Silk Invest - African Investment Opportunities September 2011
Contents
The “case” for Africa Investment opportunities
Food sector Conclusions
Page 3 3
The world is turning upside down...Again Breakdown of GDP (%) 100% 90% 80%
8% 9%
9%
16%
20%
15%
52%
61%
30%
0%
22%
3% 4%
4% 4%
5% 7%
1980
2010
2030
4% 8%
2% 4%
1% 3%
2% 4%
1000
1500
1870
1913
1950
Middle East
40%
33%
23%
11%
Africa
26%
49% 36%
10%
13%
57%
61%
40%
10%
41%
49%
42%
60%
20%
11%
18%
70%
50%
11%
Asia
W Eur & US
4 Source: The World Economy Historical Statistics, Maddison & Angus, ; World Bank; Silk Invest
Rest of world
Africa’s place in the world Share of World 30%
28%
Twice the level of FDI of India
25%
20%
20%
17%
17%
18%
17%
18%
15%
15% 11% 10%
5%
9%
8% 3%
7% 4%
7% 4%
4%
2%
0% GDP 1990
GDP 2010
GDP 2030 Africa
5
Population 2010 China
Population 2030
India
Source: African Alliance; IMF; World Bank; Silk Invest Note: Market Cap as of July 2010; Average FDI in 200-2008; Population and GDP numbers as of 2008
FDI 2010
Forget commodities…Profit from the consumer 1,600
African middle class on the rise (Population by income group)
1,400 1,200 1,000 800 600 400 200 -
35 264
35
291
43 340
194
243
272
1980
1985
1990
Below Poverty Line
46
63
85
105
129
185
152
775
911
1,051
379
456
545
654
318
322
312
293
267
230
181
1995
2000
2005
2010
2015
2020
2025
Above Poverty Line & Below 5k GDP per capita
Above 5K GDP per capita
•Around 20% of worlds’ population will live in Africa by 2025 •Total Africans above poverty line will go to 1.23 billion...close to 500 million new consumers 6 Source: World Bank; IMF; Silk Invest
Africa’s institutions are developing Institutional Strength Ratings 8.0 7.0
7.0
7.3 6.6 6.6
6.3 6.3
6.0 5.0 4.0 3.0
6.7 6.1
5.9
6.7
6.6 5.9
5.4 5.6
5.4
5.3
3.3
4.3
3.6 2.8 2.7
2.5
5.6
5.0
4.6 3.9
5.9
5.6
3.9 3.9
2.2 2.2
2.0 1.0 Corruption Ghana
Protection of minority shareholders’ interests Morocco
Egypt
Ethiopia
Strength of auditing and reporting standards Nigeria
Kenya
Judicial Independence
Russia
China
o Countries like Somalia are as much an exception in Africa as North Korea is an exception in Asia o We invest in countries which have shown a track record of improving their institutions 7
Source: World Bank; WEF; IMF; Silk Invest Note: 1 is bad and 10 is extremely strong
Low leveraged economies Financial reserves and total debt as % of GDP (%) 250
235
224
218 200 159 150
100 59
50
50 20
15 -
8
World
3 EU
1 US
Japan
Debt as % of GDP
14 LATAM
13 Emerging Asia
Reserves as % of GDP
Source: IMF Note: Debt is total of public and private debt; Reserves are IFS Reserves ex. Gold
48
39
20 18
Middle East & Sub-Saharan North Africa Africa
Contents
The “case” for Africa Investment opportunities
Food sector Conclusions
Page 9 9
Equities – Strong long term returns... 10 yrs annualized returns USD (%) World
2%
Emerging Markets
12%
Egypt
19%
Mauritius
19%
South Africa
16%
Ghana
15%
Morocco
14%
Tunisia
14%
Botswana
10%
Kenya
7%
Nigeria 10
o African markets have outperformed global markets in last 10 years
4%
0% Source: Silk Invest,; Bloomberg Note: Data as of 20 September
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Equities – ...and more upside potential Current value vs. 5 yr peak value USD (%) World
69%
Emerging Markets
76%
Nigeria
24%
Egypt
34%
Kenya
42%
o On average markets are at 40-50% of their peak values vs. 70% globally o PE ratio in most markets is at around 9 while Div. Yield is at 7%
Ghana
52%
Botswana
62%
Morocco
69%
South Africa 11
81%
0% Source: Silk Invest,; Bloomberg Note: Data as of 20 September
10%
20%
30%
40%
50%
60%
70%
80%
90%
Bonds – Africa’s bond opportunity... Indicative Yields in Local Currency 16.0% 14.0%
12.8% 11.4%
12.0% 10.0% 7.5%
8.0%
8.9%
8.0%
10.9%
13.8% 11.0%
13.5% 12.0%
13.2% 12.2%
9.2%
6.1%
6.0%
4.0% 2.0%
1.1% 1.2%
0.0% Japan Source: Silk Invest
12
South Africa
Morocco
Mauritius 5 year
Ghana
Egypt
Nigeria
10 year
o Africa represents a unique opportunity to get access to high yielding bonds o Investors can diversify across the continent to build up their portfolios
Zambia
Bonds - ...with attractive YTM across duration range Yield Vs Duration 16.00
Yield to Maturity (%)
14.00 12.00 10.00 8.00
6.00 4.00 0.00 Source: Silk Invest
13
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Duration
o Universe of available securities is developing and investors can take duration bets o Attractive yields are possible both on short dated and long dated paper
9.00
PE - Far from overcrowded... Private equity penetration as measured PE investments/GDP (%) 1.20
1.13
1.00
0.90
0.80 0.60 0.44
0.40 0.23
0.20
0.00
UK
Source: Silk Invest,; EMPEA
14
US
India
Brazil
0.16
China
0.06
0.04
Sub-Saharan Africa
North Africa
2010
o Limited competition for deals allowing investors to source their own deals o Sufficient opportunities enhanced by lack of options for local entrepreneurs
PE – ...with limited access to capital for companies Interest Rate Spread (%)
Kenya
Kenya
20%
Nigeria Ghana
11%
Ghana
Ethiopia
11%
Ethiopia
172% 78% 96%
UK
1% 0%
38%
Morocco
3%
UK
33%
Egypt
8%
Morocco
27%
South Africa
9%
Egypt
40%
Nigeria
14%
South Africa
15
Credit provided by banks (% of GDP)
10%
20%
30%
Source: World bank; Silk Invest Note: Interest Rate spread is defined as lending rate minus deposit rate
212% 0%
100%
200%
300%
Great opportunity but there are challenges… Macro risks •Potential inflation •Political instability •Most can be diversified away
Definition of African opportunity •Time horizon and asset class •Consumer vs. Commodities •Selection among 54 countries
Public markets •Operational set-up and management of liquidity •Benchmark approach vs. non benchmark •Internal research capabilities
Private equity
16
•Sourcing of deals •Structuring transactions according to local regulation •Securing attractive exits
...which require a multi-national talent pool
o Local presence 17
o Team member from country
Contents
The “case” for Africa Investment opportunities
Food sector Conclusions
Page 18 18
Choosing the right strategy is important ROE of African listed stocks by sector Food & Consumer goods
39.6
Technology
29.8
Basic Materials
21.9
Health Care
21.6
Utilities
21.5
Telecommunications
21.4
Industrials
18.7
Oil & Gas
18.4
Consumer Services
17.4
Financials
13.8
Average
22.9 -
19
Source: Silk Invest Note: Data as of 2010
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
African consumer spends mainly on food Food spending as % of total expenditures 90 80
73
75
79
70 60 50 40
46
46
Morocco
Kenya
48
33
30
27
20 10
10
United States 20
Mexico
Source: Various sources; Silk Invest
Turkey
Egypt
Nigeria
Ghana
Ethiopia
…and is upgrading his food basket o Formalization: Food sector in Africa is rapidly growing from a low base and packaged goods sold in formal retail shops account for less than 20% of market
21
Breakdown of Food sales channels 100%
o Branded products: Rapid transformation from non-packaged non-branded to packaged and branded food products
80%
o Import substitution: Local branded products are replacing more expensive imported products
50%
o New products: Expanding middle class demanding new product categories (e.g. Baby food, and different types and flavours of yoghurts and cheeses)
20%
o Modern retail distribution: Local supermarket chains in collaboration with foreign partners are increasing their footprint into Africa.
14
90%
70%
36 64 48
60%
40%
57
30%
38
35
10% 0%
1 Sub-Saharan Africa Supermarkets
7 North Africa
Small grocery shops
Source: Various sources; Silk Invest Note: Estimate as of 2009
South Africa Traditional Markets
Food spending is developing from low base Food spending per capita vs. South Africa (%) 60%
55% 47%
50% 40%
32% 30% 21%
20% 10% 0%
22
10%
13%
13%
5%
Beverages
Dairy products Sub-Saharan Africa
Source: Various sources; Silk Invest
Canned food North Africa
Meat
Recent transactions - Egypt Egypt - Confectionary •Status - Executed •Opportunity •Confectionary business with product heritage since 1881 and which went into a successful restructuring in 2008-2010 •Growth capital to allow the firm to move business to more scalable infrastructure and to fully leverage its new product lines in especially spreads business •Challenges •Egyptian political situation is moving but still volatile •Asset stripping exercise will change the company’s asset base •Structuring
•40% ownership + Convertible loan to be converted allowing us to get majority shares 23
•5x EBITDA valuation
Recent transactions - Nigeria Nigeria – Quick Service Restaurants •Status – Final stage of legal execution •Background •Professional restaurant chain with a number of profitable outlets in Abuja and Port Hartcourt, two bakeries and a catering division •Company has identified a clear market segment for itself as a high quality indigenous restaurant business and is seeking growth capital to scale up •Challenges •More constrained exit options with capping of equity in the firm at 40% •Property investments to scale up and need to secure debt from local banks •Structuring 24
•30% ownership + Rights to secure business and exit control •4.5x EBITDA valuation
Four focus areas to add value
25
Sales & Distribution
Finance & Governance
• National Coverage • Distribution Channels • Logistics • International Expansion
• Working Capital, Debt & Equity • Management & Quality Processes • People • Financial & Business Control
Product & Marketing
Value Chain & Partnerships
• Pricing • Renovation/Innovation • Capacity Extension • Packaging & Branding
• Vertical / Horizontal Integration • Margin Management • Technical Partnerships • Acquisitions
Contents
The “case” for Africa Investment opportunities
Food sector Conclusions
Page 26 26
Conclusions
27
o
Africa has undergone dramatic changes in the last few years
o
Equity markets have done well and outperformed other markets
o
Bond markets represent an attractive yield opportunity
o
Private equity industry is under developed
o
Food sector is the most relevant consumer play in Africa
o
African food companies are profitable and are growing
Thank you
28
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