East Africa’s leading telecom operator Safaricom (ISIN: KE1000001402) will create a holding company to control all its business lines, including the successful mobile money unit M-Pesa. “What we intend to do is create a group structure. So Safaricom becomes a group, and then you have different businesses,” Safaricom’s CEO Peter Ndegwa said last week. The market reaction to the announcement was slightly positive. Safaricom’s share price gained 1.4% to KES 25.30 (EUR 0.2089) on the Nairobi Securities Exchange (NSE).
We suspect, however, that investors are not as excited about the restructuring as Safaricom would hope. Let us explain: Along with the holding company, Safaricom is setting up a mobile tower subsidiary. The towers to be built will also be used by its competitors Airtel Kenya and Telkom Kenya.
This decision goes against the trend in the telecom sector. Most telecom operators are divesting the tower business as it consumes a lot of capital. Indeed, the need for capital will only increase as 5G technology requires an even denser tower network.
Capital intensiveness is one reason why South African telecom operator MTN (ISIN: ZAE000042164) spun off its tower business several years ago and sold it to IHS Towers (ISIN: KYG4701H1092, EUR 1.9 billion market cap). IHS is listed on the New York Stock Exchange (NYSE) and a leading tower operator in Africa. Its competitors in Africa are Helios Towers (ISIN: GB00BJVQC708, EUR 1.4 billion market cap) and American Tower Corporation (ISIN: KYG4701H1092, EUR 92.6 billion market cap).
You may accuse us of not having enough imagination. Fine. But our point is that it will be difficult for Safaricom to raise the necessary capital for the tower business without driving its share price down. Analysts may point out that as Safaricom accounts for one-third of the market cap of the top 30 companies listed in East Africa (EUR 8.4 billion), it is well positioned to finance the tower business. But we would object that Safaricom has already spent EUR 1.2 billion on its market entry in Ethiopia. That figure is to rise to EUR 2 billion in five years. So there is, in our view, a risk that Safaricom may be overextending itself, and this is something that investors are worried about.
For euro-denominated investors, Zambia has been Africa’s best performing equity market this year. The leading stock index for the country, the LuSE ASI, is up 43.5% this year in EUR terms. The rise was recorded in an overview published by African Markets. However, in USD terms, the index only gained 24.4% and in the local currency ZMW just 19.4%.
Zambia’s equity market is quite diversified. Here are some examples: Copperbelt Energy Corporation (ISIN: ZM0000000136) is the country’s company for the transmission and distribution of electricity with a EUR 400 million market cap. However, its price-to-earnings ratio, at 167, is absurdly high.
Zambia Sugar (ISIN: ZM0000000052, EUR 350 million market cap) specialises in sugar and sugar-derived products such as molasses, syrup and ethanol. Since January, its share price is up 24% to ZMW 18 (EUR 1.12). AECI Mining Explosive (ISIN: ZM0000000284) manufactures dynamite and other explosives for the mining and construction sectors in Central Africa. But the share is rarely traded.
As the example of AECI reflects, we do not recommend Zambia’s equity market to investors due to its sheer lack of liquidity. Share prices are often random quotes that have little to do with the fortunes of the traded companies.
For EUR investors, Africa’s second best performing stock exchange this year is Tunisia. The country’s leading stock index, the Tunindex, is up 17.9% in EUR terms. But the index has only gained 1.9% in USD terms and 15.3% in the local currency, the Tunisian dinar (TND). While this market is more developed than the Lusaka Stock Exchange, investors should only consider the more liquid stocks of the Tunindex 20.
One example is Banque Attijari de Tunisie (ISIN: TN0001600154), the Tunisian subsidiary of Casablanca-based Attijariwafa Bank. As we reported, the bank has benefited from recent investor interest in African banking shares. Since January, Banque Attijari de Tunisie is up 23.3% to TND 37.49 (EUR 11.68).
In deciding a stock’s trend, two factors are key: The movement of the price and the trading volume in that stock. On both counts, Ivory Coast-based Sucrivoire (ISIN: CI0000002028) is convincing. While the share had traded between XOF 1000 and XOF 1100 in the past few months, last week saw a sudden jump in its price. Sucrivoire increased to XOF 1185 (EUR 1.81) from XOF 1044 on 18 October – reflecting a gain of more than 13%. The rally was accompanied by high trading volume in the stock. One day last week, 8,350 Sucrivoire shares changed hands.
We don’t know the exact reason for the sudden jump in the share. Generally speaking, we believe that Sucrivoire is benefitting from a re-evaluation of the food sector by investors. Sucrivoire is a well-managed subsidiary of the Ivorian holding company Sifca. Its CEO is Jean-Louis Billon. Sucrivoire operates 13,752 hectares of industrial sugar cane plantations and 3,423 hectares of village-owned plantations in the Ivory Coast.
Despite good results, the share price of Moroccan supermarket operator Label Vie (ISIN: MA0000011801) is underperforming. The share has shed 8.8% of its value since 23 September, to trade at MAD 4501 (EUR 412). This is certainly frustrating for Label Vie, as last week the retailer announced strong results for the first half of 2022. According to the company, earnings for the period were up 36.4% to MAD 218.7 million, while sales rose 16.8% to MAD 6.3 billion.
But let’s look at why the share has not resonated with investors. On 9 September, Label Vie announced a capital increase of up to MAD 180 million (EUR 16.5 milion). The new shares were reserved for Label Vie’s employees, who could buy them at MAD 3273 (EUR 300) apiece – or 27.3% below the current market price. We welcome the opportunity for employees to participate in the company's success. But it is also true that the capital increase was not cheered by Label Vie’s other shareholders, as the move dilutes the share in the short term.
Investors also have other concerns. One of them is a high price-to-earnings ratio of 24.7, based on estimated earnings for 2023. It seems to us that Label Vie has maxed its valuation and that investors are starting to reconsider their exposure.