There were some doubts about Jeffrey Immelt when he took up the position of CEO at General Electric (NYSE:GE) back in 2008 - the company was going through one of the toughest periods in its history and it was important to restore investor confidence in the ability of the management as well as the company. Over the last five years, effective execution of the strategy and the efforts to bring the business back to its roots has paid-off and the stock has almost doubled. However, we believe the company has just prepared the launch pad over the last five years and the real growth lies ahead. Some major deal like Alstom will propel the company forward and the stock will take-off over the next two-three years - energy and aviation segments will be key growth drivers for GE - we have talked about the Alstom deal as well as the aviation segment in detail in our previous articles. We want to look at the demand side in this article as we have already discussed the supply side.
Africa: A Major Growth Driver for the Energy Segment?
Power and Water segment has been paying-off well for GE this year. It was responsible for bringing in $6.3 billion worth of revenue in the second quarter, which accounts for approximately 23% of the total revenue for the quarter. Revenue growth is the third largest, after Oil and gas, and aviation segment. Although already growing at an impressive rate, we expect this segment to grow further even more rapidly over the next few years as it expands its footprint in Africa.
Africa is growing at an impressive rate. Its gross domestic product growth for 2013 was 6.81% which is roughly double the average projected global growth rate of 3.5%. Africa has also attracted 10% of the total global Foreign Direct Investment in the last three years. We believe that this rapidly growing region will create a number of opportunities for the power equipment suppliers as well as power generation companies. These economies will need to enhance their power infrastructure in order to continue economic growth, which will allow companies like GE to enhance the sales from their power equipment and power generation segments.
Eskom, which is the largest electricity producer in Africa, is responsible for 40% of the total power supply of the continent. It is also considered to be the 10th largest producer in the world. With a capacity of 42,000 MW combined with 15% reserve margin and 5-10% operating reserve margin, the power giant is struggling to meet the increasing demand of the continent. This has been resulting in extreme power outages, disrupting many industries.
Another major issue is the high cost of electricity which is taking a toll on many industries. This is also proving to be a hurdle for the new entrants in a number of industries. Therefore, solving the cost problems will be a key factor for these economies to maintain or enhance the current economic growth rates. South Africa is aiming to generate 42% of its total electricity from renewable resources, mainly through steam and gas turbines and wind power, according to Africa Electricity.
At present, Africa has an installed capacity of 147 GW, which is roughly equal to installed capacity of Belgium or what China adds in a year or two. With this capacity, over half of the Sub-Saharan Africa would remain without electricity for even more than a decade. To overcome this shortage, Africa will need to add 250 GW of capacity till 2030. On average, this represents an investment of approximately $40 billion every year. Even Eskom has started to raise equity in order to boost their capital expenditure which it expects to grow close to a $100 billion. Africa Electricity expects an even bigger capacity to meet the upcoming demand of electricity in the region, i.e. 300 GW.
How can GE Benefit from this Opportunity?
It is clear from the above discussion that a massive opportunity exists for the companies providing equipment and services to these industries. However, it is important that we keep the cost factor in mind - the African economies are not only looking at growing their installed capacity; they are also giving thought to the cost of the electricity. GE's deal with Alstom will give it a considerable advantage in the cost department - this deal not only adds attractive assets to GE's portfolio, but it also allows the company to enhance its profits. Furthermore, the cost advantage might also allow the company to take advantage of special situations. For example, if an African economy is in need of equipment and there is a bidding war; GE can adjust its rates accordingly as the cost advantage will allow it more room to play with the rates.
The company has already started to ramp up its operations and expects to invest $2 billion to build better supply chain and take better infrastructure initiatives. The African segment has already started to grow for GE. In 2013, GE's revenue from the continent was $5.2 billion with an additional $8.3 billion in order backlog. The company expects to generate $90 billion in investment opportunities in this market. Based on the upcoming demand, we expect the revenues from this region to grow rapidly over the next decade.
We believe GE is uniquely positioned to benefit from growing African electricity demand. The company is focusing on enhancing its supply chain and infrastructure in the region in order to exploit this opportunity. Growth opportunities in the power segment along with the growth from the aviation segment are the two factors we believe will be key for GE over the next few years. The last five years were about recovering from the catastrophe that happened in 2008. However, we believe the next five years will be the years of growth and the company will really kick things on.
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.