There is a worrying development in Africa that we think investors should be aware of. Before we elaborate, let us give the good news: Economic growth in sub-Saharan Africa is expected to be 3.8% in 2023 and increase to 4.1% next year, according to the latest projections from the International Monetary Fund (IMF). By comparison, economic growth in advanced economies should total a mere 1.2% in 2023 and 1.4% in 2024. These rates compare with as much as 2.7% in 2022, the IMF predicts.
The bad news is that Africa’s two leading economies, Nigeria and South Africa, will act as less of a growth driver for the continent if the IMF’s economists are right. According to them, growth in South Africa will be just 1.2% in 2023 compared with 2.6% in 2022 and even 4.9% in 2021. The outlook for 2024 is equally disappointing, with South African GDP expanding by just 1.3%. Nigerian economic growth will not be as tepid, but it will still slow a bit: According to the IMF, the country’s GDP will increase 3.2% in 2023 compared with 3.0% in 2022, but slow to a rate of 2.9% in 2024.
Although the projections reflect that the two economically important countries will underperform the sub-Saharan African average, countries like Kenya should do better. But as these latter countries are second-tier, their performance will be not enough for Africa to keep pace with other emerging markets like China or India.
According to the IMF’s projections, growth in China will be 5.2% in 2023, up from 3.0% in 2022. In India, GDP growth in 2023 will admittedly dip, but remain high at 6.0% (2022: 6.8%). GDP in the emerging market of Asia overall will increase 5.3% this year from 4.3% last year.
In view of these developments, we would very much caution investors against betting Africa as a growth story – along the lines of “Africa Rising.” Instead, Africa’s markets are ideal for stock picking, and those investors who appreciate this will find many interesting opportunities there.
During its initial public offering (IPO) last December, Moroccan hospital operator Akdital (ISIN: MA0000012585) raised MAD 1.2 billion (EUR 109 million). At first it appeared as though the shares sold on the Casablanca Stock Exchange (CSE) were overpriced. Consider that in the month following the IPO, Akdital lost 10.4% to MAD 270.50 (EUR 24.60). But since then, the stock has recouped the loss and returned to its initial offer price of MAD 302 (EUR 27.47).
The recovery in the share is certainly linked to Akdital’s rapid expansion. At the end of 2022, the company opened its eighth health unit for the year in Salé. Including all units for 2022, Akdital runs of total of 17 with a capacity of 1822 beds. Last week, Akdital, together with the university Mohamed VI Polytechnique (UM6P), announced the opening of an oncology centre in Benguérir.
Many investors in developed markets are wary of companies that invest too heavily in expansion. But in the context of emerging markets, we consider such investment to be positive for a company.
Indeed, Africa’s health sector is one of the industries that is growing and professionalising quickly. This bodes well for Akdital. Cleopatra Hospital (ISIN: EGS729J1C018) is also benefitting from this trend, as reflected by the stock’s performance. Shares in Cleopatra, listed on the Egyptian Exchange (EGX), are up 4% to EGX 5.53 (EUR 0.17) since 1 January. This month, however, Cleopatra’s has lost a bit of its momentum, declining by 2.8%.
It is nothing spectacular, but shares in East African Breweries (EABL, ISIN: KE0000000216) are up 7.3% to KES 179.75 (EUR 1.34) since 1 January. Last week, EABL announced that its net sales in 2022 were up 4% to KES 57.3 billion (EUR 427 million). According to the brewer, sales were dampened due to tax matters. EABL’s net profit for the year stagnated at KES 8.7 billion (EUR 64.8 million).
Despite its somewhat lacklustre results, we believe that the increase in EABL’s share price is justified. Its return on equity remains relatively strong and its free cash flow yield totals an impressive 8.9% based on the 2022 results. Although the yield is expected to drop to 7.2% based on the 2023 estimations, we feel that this is still competitive for the brewery sector.
Indeed, as the macroeconomic environment becomes tougher, investors may be looking for resilient stocks like EABL that produce high margins and have a strong market position.
Sappi (ISIN: ZAE000006284, a South African producer of pulp and paper, was a highflyer on the Johannesburg Stock Exchange (JSE) last year. Its share price increased by 25.2% to ZAR 54.58 (EUR 2.86) in the past twelve months. However, Sappi’s CEO Steve Binnie said last week that the outlook for the company was darkening.
As to the reason, Binnie blamed the South African government for allowing scandalous conditions in the country’s power supply. He said Sappi has been forced to find alternatives to power supplied by state-owned Transnet and Eskom owing to the latter firms’ unreliability. Business Live reports that Binnie is urging the government to intervene to stop the negative effect the situation is having on its business and entire value chain.
So far, investors have not reacted to Binnie’s wake-up call. Sappi’s share price did not really move last week. But it does not have to stay that way.