Corporate health check: How will Africa’s major companies fare in 2018?
The year ahead looks to be a strong improvement on 2017 for some of Africa’s biggest companies. A recovery in export commodity prices is being welcomed in many corners of the continent. Plummeting prices of oil and minerals cut sharply into profits of companies in those sectors, and last year, sub-Saharan Africa registered 1.4% growth in gross domestic product, the slowest pace in more than two decades.
Some major companies in the continent’s biggest economies are hurting from a year of poor growth. They will be encouraged by signs of better market conditions. South Africa’s recession pushed many of the country’s biggest finance firms to look abroad for new opportunities. But now, financial services companies like Discovery Limited are encouraged by better prospects at home.
In Nigeria, a push to diversify the economy away from oil will drive the growth of other sectors. Dangote Group’s cement and agribusiness units look set to benefit, and oil and gas companies will continue to struggle with low prices. But local player Seplat Petroleum is positioning itself to make acquisitions in the near term.
The telecoms sector is a particular bright spot. Rising demand for services will drive growth, and Kenya’s Safaricom looks poised to begin its long-await expansion strategy in East Africa.
Airlines are scouting for new partners as competition heats up in Africa’s hottest destinations. While South African Airways is waiting for government bailouts, Ethiopian Airlines, the continent’s most profitable carrier, is looking to beef up its West and Central African routes.
A change in Safaricom’s ownership structure has made the telecoms behemoth free to venture out of Kenya for the first time.
Until recently, Safaricom – East Africa’s biggest company by turnover – had been unable to expand outside of its home turf. Under the company’s previous ownership structure, it was seen as a Kenyan company focused on the Kenyan market. But with the sale of parent company Vodafone’s stake in Safaricom in August, the company is now free to move into other countries.
Safaricom is on the cusp of an expansion drive that will see it set up operations in as many as five African markets by 2021, according to Bob Collymore, the company’s chief executive officer. “We want to go into white space […] space that no one is in at the moment, and no one is in e-commerce,” Collymore, Safaricom’s chief executive officer, told the Financial Times in September before he went on medical leave.
Collymore’s vision for the company is to push its new Masoko e-commerce platform as well as its M-Pesa mobile-payment products into neighbouring countries. The company will be trying to replicate the strong growth in mobile banking products it has fostered in Kenya. Mobile-money services earned Safaricom $530m last year in Kenya.
Safaricom’s financials are strong overall. In March, the company recorded a 27% year-on-year increase in pre-tax profits, reaching $685m.
In August, Safaricom’s parent company, UK-based telecoms firm Vodafone, transferred almost all of its 35% stake in the company to Vodacom, its South Africa-based subsidiary. Talk of an expansion drive in the wake of Vodafone’s share sale drove Safaricom’s share price up to a record high of $0.26, giving the company a market capitalisation of $10.5bn.
The share sale was an important milestone. In November, Nicholas Ng’ang’a, the chairman of Safaricom’s board of directors, told reporters: “For Safaricom, this reorganisation has given us an expanded mandate to explore opportunities outside Kenya […] We are currently looking at [the East African] market.”
The most attractive telecoms market among Kenya’s neighbours is certainly Ethiopia, which has a population of around 100 million people. Safaricom has denied rumours that it is in advanced talks with the Ethiopian government to buy a significant stake in state-owned monopoly Ethio Telecom.
The Ethiopian government, which has not been welcoming to foreign investors, recently launched mobile-money services, leading many to speculate that Safaricom’s M-Pesa could also be coming to town.
Sateesh Kamath, Safaricom’s chief financial officer, will become the company’s acting chief executive officer while Collymore is on leave. “Asset-light” partnerships will form the basis of the company’s expansion strategy, Kamath told local media. “We do not [want to] go and invest millions and millions. It will be partner-based and platform-based.”
With the success of its data and rewards-based Vitality programme, South African’s third-largest insurer is now taking aim at retail banking sector.
Discovery Limited is known as a disruptor in the insurance world thanks to its app-based Vitality programme, which tracks and rewards positive client behaviour. Now, seeking to diversify its business, the South African insurance and financial services group wants to apply Vitality’s model, driven by technology and data, to the world of retail banking.
The Johannesburg-based company plans to launch Discovery Bank by mid-2018 after receiving authorisation from South Africa’s banking regulator – subject to a few conditions – in October.
Adrian Gore, Discovery’s founder and chief executive, tells The Africa Report: “We believe that our shared-value model has strong application in banking, given the way it monetises better client behaviour for the benefit of the client and Discovery.”
The Vitality model works by tracking behaviour, including visits to the gym and food purchases, and rewarding healthy choices with incentives such as free coffee and discounts on movie tickets and flights.
Gore says the Discovery credit card is a jumping-off point into retail banking. The card is profitable for the company, generating an average profit of more than R350m ($25m) per year. “We know for instance that the level of bad debts on the Discovery Card is materially lower than the industry average,”Gore says. “We attribute this to a conservative approach to risk management and the excellent quality of the client base.”
But the new Discovery Bank will not be the only new entrant into the market next year. TymeDigital, which is 90% owned by the Commonwealth Bank of Australia and 10% by Patrice Motsepe’s African Rainbow Capital, received a licence from regulators in late September.
Discovery’s Gore is tight-lipped about Discovery Bank’s planned products. Last year, Discovery said it would spend R2.1bn to set up the bank. Analysts expect it will target the higher end of the market, as with its Vitality programme.
Discovery also plans to continue expanding Vitality to a global client base. The company currently operates in 16 countries, serving 10 million clients, with wholly owned businesses in South Africa and the UK along with partnerships with insurers in North America, Europe, Asia and Australia.
Gore says the expansion will continue in the new year. “We’ll be introducing a new partner group next year in Japan with Sumitomo and have announced a strategic model in partnership with Hannover Re to deliver a cloud-hosted Vitality solution with potential to reach another 150 countries,” he says.
China’s Ping An Health, in which Discovery has a 25% stake, has seen “phenomenal growth” that Gore expects to continue. He anticipates that the venture will reach profitability in the next financial year.
With sluggish economic growth in South Africa, Gore says he remains optimistic despite the country’s challenges. “Historically, we have invested in the country in the midst of tumultuous times, and often these are actually the best times to build,” he adds. Gore founded Discovery in 1992 during South Africa’s volatile transition to democracy and with a market dominated by big players. Discovery is now South Africa’s third-largest life insurer by market value.
Dangote Group has been one of the few companies to outrun Nigeria’s recession and is expected to expand into more African territories next year.
For the first two quarters of 2017, Nigeria endured its worst recession in 25 years as the government struggled to help the economy to diversify away from oil. At the same time, Dangote Group, owned by billionaire Aliko Dangote, has been expanding its operations into oil refining and agribusiness.
In August, Dangote Group signed an agreement with Niger State to establish a $450m sugar complex that when completed, should create more than 15,000 jobs. Dangote Group already runs a Lagos sugar plant and a sugarcane plantation in Numan, Adamawa State. Over the next three years, it plans to spend $3.8bn on sugar and $800m on dairy projects.
Ugodre Obi-Chukwu of Nairametrics, a business intelligence firm, explains: “It was a stellar year for the Dangote Group considering this was a year with strong economic issues […] The revenues are up by 36%, earnings per share up by 39%. It was a stellar year.”
Dangote’s government qualifies for tax waivers under the government’s ‘pioneer status’ programme for infant industries. This has has helped the group’s cement business to grow and should allow it to begin exporting in 2018.
The conglomerate also became the beneficiary this year of a 10-year tax holiday tied to a contract to rehabilitate the expressway to the Apapa port in Lagos. Nairametrics’ Obi-Chukwu tells The Africa Report: “Their corporate social responsibility hasn’t translated into business gains yet, but it will when they finish construction because then they can move products quicker from plants and also have easier access to the plants […] The government also sees [Dangote] as a partner and as someone who has benefitted from their policies.”
With government support largley assured, Dangote Group could launch an aggressive assault on foreign markets and sell off some of its stakes in Nigerian operations, observers say. In September, Dangote made an offer for South African cement manufacturer PPC before withdrawing it in October.
Manji Cheto, Teneo Intelligence senior vice-president for Africa, says: “The company is already operating in some challenging markets […] Although you could argue that its decision to spread its footprint across the African continent – and possibly beyond – as well as across sectors, is precisely to hedge to better manage these risks.”
Analysts argue that Dangote likes to be a dominant player in a sector. “He divests in businesses in sectors that are more inclined to have more competition,” explains Obi-Chukwu of Nairametrics. “He did so with the flour mills, but bought it back. Another deal in South Africa fell through this year, but I expect expansion into more African territories next year. In some of these countries, there are plants under construction. And in some others, he just got licenses. However, Nigeria remains the largest market for the group and will remain so next year.” Dangote’s recent conflicts with the authorities in both Ethiopia and Tanzania suggest he is still tweaking his pan-African radar.
This article came from the December/January 2018 print edition of The Africa Report magazine