No longer a burned-out hole

In the early 1990s African securities markets were opened to foreign portfolio investors, since when there has been a reversal of capital flight. Slowly, markets are creeping on to the radar screens of emerging market fund managers.

“Africa is no longer a burned-out hole,” says Christopher Hartland Peel, head of equity research at Standard Bank, London, and author of African Equities (published by Euromoney Publications). “Crucially there have been no financial scandals, failures of stockbroking firms or frauds in the markets. African equities have given positive inflation-adjusted and dollar returns, and higher than those of treasury bills.”

Here are some of Africa’s best listed firms.

Commercial International Bank (Egypt)

Egypt’s Commercial International Bank (CIB), one of the Cairo stock exchange’s most popular stocks, has a well-earned reputation for innovation. Its privatization through a share distribution to employees in 1992 was copied by many local companies. Its initial public offering a year later helped kick-start Egypt’s capital market activity. Last year it issued a $120 million GDR ­ Egypt’s first (and easily the largest from the Middle East) – and the $100 million syndicated loan it announced in March is the first by an Egyptian borrower for 15 years.

Founded after a dinner agreement in 1975 between Anwar Sadat and Chase Manhattan’s then chairman, David Rockefeller, CIB’s core activity has always been wholesale banking for private Egyptian and multinational companies. When Chase eventually pulled out in 1987 – as part of a global strategic realignment following its LDC debt problem – virtually no-one gave CIB a chance, but it has confounded the pessimists.

CIB continued to work with Chase but reverted to being an almost wholly-owned subsidiary of the National Bank of Egypt. NBE gave it a free hand in management, but continued to inject funds, enabling it to maintain earnings while expanding its capital base.

Far from losing its client base, CIB has increased its share to 16% of all loans extended to Egypt’s private sector, which in turn is contributing the lion’s share of economic growth. Its balance sheet has expanded to E£10.85 billion ($3.2 billion). It took the unusual step last year of reducing dividend payout so as to further strengthen its capital position.

ING Barings expects a further strong rise in CIB’s loan and deposit growth for 1997, helped by the rapid expansion of its retail network, which is set to reach 35 branches by next year. By developing its electronic banking capabilities, in which it is the domestic market leader, CIB is positioning itself to win yet more market share from the large and still highly inefficient state banks.

Dynamic managing director Adel El Labban has long maintained that the guiding principle will be to sustain an annual return on equity of at least 20%, a feat it has achieved for the past 11 years.

Kenya Commercial Bank (Kenya)

Few sub-Saharan African banks have matched the performance of Kenya Commercial Bank, whose network has expanded rapidly over the past five years to capture 21% of the country’s loans and deposits market. Indigenously owned and managed, it is the country’s largest bank in terms of loans, assets (over $1.2 billion) and branches, 25% larger than its expatriate rival Barclays Bank Kenya and more than double the size of Standard Chartered Bank Kenya.

As a recent report by ING Barings notes, a big factor behind KCB’s profitability – the return on equity of 34% compares favourably with other banks in the region – has been its access to cheap deposits through a network of 275 retail branches, and its ability to reinvest the surplus funds in money market instruments. The liberalization of the financial sector and exchange controls in 1993 and the subsequent high interest rates on government treasury bills have made the last few years very rewarding for Kenya’s banking sector as a whole, and KCB has been the biggest beneficiary. It has also been steadily improving the quality of its loan book.

The origins of KCB go back to 1896 when the National Bank of India opened its first branch in the country. The local NBI network merged with Grindlays Bank in 1958, and after Kenyan independence in 1963 the government took over Grindlays’ operations and incorporated the bank as KCB in 1970. KCB was listed on the Nairobi Stock Exchange in 1988 when the government sold a 20% stake; further 10% stakes were sold in 1990 and 1996. Further divestiture is expected.

Namibia Breweries (Namibia)

Namibia Breweries (NamBrew) is locked in an intriguing David and Goliath struggle with South African Breweries (SAB), one of the world’s top-10 brewers. SAB has a 98% share of its home lager market, but dimunitive NamBrew (roughly a fiftieth its size) is trying to muscle in, with some success – last year its sales to South Africa more than doubled.

NamBrew’s main selling point is its recipe, which springs from a Bavarian purity law of 1516 (Namibia is a former German colony) that demands a natural slow-fermentation process and the exclusive use of malt.

Through clever marketing, its two “clear beer” brands – Windhoek and Tafel – which are 25% more expensive than SAB brands, have acquired considerable cachet among South Africa’s new rich. Managing director Bernard Masche claims the appeal is now widening to include students.

Last year NamBrew ran a campaign claiming that SAB put chemicals into its beer to speed up the brewing process. SAB retorted that the ingredients of its best-selling Castle Lager were “nothing short of perfection”, although it did not deny adding potassium metabisulphate and other extras. South Africa’s Advertising Standards Authority ordered both brewers to withdraw their advertisements because of “inaccuracies”.

NamBrew was listed on the Namibian stock market in May 1996, raising N$150 million, since when its shares have risen from N$2.40 to N$3.00. Its market capitalization is N$550 million. With a domestic population of just 1.5 million, it is hardly surprising that the ambitious company is keen to export more: exports rose from 16% of sales to 20% last year and Masche expects a doubling of sales to South Africa this year. Angola, Botswana and Zimbabwe are other markets which it is targeting.

SAB, meanwhile, has been refused permission by the Namibian government to build a brewery in Namibia. NamBrew regarded this attempt as a cynical attempt to force it from its home market.

ONA (Morocco)

Morocco’s largest conglomerate was established as Omnium Nord Africain during French rule in the 1920s, but it is now known simply by its initials to distance it from its colonial past and give it more of a contemporary ring.

The urbane and entrepreneurial chairman Fouad Filali is King Hussein’s son-in-law, but since he joined ONA in 1986 it has moved steadily away from being a royal family estate. The family still holds 13% of the stock, but Moroccan and foreign institutions own close to a third each; the remainder is free float.

Now the largest and most liquid company on the Casablanca Stock Exchange, ONA’s core activities straddle the mining sector (it distributes equipment throughout west Africa and owns 67% of SMI, Morocco’s largest silver mine) finance (it has a 20% stake in Banque Commerciale du Maroc and 53% in insurance company CAA) food-processing (sugar refineries and edible oils) and international trade through its subsidiary Optorg.

Around 40% of ONA’s Dh18.5 billion ($2.1 billion) turnover stems from volatile markets such as mining, making some analysts cautious. However, through a four-year restructuring programme involving the sale of loss-making non-strategic holdings and reducing costs in other subsidiaries, it has consistently exceeded market expectations as to its earnings.

The restructuring has been overseen by a highly regarded young management team, headed by Filali and his impressively straightforward managing director (since 1995) Gilles Denisty, previously at Price Waterhouse.

ONA has consistently taken the lead on the international and domestic capital markets. Its innovative $30 million Eurobond arranged by Citibank in 1993, which raised $5 million more than its initial objective and was widely hailed as signalling Morocco’s return to financial credibility, was followed a year later by a secondary share offering on the Casablanca Stock Exchange, further widening share ownership.

Trans Zambezi Industries (Zimbabwe)

Zimbabwe’s fast-growing conglomerate, Trans Zambezi Industries, has earned comparisons with British multinational Hanson in its heyday because of its strategy of buying controlling stakes in undervalued companies.

TZI, which has been buying companies across southern and central Africa, is now digesting its most ambitious acquisition so far, the Zimbabwe-listed paper and plastics manufacturer Art Corporation, which it bought last October.

By repaying Art’s high-interest loans and injecting strong management, TZI has since turned what used to be Zimbabwe’s biggest loss-maker into what is expected to be the group’s most profitable component.

TZI’s chief executive, Hilary Duckworth, grew up on a Zimbabwean tobacco farm. He worked at Hanson for a year during the turnround phase, but says that TZI is operating in a very different environment, one where good management is at a premium and where most of the businesses are expanding (Hanson tended to buy mature companies). Furthermore, he adds, there is constant change because of Zimbabwe’s structural adjustment programme. As well as providing investment, TZI places a lot of emphasis on providing strategic direction.

First incorporated as an industrial holding company in the British Virgin Islands in 1993, TZI acquired a majority stake in Zambezi Ranching and Cropping (ZRC) and then floated on the Luxembourg Stock Exchange. A string of acquisitions in Zimbabwe and South Africa followed, spanning battery and light-fitting manufacturing, insurance, paper and packaging, money-broking and farming (it is the country’s dominant producer and distributor of beef).

Last year’s turnover of $48.7 million was twice that of 1995. ING Barings expects it to double again next year; earnings per share have been growing at a rate in excess of 20% for the past two years.

Having spent spells at Robert Fleming and Société Générale, Duckworth is at home in the international capital market. Last August he raised $37.7 million through an international equity issue; this was followed in February by the listing of a Zimbabwean depository receipt in Harare and a listing in Lusaka in April. TZI has borrowings of just $7 million and Duckworth expects it to make a conservative entry into the international debt market in the not-too-distant future.

To those who caution that TZI’s managers may yet find themselves overstretched, Duckworth points out that the holding company has already sold $30 million of non-core assets and invested $40 million in increasing exposure to companies that are already under its control.

West African Portland Cement (Nigeria)

In a country renowned for corruption rather than corporate governance, West African Portland Cement (Wapco) stands out for the apparent absence of the former and the quality of the latter.

A high domestic market share and a committed foreign strategic partner mean that Nigeria’s largest cement producer is well placed to become one of the main beneficiaries of the expected rise in consumer demand later this year in what is comfortably the largest market in West Africa.

Analysts are reassured by UK cement company Blue Circle’s 40% stake, which it has held for over 30 years. This has provided Wapco with “excellent and dedicated management”, says Standard Bank’s Christopher Hartland Peel. The other main shareholders are O’dua Investment Company (26.8%) and the Nigerian government (16.6%).

Wapco began operating in 1960 from its first plant in Ogun State. It opened another plant in 1978 and now produces an annual 1.4 million tonnes. The share price rose 150% during 1996, but according to Standard Bank’s March report, a 9% reduction in the selling price of cement will depress shares this year before they recover once more in 1998.

With one plant nearing obsolescence, Wapco looks set soon to become familiar on the international capital market as it seeks to raise the replacement cost – likely to be in excess of $100 million – through a combination of syndicated loans and debt and equity issues.

Capital Alliance (South Africa)

In 1995, Capital Alliance (Captall) was simply a cash shell. Since then, through a string of acquisitions, it has transformed itself into a broadly-based financial services company and one of the most highly rated of South Africa’s so-called black empowerment companies, well-placed at the epicentre of a mushrooming market for its products.

Recently Captall was in the news for advising Saflife (which owns a large stake in Captall) which in turn led the African Mining Group’s bid for a 35% stake in JCI, which looks set to become the country’s first black-controlled mining group. (The sale by Anglo American fulfills part of Anglo’s pledge made at the time of the 1994 election to increase black participation in the South African economy.)

The subsequent strengthening of the rand and the fall in the price of gold has taken some of the glitter off the JCI deal, but Capital Alliance’s stock remains high.

Fifty per cent owned by a consortium of black businesses and trade unions headed by MZI Khumalo – a canny businessman who spent 12 years on Robbin Island with Nelson Mandela – Captall has useful links to the government and the black establishment. But the dynamic management team, headed by Mark Barnes, a former head of treasury and corporate finance at Standard Merchant Bank, sees Captall as “driven by shareholder wealth with black and white in partnership”. He says: “We’re black controlled but we’re not prepared to compromise on skills.”

Captall’s acquisitions have so far spanned life assurance, corporate and investment banking, stockbroking, asset management and properties. Its strategic focus, says Barnes, is to develop into a fully integrated, broadly based “and very South African” financial services group. So far the market has responded well. The shares have risen from R9 rand to R28 since March 1996, while the number of shares have increased from 50 million to 125 million.

“They’re extremely aggressive and well-postioned,” says Dana Becker, head of research at ING Barings in Johannesburg. “So long as they stick to their knitting, they should continue to do well.” Captall has some $1 billion excess capital available for further growth, and, says Barnes, with the area “awash with opportunities for financial engineers, so long as we provide the right skill fit, it is difficult to see us not doing well”.