base—when we invest in local companies, we like those that have multinational shareholders. We also like companies that have access to cheaper capital. Aside from that, there are three important factors I look for. The first is consumer growth. Africa is urbanizing. We’re looking for companies that are exploiting this huge market opportunity in the urban areas. The second thing is infrastructure, companies that provide infrastructure services to the big urban centers—not only roads, but also technology infrastructure such as telephone and Internet. Many African countries are spending a lot of money to fund this infrastructure. Finally, there are many companies that are part of Africa’s commodity story. Most people when they think about Africa, they think of its abundant natural resources. We look at companies thriving in that space. Big multinational companies are beginning to invest in Africa to increase their oil and gas resources.
What’s your favorite commodity-based African company right now?
Tullow Oil plc. (TUWOY). They have been the most successful oil and gas exploration business in Africa. The investment thesis for this stock is based on the company’s assets in Ghana and Uganda, where the most recent oil discoveries in Africa have been made. The market potential is about $7 billion in oil. The Ghana discovery is jointly owned by three companies: Tullow Oil, Kosmos Energy, and Anadarko Petroleum. They each currently own one-third of the discovery. Additionally, Tullow Oil has another recent discovery in Uganda. It owns 50% of that asset with a company called Heritage Oil. Now, Heritage Oil has recently decided to sell its 50% stake to Tullow, making it the sole owner of that asset. In Ghana they are looking to start pumping out oil by the end of this year. In Uganda it’s going to be 2011. Tullow is positioned to benefit from that given the fact that they are a large holder of those two assets. Their stock price right now does not reflect the value of those two assets. So, as a long-term call, it’s a very good company to own. In addition to that, Tullow continues to explore oil on the rest of the continent. Our 12-month price target is $11.
What’s a good way to capitalize on consumer growth on the continent?
SABMiller plc. (SBMRY) is a South African brewery company that started out in Cape Town and grew its business across the entire continent. It has been very successful at doing that, and has since expanded outside Africa—with assets in Europe, the U.S., and Latin America. After this summer, the company is looking to benefit from the World Cup [held in South Africa in June and July] because it sells 90% of all beer in South Africa. The company is looking to capitalize on it in order to expand in other African countries. It owns the largest brewer, for example, in Zimbabwe. And, they’re pursuing the same strategy in the rest of Africa. So, if you go to Kenya or Uganda or any of these countries they own some of the largest local brewers. They are looking to use their infrastructure in a way to expand their business. So, it has a good exposure to Africa, Latin America, and Europe. It’s an African company that has really gone global. Owning a piece of this company gives an investor exposure to Africa but also other emerging markets. My 12-month price target for SABMiller is $35.
So, we have both commodity and consumer-based picks. Do you have an infrastructure play for us?
Yes. My final pick is MTN Group Ltd. (MTNOY), the largest telecommunications operator in Africa. Based in South Africa, they operate in 21 countries in Africa and the Middle East. Their two largest markets are South Africa and Nigeria. Their main source of future growth will come from all the untapped markets in Africa. Telecommunications penetration among consumers on the continent is under 15%. That presents an opportunity—a lot of growth possibilities. Another growth opportunity for the company is in the data market. In Africa there is only about 2% penetration in the data market. Our 12-month price target for this stock is $18.