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Africa is destined for solid economic growth on average, but it’s made up of many nations and prospects vary between sectors – so where do you find the smooth track to superior returns? A world-class analyst highlights MTN, listed on the Johannesburg stock exchange, as an obvious stock that is set to rise as Africa does. Adam J Crawford of Casey Research has his eye on MTN ADRs (American Depository Receipts) that are traded over-the-counter. MTN also has a BEE share, MTN Zakhele, which is set to benefit as the company generates revenue from across Africa. Trading in over-the-counter BEE shares has encountered an unexpected legislative hiccup, with BizNews Radio reporting this week that the Financial Services Board thinks it is illegal. So if you haven’t yet put money into MTN, your best bet may be the JSE-listed stock for now. You can find all the latest MTN share price data here on BizNews. The MTN ticker code is: MTN. – JC
By Adam J. Crawford, Analyst*
Sub-Saharan Africa (SSA). Say the words and most people think of poverty… famine… epidemics… political strife… sectarian violence. Yet, just recently, Microsoft announced a new investment on the continent, calling Africa a “game changer in the global economy.” So what gives?
Game Changer?
MTN is a company that is bringing in revenue from around Africa.
For starters, we concede SSA faces challenges… relatively low per-capita GDP, relatively low life expectancy, and more than its fair share of military conflict. Nevertheless, considerable progress is being made.
Politically, things have changed dramatically over the last two decades. In a recent report from financial advisory service firm KPMG titled “African Emergence—The Rise of the Phoenix,” researchers explained why…
The end of the Cold War more than two decades ago brought new freedom to Africa. People started to demand political representation and called on governments to be more transparent. Democratic features were introduced and a vibrant civil society emerged.
Influenced by this political renaissance, governments began to act more responsibly. Several ended hostilities with neighboring countries.
With political change came economic change.
Beginning in the 1990s, fledgling African democracies increasingly accommodated private enterprise by reducing trade barriers, cutting corporate taxes, and privatizing state-run industries. By the time the 2000s rolled around, these reforms started to gain traction. In 2000, GDP for all of SSA was a meager $331 billion. By 2012, it had quadrupled to $1.3 trillion.
As far as the future is concerned, with more stable political and economic environments and the unleashing of market forces, SSA will reap the benefits of two megatrends:
1) growing demand for natural resources;
2) increasing consumer spending by an expanding middle class.
Let me explain…
As the world’s population grows and per-capita consumption rises in emerging economies, the demand for natural resources will increase… and SSA has plenty of natural resources, such as gold, oil, chromium, and platinum. But as important as natural resource exports will be, they aren’t the region’s only engine for economic growth.
Consumerism is also a powerful factor, and it’s being driven by an emerging middle class. More and more SSA citizens are moving from subsistence farming to higher-paying urban jobs. In 2000, about 59 million African households were earning discretionary income; by 2020, discretionary income will be available to 128 million households.
All of this points to the expectation of continued economic growth. Economists at the International Monetary Fund estimate that by 2018, GDP for SSA will reach $1.9 trillion. That amounts to a compounded annual growth rate of 7%, which compares favorably with estimates for Latin America and developing Asia of 4.7% and 8.1% respectively.
Leapfrogging to the Tech Frontier
Microsoft is not the only big tech company betting on growth opportunities in SSA. Intel, Google, Hewlett-Packard, and IBM have also invested heavily in the region. But are these companies a little early? Won’t the benefits to tech come after the buildup of roads, power grids, and healthcare systems?
Not really.
Whereas in developed countries, high tech has been “bolted onto” existing infrastructures years after they have been created, in developing regions high tech can be integrated in as the infrastructure is constructed. For example, as the US struggles to mesh electronic health records with the healthcare system and smart-grid technology with the power grid, developing economies can build these features right into their nascent systems at the outset. In the words of John Kelly, head of research at IBM, Africa “can leapfrog straight to the tech frontier, without worrying about adapting old systems…”
In addition, the Cloud is adaptable to and quite useful in the early stages of an economy’s development. According to The Economist, “The ability to use software, computing power, and storage online ‘as a service,’ paying only for what you need and only when you need it, may put the cost of information technology within the budget of many small African businesses.”
The point is: the time for tech in SSA is now… not a decade from now. That’s why so many big tech firms are setting up shop in the region. Research firm IDC predicts that IT spending across Africa will increase from $30 billion in 2012 to $40 billion in 2016, and if telecom is included, spending will increase from $103 billion in 2012 to $130 billion by 2016.
But here’s the thing: Africa won’t significantly move the revenue needle for the global tech giants, so investors should look elsewhere for opportunities. Our advice? An African telecom.
The Gains Down in Africa
MTN-sponsored concert in Abuja. The JSE-listed company is giving you exposure to Nigeria and other African countries. It has more subscribers (and revenue) in Nigeria than South Africa, Johannesburg stock broker Vestact has noted.
As mentioned before, over the next few years, millions of SSA households will be acquiring discretionary income for the first time. That means millions more in the region will have more money to purchase necessities, and they’ll begin to purchase things like mobile phones and mobile services.
According to GSMA, a global trade organization for mobile phone operators, there will be 250 million mobile phone connections in Africa over the next five years. That bodes well for African telecoms. But it’s a hotly contested space. So which telecom is the best bet?
We like MTN Group Limited (MTNOY). The company is on solid financial ground. It pays a nice dividend. Its network is superior to the competition’s, which is why MTNOY is the market share leader in SSA. Oh, and the stock is cheap—even after the 12% run the stock has gone on since we recommended it in the December issue of BIG TECH. If you want access to our comprehensive report on MTNOY as well as access to our other buy recommendations, which include a networking equipment provider with 90% near-term upside potential, then sign up for a risk-free trial of BIG TECH.
* This article is published here on BizNews with the kind permission of Casey Research.
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