Opportunities for JSE-listed companies in Africa are well documented but success in the rest of the continent is not guaranteed, according to Portuguese-based Espírito Santo Investment Bank.
The thrust of the message in a report prepared by Avior Research is that timing is critical for both companies and investors.
For companies, the “rewards for early entry can be very considerable”, but those that did so should exercise caution.
“The most successful moves into Africa have seen companies first dip their toes into markets to gain an understanding of relevant forces before committing material amounts of capital.
“In general, large-scale acquisitions have failed more often than [they have] succeeded. Even MTN tested the waters in Uganda and Swaziland before pushing into Nigeria. We caution that it often takes 10 to 20 years to become an overnight success.”
Getting execution or timing wrong could damage investor confidence and destroy capital, said Avior, citing Altech and Telkom.
“Operations in Nigeria and Kenya, were generating significant losses [for Altech] until disposed of in January 2013,” Avior said.
It put the losses at R2.3 billion over the past two years.
“Lessons learnt have been very expensive, not just in the form of losses but also opportunity cost. Altech’s net cash resources have dwindled from R1.6bn to a net debt position of around R800 million over the past four years.”
The report described Telkom as “a case study of what can go wrong when investing in Africa”, and warned of the “pitfalls of chasing the African growth story without a proper understanding or the appropriate resources”.
The researchers concluded that the best time to buy into a company depended on the differential between growth in South Africa and growth across its borders, as well as the extent of the company’s exposure to the rest of Africa.
“Assuming a company’s profits in Africa are growing at 35 percent per annum, versus 10 percent in South Africa, a 1 percent exposure to Africa is irrelevant, as it will only deliver 2 percent higher earnings than a company with zero exposure, after five years.
“The sweet spot is to go for companies which get 15 percent or more of their revenue from Africa. By this point the growth contribution is typically meaningful, the company understands its market and the risk of failure is naturally lower.”
MTN, Illovo Sugar and Tongaat Hulett earned a substantial share of their income from their operations in the rest of the continent, the report noted.
It said MTN offered some of the best African exposure among JSE-listed companies, with 57 percent of group revenue likely to be generated in Africa outside of South Africa this year. “MTN has operations in 17 African countries, covering 44 percent of the sub-Saharan African population outside South Africa.”
On Illovo, the report said: “Sugar is an easy play on the rising consumer in Africa [and] Illovo offers the widest exposure to African sugar consumption growth, with a 62 percent contribution to group revenue.”
While Tongaat had a dominant position in Zimbabwe, this was threatened by “ongoing indigenisation risks, which could dilute profit contribution”.
However, the company’s position in Mozambique was strong and revenue contributions from Africa represented 35 percent of its earnings in the first half of financial 2013.
Many locally listed companies received between 5 percent and 10 percent of revenues from Africa so “the sweet spot is approaching fast”.
Avior concluded that the best opportunities on the continent appeared to be those that “can make money off low-end consumer items, resources and infrastructure”.