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Africa’s top 500 companies: Time to tighten up

By Nicholas Norbrook
Posted on Tuesday, 13 February 2018 10:14

For the fourth year running, the turnover of Africa’s 500 largest companies fell in our exclusive rankings. And though the drop was less steep – 6.7% for the companies’ 2016 financial year results compared to 12.6% the previous year – it means turnover is back to where it was in 2008. Back then, Africa’s corporate titans made $566.9bn. After a neat parabola of African corporate rise and fall, the 2016 turnover was $569.2bn.

This certainly puts a gloss on the enthusiasm of recent years. Even after the 2008 financial crash, Africa’s top firms only paused before regaining their stride. And while in 2013 and the first half of 2014 some of the losses could be ascribed to weakening currencies – our Top 500 ranking is based on United States dollar values – after that more nefarious factors kicked in.

The dramatic impact of the slump in commodity prices, the collapse in public finances and the hike in financing rates have played their part. And, more recently, sliding local currencies, like in Egypt and Nigeria, also complicated access to foreign exchange for corporates dependent on importing inputs.

Glass-half-full folk will point to a far greater resilience across the continent. Yes, overall economic growth declined rapidly in 2016 but hit 1.6% on average, rather than tipping wildly into negative rates. Those big economies that did go into the red – Nigeria and South Africa – have pulled themselves back into modest growth rates this year.

Those worried about the management of the heavy hitters at the top of the corporate pile in Africa are seeing fewer reasons to cheer. In Algeria, for example, our number one company of the Top 500, the national oil firm Sonatrach (#1), has seen a spectacular collapse in its turnover, which dropped from $61.9bn in 2014 to $33.2bn in 2015 and to $30.2bn in 2016. It remains, by far, the largest company in our rankings.

Shareholders are also nervously following the travails of Steinhoff (#2), the South African retail conglomerate engulfed in a major accounting scandal. They have seen the value of their holdings plummet by 80% since the beginning of December 2017, when the troubles were announced. The shredding of the reputation of KPMG’s South Africa operations, alongside the Steinhoff debacle, suggest that fixing the ways accountants work would go a long way to improving African capitalism. Those will be some of the key themes of the annual Africa CEO Forum to be held in Abidjan on 26-27 March this year. Indeed, given that South African companies represent 152 of our Top 500 companies and fully half of the global turnover of the ranking, issues of corporate governance in South Africa rank near the top of the list of things that would usefully boost company performance in the years ahead, regardless of market conditions and global demand.

The way to recovery

But to reassure those who are not holding their breath over activist-backed improvements to issues of corporate governance, global market conditions are nevertheless becoming more clement. All of Africa’s main trading partners in Asia and the West are experiencing coordinated growth, which experts at the Organisation for Economic Cooperation and Development (OECD) and International Monetary Fund predict will last a few years, at least – and this provides a change to the unpredictable headwinds of recent years.

In 2017, the global economy had its best year since 2010: the Dow Jones Industrial Average in the US grew 25%, eurozone GDP growth outpaced the US – at 2.3% – while buoyant consumers in the West kept Asia’s factories spinning. That, in turn, is having an impact on commodity prices, a reliable proxy for economic growth in Africa.

Certain industries are already feeling a spring in their step today. While the oil and gas sector shrank as a share of our rankings, commodity prices strengthened through 2017 and should continue to do so in 2018 (see page 78). Industrial metal prices were up 24% in 2017 and should continue to rise according to Goldman Sachs, whose December 2017 research note also predicted a higher oil price, at around $62 per barrel, for the year ahead.

That will stabilise government spending in resource-dependent economies like Nigeria, Angola and South Africa. This, in turn, improves the outlook for many large corporates, given the significant role government spending plays in so many economies.

Given the backward-facing nature of our corporate data, which charts the 2016 financial year, these changes will not show up in our rankings for some time. But the sobering curve shown over these past years gives pause for thought for the boosters of Africa’s economic success over the past decade.

Huge structural reforms are necessary to put the continent’s firms on a sounder footing. There are $36.9trn in OECD-country pension funds that will not invest in African companies without serious improvements to the ways companies operate. To attract a greater share of global investment, Africa could take a leaf out of Asia’s book: over the past two decades, Asian companies drastically improved their governance.

Investors responded, creating a fundamental realignment in global trade and launching the ‘Asian century’. In 2016, Singapore alone attracted almost as much in foreign direct investment as 54 African countries. If African countries take the same path as their counterparts in Asia, the rewards could be huge: small and medium-sized enterprises could increase their access to the continent’s liquid banks; big corporates could attract global pension funds; and private equity could find ready exits from their investments.

But it is is not just African companies that need to put their shoulders to the wheel. Governments across the continent are responsible for bringing down the costs of getting goods from point A to point B, reducing the cost of powering factories and providing a workforce that is up to the job.

Price of doing business

Compare, for example, how two countries are exploiting their gas resources. Mozambique has chosen an export strategy, planning to sell its gas on global markets. Tanzania, on the other hand, is developing the gas to build an industrial corridor around the Dar es Salaam area in addition to liquefied natural gas plants for exports. “Dar es Salaam is going to be one of the supercities of this century,” says Andrew Moorfield of Exotix Capital, which recently financed the acquisition of PanAfrican Energy by Tanzania’s Swala, a locally listed oil and gas company. “There are pipes into the various factories. They are developing clusters with economies of scale, moving the country away from agriculture and tourism,” Moorfield adds.

Cement production – which largely relies on a cheap power source, such as natural gas – is also a bellwether. Tanzania’s price per tonne is among the cheapest, at $75. Kenya pays $95, Nigeria pays $120, Ghana pays $125 and Angola $205. The development of gas-to-power plants and other cheap sources of electricity leads to lower costs cascading through the economy, raising the competitiveness of nearly all companies.

Another country working hard to push the price of doing business down is Ethiopia, where cement is $85 per tonne. Chinese telecom company Transsion, which has made several fortunes selling handsets to markets across Asia and Africa, is building a factory in Addis Ababa. Transsion, which sells under the Itel brand of handsets, will still be shipping phones from Chinese factories to consumers in West Africa. But for the eastern side of the continent, Ethiopia will become a production and distribution hub for the company. And while Ethiopia has competitive power and logistics costs thanks to new hydroelectric dams and train tracks to the port in Djibouti, “don’t forget of course Ethiopian Airlines, which can connect you to any African market,” says Arif Chowdhury, group vice-president for Transsion.

Another area of growth potential for the continent is agribusiness (see page 76), argues Mo Dewji, chief executive officer of MeTL Group. In particular, there are many opportunities to add value to raw materials. “Our tariffs protect manufacturers in the country. So, if you want to bring in finished goods, it is 25% tax. [But] if you bring in raw materials, it’s 0% tax. Look for any natural resources that you can value add to, like for example go into juice or tinning tomatoes.” He is currently in the process of setting up a pasta fac­tory in partnership with a com­pany from the United States.

Ultimately, government and business will need to work together to turn around corporate performance on the continent. Attracting heavyweight investors, who can bring the strong capital flows that Africa needs, depends on it.

This article first appeared in our February 2018 print edition of The Africa Report magazine

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