African Risk and Opportunities

I subscribe to the “Stock Gumshoe” blog, which specializes in ferreting out the truth behind those teaser ads for scores of investment newsletters and tipsheets that promise you 1,400% returns in six months, but only if you take advantage of this limited time subscription offer, a $1,000 value for only $695. In addition to debunking these extravagant claims, the blog’s publisher and author, Travis Johnson, analyzes various investment opportunities he finds interesting, some of them off the beaten track, and he doesn’t charge you hundreds of dollars to reveal the names and details. Recently he posted a lengthy article on Africa, with a particular focus on Lonrho, a U.K.-based company with a long history in Africa and a newly revitalized Afro-centric investment strategy. Here is my comment, posted on Travis’s blog:

I am a big fan of Africa, probably a function of my having worked and/or lived there for about a third of my adult life, and I thank you, Travis, for focusing on a much-maligned and -neglected part of the world. As a business consultant and sometime private equity/finance adviser and investment banker, I lived in South Africa for seven years, most of the time working in the financial sector. I have also lived for extended periods in DRC, Botswana, and Zambia, and I have worked or done business in about 30 countries on the continent.

I believe that African risk, more than almost any other region’s, is overpriced. Part of this is because most people, especially in the U.S., think Africa is one country, and can’t distinguish between Sudan and Senegal. Of course there are risks, but most of them can be managed, and there is certainly a risk premium for investing there, but I have come across far too many supposedly sophisticated investors who won’t touch any part of Africa with a barge pole.

There are a lot of ways to get African exposure, but apart from investing in various Africa-focused ETFs or buying the shares of African companies with ADR listings, there aren’t too many pure Africa plays. You could invest in big mining companies like BHP, RTZ, or Freeport McMoran (FCX), junior mining companies, mainly listed on the TSX, or in various energy companies both big and small that operate around the continent. But except for a few juniors, most of these companies have exposure all across the globe. The same goes for companies like Diageo (DEO) (which owns Guinness), Heineken, and SAB Miller, which dominate brewing across Africa, and for telecoms firms like MTN, which have extended (some would say overextended) into Asia and the Middle East. The big companies listed in Johannesburg, many of which have primary or secondary listings in New York or London, are not pure African plays either. SASOL (SSL), Sappi (SPP), Old Mutual, Anglo American (AAUK), and others, have their roots in South Africa, but operate all over the world.

Lonrho (LONR in London, LNAFF.PK on the pink sheets) is an exciting company, resurrected from the ashes of Tiny Rowland’s old company, which operates in some of the most promising growth areas on the continent. They do mine for diamonds in South Africa (not too exciting), but the real excitement is in some of the areas Travis mentions: the Luba Freeport in Equatorial Guinea, the new Fly540 airline operating out of Kenya, and big agribusiness plans across Southern Africa. As the world, and especially the Gulf countries, look to secure their food supplies, they are turning to Africa, which presents huge opportunities for investment in the sector. Lonrho also offers one of the few Zimbabwe plays around, and if you think this is a bad joke, don’t. Zimbabwe is starting to come back, and sooner than you think it will once again be a huge agricultural exporter, manufacturing center, and tourism destination. I think Lonrho is a classic buy and hold opportunity. Buy it now, forget about it, and in several years you could be holding something pretty valuable.

Lonrho, and Southern Africa, are not the only play on the continent. I have said before that in the next 20-40 years Nigeria will be a more important economic (and possibly political) force than Russia, and I still believe that. Nigeria has a long way to go, but it looks like following a similar path to Indonesia’s, which has gone from military dictatorship to genuine democracy and which has made a significant dent in corruption.

By all means do your own research. If you are looking to start living off your retirement funds in the next five years, Lonrho and other Africa plays may not be for you. But if you are looking at the longer term, take a close look at these.

Disclosure: Long Market Vectors Africa ETF (AFK).

Comments

[Mad Hedge F...:]

xxch Feel like investing in a state sponsor of terrorism? How about acountry whose leaders have stolen $400 billion in the last decade andhave seen 300 foreign workers kidnapped? Another country lost four warsin the last 40 years. Still interested? How about a country thatsuffers one of the world’s highest AIDs rates, endures regularinsurrections where all of the westerners are massacred, and racked up5 million dead in a continuous civil war? Then Africa is the place foryou, the world’s largest source of gold, diamonds, chocolate, andcobalt! The countries above are Libya, Nigeria, Egypt, and the Congo.Below the radar of the investment community since the colonial days,the Dark Continent has recently been attracting the attention of largehedge funds and private equity firms. Goldman Sachs has set up EmergingCapital Partners, which has already invested $1.6 billion there. Chinasees the writing on the wall, and has launched a latter daycolonization effort, taking a 20% equity stake in South Africa’sStandard Bank, the largest on the continent. In fact, foreign directinvestment last year jumped from $53 billion to $61 billion, whilecross border M & A leapt from $10.2 billion to $26.3 billion. Theangle here is that all of the headlines above are in the price, thatprice is very low, and the perceived risk is much greater than actualrisk. Price earnings multiples are low single digits, cash flows arehuge, and returns of capital within two years are not unheard of. Thereality is that Africa’s 900 million have unlimited demand for almosteverything, and there is scant supply, with many firms enjoying localmonopolies. The big plays are your classic early emerging markettargets, like banking, telecommunications, electric power, and otherinfrastructure. For example, in the last decade, the number oftelephones has soared from 350,000 to 10 million. It reminds me of theearly days of investing in China in the seventies, when the adventurousonly played when they could double their money in two years, becausethe risks were so high. This is definitely not for day traders. If youare willing to give up a lot of short term liquidity for a high longterm return, then look at the Market Vectors Africa Index ETF (AFK),which has rocketed by 82% from the March lows to the recent highs, andthe SPDR S&P Emerging Middle East & Africa ETF (GAF).

Oct 28 04:29 PM

[Chip Krakoff:]

Mad Hedge, I agree with your overall premise that the perceived risk of investing in Africa is higher than the real risk - at least for the savvy investor, of which there are not that many, at least in the U.S. You are also right that Africa needs just about everything, and that the companies that provide those things can make huge profits. Your other remarks, however, though based on truth, seem designed to heighten the perceived risk and raise the risk premium. I don't know Libya, but I do know the other 3 countries you mention very well (I used to live in DRC and I have been to Nigeria and Egypt each at least a dozen times in the past 6 or 7 years). Though these countries have immense problems and still face huge challenges, both Nigeria and Egypt have undertaken tremendous reforms (see my previous article about the case for investing in Egypt) and represent some very attractive investment opportunities. DRC is a tougher case, but even there the situation is better than it was a few years ago. There, the opportunities are mainly in natural resources, but there are an awful lot of them.

If you take a long view, as the Chinese famously do, you have to invest in Africa. For the individual investor it is hard to reap those outsize returns you mention, but you can still do very well indeed. But don't play with the rent money.

Oct 29 09:13 AM

[Paul Harper:]

good points both, also a quick snippet on Egypt, they are more & more aligning themselves with the West, especially in building ties with the EU, the French have been doing business there for years & have made a barrel load of cash.
US investor caution regards "Islamic" countries, can be a little short sighted. After Turkey & Lebanon, I find Egypt to be one of the more secular of the Levantine nations.

Oct 29 11:32 AM

[sticktoitiv...:]

"most people, especially in the U.S., think Africa is one country"

Sad but true.

"Your other remarks, however, though based on truth, seem designed to heighten the perceived risk and raise the risk premium"

You need to be aware of the risks. Your article, though informative, probably needed madhedge to balance it out a little.

Oct 31 06:33 PM

[StockMaster...:]

SSL is cheap, pays a great dividend and when oil is at $100 will be worth at least 30% more than it is now. This is inevitable in the next 3 years. Its also a great China play on coal, coal to liquids, and nat gas

Nov 01 07:02 PM

[Kansas City...:]

Chip,

I can't find anything on the pink sheets for lornho anywhere. Even on the company's old site it lists its London listing only. Whats going on?

Nov 03 03:56 PM

[old boat guy:]

Kansas City--try LNAFF. from Topeka you dummy

Nov 10 02:29 PM