Monetary policymakers in Africa find themselves in a dilemma. As the continent is underbanked, crypto currencies offer millions of Africans their only access to banking services and e-commerce. However, central bankers in Africa and those outside of it do not like the idea of private currencies spreading as they are largely beyond their control.
Africa’s central bankers want to resolve this dilemma by promoting central bank digital currencies (CBCDs) – which are nothing more than crypto currencies issued and controlled by them. Indeed, as intra-African relations get tighter, Africa’s central banks are exploring the use of CBCDs to facilitate cross-border payments. Recently, representatives from several African central banks met in Kenya to discuss this issue and agree the next steps.
The result: The central bankers decided to cooperate to combat money laundering and the financing of terrorism. This would be facilitated by the establishment of a central bank for all of Africa, as it is discussed for years. But so far, this project has not progressed beyond a short Wikipedia entry (https://en.wikipedia.org/wiki/African_Central_Bank).
But back to cryptos: The South African Reserve Bank (SARB) announced earlier this year that it was testing the ledger technology used by blockchain-based currencies to track transactions in real time. In July, the SARB also became part of “Project Dunbar,” an effort to launch digital currencies that also involves the central banks of Australia, Singapore and Malaysia.
Meanwhile, Nigeria has launched its own digital currency, the eNaira. Ghana announced a project to issue a digital version of its currency, namely the eCedi, and Kenya is considering following suit. Finally, the government for the Central African Republic (CAR) has approved the use of cryptocurrencies as legal tender.
However, state-controlled CBCDs will likely have a hard time in Africa. While they can address the problem of financial exclusion, this alone does not guarantee their success. This is because many Africans prefer cryptos to their often weak national currencies. For millions of Africans, cryptocurrencies have come to represent the future of finance and payments. Indeed, while completely unknown outside of Africa, private cryptocurrencies like Tamadoge, Battle Infinity, Yellow Card, Polkadot, Solana, Akoin City and Bitsika are becoming very popular.
As Europe and North America prepare for a possible recession in 2023, Africa’s economy is still growing. Africa’s retail sector has reflected this fact. However, there are signs that the sector’s valuation on the stock market could be maxed out.
Let us explain: Recently, Moroccan supermarket operator Label’Vie (ISIN: MA0000011801) has been a high flyer on African equity markets. Its share price went up 11% to MAD 4889 (EUR 439.50) in the past four weeks. But if you look at the stock’s performance since January, it has been an underwhelming minus 1.2%.
Label’Vie’s recent rally has been driven by strong financial results. At the end of September, the company’s consolidated revenues increased by 18% year-on-year to MAD 10.2 billion (EUR 917 million). According to the analysts at Moroccan bank BCME, the sales growth is mainly due to implementation of “an aggressive commercial policy aimed at preserving the purchasing power of its customers in a context of high inflation.” Label’Vie is indeed investing heavily in expansion and has increased the budget for this by 10% to MAD 8.9 billion (EUR 800 million). The group is set to open 11 new supermarkets in the fourth quarter alone.
But here is the catch: Label’Vie’s is financing its expansion in part by issuing debt. This could be a bit risky, as its borrowing is becoming more expensive. The interest rates on two of Label’Vie’s corporate bonds issued on 2 December 2019 have gone up. The rate on tranche “A” with a maturity of five years has increased to 3.94% and the rate on tranche “C” with a maturity of seven years has gone up to 3.84%. Previously, the rate for both bonds was 2.84%. All told, Label’Vie has MAD 2.9 billion (EUR 261 million) worth of corporate debt outstanding.
BCME’s analysts are still positive on Label’Vie’s share and see a upside potential of 9%. But the analysts are not enthused with its profitability, which is another factor that investors should consider. The retailer’s operating margin is just 5.4% and the net margin 3.7%.
South African retailer Shoprite (ISIN: ZAE000012084) is doing better by comparison. Its share is up 17.5% to ZAR 238 (EUR 13.01) for the past six months and 17.9% since January. This is despite the fact that its profitability is also lacklustre. The operating margin stands at 6% and the net margin at 3.1%. Like with Label’Vie, analysts are unimpressed by Shoprite’s profitability.
Our message to investors: Given that the valuations for Label’Vie and Shoprite are high currently, the risk of a setback seems greater to us than further gains.
As we already have mentioned, international investors should take a look at the opportunities afforded by Egypt’s stock exchange EGX. We have found two more interesting stocks, namely Abu Qir Fertilizers (ISIN: EGS38191C010) and Misr Fertilizer Production Company (ISIN: EGS39061C014). Both companies are benefiting from strong global demand for fertilizers and problems elsewhere in supply chains.
Abu Qir’s share has gained 80.1% to EGP 38.89 (EUR 1.50) this year and shows no signs of stopping. The company, now valued at nearly EUR 2 billion on the EGX, is Egypt’s leading producer of nitrogen fertilizers. However, investors should be aware of its small free float. The Egyptian government holds a 71.3% stake in Abu Qir.
Misr’s performance has not been as impressive as Abu Qir’s. Since January, its share has gained 47.7% to EGP 143.99 (EUR 5.55). As with Abu Qir, Misr’s free float is small, seeing that the government has a 56.9% stake in it. Misr, now valued at EUR 1.3 billion on the EGX, specialises both in nitrogen fertilizers and petrochemicals.
The situation on the oil markets is currently confusing. On the one hand, the price for crude oil fell 5.76% last week and is down 37.6% for the past six months. We attribute the declines mainly to China’s continued zero-Covid policy and the negative impact on international business sentiment. On the other hand, a lack of investment in the oil sector and the Western embargo on Russian supplies have created structural tightness that, in our view, should boost the price.
Like us, some market players expect the oil price to surge once again. This, of course, would benefit oil suppliers like South Africa’s Sasol (ISIN: ZAE000006896) whose share price has indeed declined along with that of oil. Sasol’s share has lost 35.4% of its value to ZAR 278 (EUR 15.26) in the past six months.
That said, we are not sure that Sasol will benefit as much as other oil suppliers could owing to its structure. This is because Sasol generates 58% of its sales from chemicals and only 36.6% from fossil fuels like oil. Another problem is that big international investors are wary of African oil companies in general due to them being often partly state-owned. This limits the free float and can make them beholden to political interests.