Nigeria Is Now The Largest African Economy, A Look At Possible Investments

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 |  Includes: AFK, MTNOY, NGE, SRGHY
by: Chris Katje

Summary

Nigeria passed South Africa as largest GDP country in Africa.

MTN Group gets majority of its revenue from Nigeria and serves 56.8 million subscribers in the country.

The Global X Nigeria Index ETF offers best pure play investment in region with 70% of assets in Nigerian stocks.

The final numbers are in and Nigeria is the biggest country in Africa, in terms of gross domestic product. While South Africa continues to see its GDP fall, Nigeria is rising to the top and hit $510 billion in 2013. Despite the rise, there is still much upside for Nigeria and investors should look at accumulating small stakes in companies with ties to the African nation.

Nigeria's GDP total of $510 billion outpaced South Africa by $190 billion. Nigeria continues to thrive with growing oil exports and growing infrastructure. The United Nations says Nigeria's population will pass the United States by 2045, and will be the third largest in the world. Currently, only 9% of Nigeria's working age population is employed. Jobs continue to be scarce and the country needs to improve on this to build its economy.

To make matters worse, Nigeria is home to a high percentage of oil thefts at its pipelines. The area around the country is also becoming a dangerous for large ships to travel in as pirates run rampant and rival those of Somalia. Despite the risks, I believe Nigeria offers a great investment opportunity and investors have several foreign stocks and exchange traded funds to choose from for exposure to the region.

Shoprite (OTCPK:SRGHY) is the largest retailer in Africa. Currently, the majority of the company's revenue comes from its heavy store count in South Africa. In South Africa, Shoprite has 1185 corporate owned stores and an additional 337 that are franchised. In fact, only 240 corporate owned and 40 franchised stores are outside of South Africa. Nigeria has eight Shoprite stores and could become a huge growth opportunity for the retailer.

Shoprite has a market capitalization of $8.6 billion. The large African retailer has stores in 16 countries and should continue to benefit from growth in Nigeria and other countries. A growing economy in Nigeria and more demand for basic consumer goods could power Shoprite to a large base of hundreds of stores in the country. Considering the population of Nigeria is set to become the world's third largest in 2045, Shoprite could benefit for quite sometime.

MTN Group (OTCPK:MTNOY) is another African giant seeing large growth from Nigeria. This company, unlike Shoprite, already gets the majority of its revenue from Nigeria. MTN is a telecommunications company with a presence in 22 countries. The company had 207.8 million subscribers at the end of 2013. Of that total, 56.8 million subscribers came from Nigeria.

Nigeria made up 35% of 2013's total company revenue. Total subscribers in Nigeria increased 19.7% in 2013. South Africa counted only 25.7% of subscribers for MTN Group in 2013. The second largest country in MTN's subscriber base is Iran, as MTN continues to grow in the Middle East as well.

Other large American giants are investing in Nigeria. Yum Brands (NYSE:YUM) opened its 25th Kentucky Fried Chicken restaurant in the region. Domino's Pizza (NYSE:DPZ) has five stores in Nigeria and plans to open more. However, these companies see minimal impact from growth in Nigeria, as they are already international giants. Investors looking for pure-play ways to invest in Nigeria should consider investing in ETFs.

Unfortunately there aren't a ton of ETFs that have large portions of their holdings in Nigerian stocks. A visit to ETFdb shows six related ETFs under Nigeria and 122 under South Africa. In the future, I expect there to be a couple more Nigerian related ETFs, but right now the options are slim pickings. Of the six ETFs, only three have more than 10% dedicated to Nigeria.

The largest ETF dedicated to Nigeria is the Global X Nigeria Index ETF (NYSEARCA:NGE) with 70% of assets tied to the African country. A current look at the top 10 holdings in the fund shows this:

  • Guaranty Trust Bank (OTC:GUARL): 10.9%
  • Zenith Bank: 8.5%
  • Nigerian Breweries: 7.6%
  • TGS-NOPEC Geophysical (OTCPK:TGSGY): 6.6%
  • First Bank of Nigeria: 5.9%
  • Saipem (OTC:SAAYY): 5.8%
  • Nestle Nigeria: 5.0%
  • Afren (OTC:AFRNY): 5.0%
  • Seacor Holdings: 4.5%
  • United Bank of Africa: 4.4%

The ETF has large interests in finance (38%) and energy (32%), and a glance at the top ten holdings shows four banks. Consumer products makes up 20% of the fund, which is refreshing to see as I believe this is the biggest growth sector for the country. Also, only 10% of the fund is dedicated to large cap stocks, while medium and small/micro stocks make up 57% and 33% respectively.

Global X Nigeria ETF is just over a year old, with an inception date of 4/2/13. The ETF is down over 11% in 2014 and could see a boost for the rest of the year, as investors try and decide what areas of Africa offer good investment opportunities. The ETF has only 31 holdings, with the top ten making up 64% of total assets. The expense ratio for the ETF is 0.68%.

Another ETF for investors looking for Nigeria exposure to consider is Market Vectors-Africa Index ETF (NYSEARCA:AFK). This ETF offers more diversification within the African continent, as Nigeria makes up only 17.1% of the fund. While this limits the upside of the ETF being impacted from Nigeria's growth, it also lowers risk, with other more established countries making up a large percentage of assets. The ETF's largest country representations are South Africa (22%), Egypt (21%), Nigeria, and the United Kingdom (15%).

The Market Vectors ETF has 149 holdings, with the expense ratio being slightly higher than the Global X ETF at 0.78%. Nigeria has three of the top ten positions with Guaranty Trust (4.6%), Zenith Bank (3.3%), and Nigerian Breweries (3.2%). Together these three Nigerian companies make up 11.1% of the ETF. With total Nigerian dedication of 17.1%, the other Nigerian companies in the ETF make up a small percentage of total assets. The ETF is a good way to invest in Africa while getting some exposure to Nigeria.

Other ETFs with stakes in Nigeria include MSCI Frontier 100 Index Fund (NYSEARCA:FM), Beyond Brics ETF (NYSEARCA:BBRC), and Frontier Markets ETF (NYSEARCA:FRN). These ETFs have stakes of 10.4%, 7.9%, and 4.4% respectively. The sixth ETF under Nigeria is a small-cap U.K. fund with less than 1% listed as dedicated to Nigeria.

There remains risks with Nigeria as the country has low employment, huge infrastructure needs, and rampant crime. However, the growing GDP and population create opportunities to improve the economy and grow consumer products companies going forward. Investors should consider the risks of investing in an emerging market before investing in a foreign stock or ETF.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.