• Investing in Africa – Discussing the business environment in Africa

    Africa resident and Millionacres analyst Tyler Crowe joins Motley Fool Global Partners Advisor Bill Mann and Industry Focus: Energy host Nick Sciple for an introduction to the African economy and a look at some of the trends that are setting the continent up to become one of the world’s fastest-growing regions.

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    Nick Sciple: This conversation was recorded on June 30th, 2021. Some things may have changed by the time you hear it.

    Welcome to Industry Focus. I’m Nick Sciple. This week, we’re taking a dive into emerging markets with a look at investing in Africa. Joining me to break it all down, our Millionacres analyst and Africa resident Tyler Crowe, and Global Partners Advisor, Bill Mann. Thanks for joining me, guys.

    Bill Mann: How are you, Nick?

    Sciple: I’m great. We’re pre-recording this because I’m getting ready to head out for my bachelor party/wedding/honeymoon. I’m doing great, very exciting time, very busy time. Yes, I’m glad.

    Mann: By the time this airs, you might be dead.

    Sciple: All of us, could be not me specifically. But yeah. You’re hearing this in the future. We’re living in the past. We’re time traveling to you, podcast listener. Hopefully, things have gone well in the interim.

    Mann: I hope your bachelor party goes really well, but not as well as that. I hope you have a blast and congratulations.

    Sciple: I agree. I think my fiance would agree as well. How are you doing, Tyler?

    Tyler Crowe: I’m doing great. I do have to apologize, as you mentioned, being an Africa resident every once in a while the power does cut out from time-to-time. If I get a little blank stare, that might be it.

    Sciple: Awesome. Yeah, let’s talk about Africa. We’re going to talk about what’s happening in this huge continent. What could drive it over the next decade or so, and then some investment opportunities off the bat. I just want to talk about the demographics. Because the demographics of Africa really set up nicely for lots of growth coming into the future. Tyler, what can you tell us about what’s going on for Africa just from a population point-of-view. Who lives there?

    Crowe: That is such an interesting question to ask because it is such a dynamic place. We talked about Africa as a whole a lot, but from country-to-country, it’s changing a lot. But it is, as of right now, it’s about 16.7% of the world population. With the median age only 19 years old. This is a young, growing, dynamic, hungry continent. But over the next 40 years, we’re expecting the population to increase 85%. Urbanization is going to be huge in this area. We’re talking about right now, there are no cities in Africa that are the size of New York City, about 20 million. In 40 years now, there could be more than 10 and then in 70 years from now, there could be more than 20. The growth rates here are staggering. The urbanization rates are staggering. It is a continent on the move.

    Mann: It’s also a continent, Tyler. When you say, “How are things in Africa?” it’s a little bit like saying, “How are things in North America?” There’s a vast difference between South Africa and where you are, in Gambia.

    Crowe: Yes. Absolutely. I’ve been living here for a little over five years. The two countries I’ve lived in are Malawi and Gambia, two places that I think most people would consider, on the less developed side. That’s not an understatement in any way. But you go to places like Johannesburg, Cape Town, Nairobi, Lagos. Your getting a very different experience than where you would get in where I have been and even within those countries, in places outside the cities. The dynamics, the change, that you can get in 100 miles is just staggering.

    Sciple: When you look at the economy, obviously lots of lots of diversity going on. Lots and lots of ranges of development. But when you think about the highlights of Africa as an economy, as a contributor to the world and world trade today, where does it plug-in? What are the major industries?

    Crowe: Well, as of right now, if we talk about it on the global scale, most of Africa is known for its extractive resources, as we already know. You got the Zambia Copperbelt, it’s one of the largest copper producing areas of the world, which also happens to be right around the places where we’re getting a lot of similar metals. Cobalt, which is one of the huge ones we’re talking about with the electrification of the grid because Cobalt is a huge battery requirement. Oil has always been one of the biggest resources for a long time in many countries across the world. No matter where you go, you’re going to find some extractive resource, one way or another; South Africa, diamonds, precious metals. Even where I was in Malawi, there was a little bit of uranium and timber. Somewhere on this continent, somebody is doing extractives.

    Sciple: Right. This opportunity to develop further throughout the 21st century is to move from this highly extractive farming based economy toward more developed modern technology-based economies moving into the future. You have this young, dynamic, hungry economy, under-development in some of these areas with lots of opportunities to expand into the future. What can you talk about where they are as far as technological development and what opportunities are there for the continent and maybe specific countries too? Again, we talked about how it’s hard to generalize. We’re trying to do that here. But do your best.

    Mann: There are 95 companies. African domiciled companies that are trading on the U.S. exchanges. Almost all of them are on the OTC exchange, so not on the New York Stock Exchange, not on Nasdaq. Some of them are rather large companies. Naspers, for example, is an $87 billion company. Its legacy was as a newspaper company. But they did a little thing about 15 years ago, where they put a tiny bit of money into a company called Tencent. It was one of the best investments that’s ever been made. They turned $50 million into somewhere in the area of $100 billion. There are some really incredible technological companies and investments in Africa. By and large, they are focused in South Africa. Almost everything else that you see throughout the continent is banking or it is extractive, as Tyler said, or it is in some form of construction. Those are the primary opportunities that are out there. The other thing that’s out there that is hard to buy in the U.S. but you can do it is a company called Safaricom. It’s a Kenyan national telecommunications company that also has something called M-Pesa, which is really one of the really neat things that you see throughout Africa. In areas where there is very little infrastructure, this is a way for the unbanked to get bank accounts, being able to participate in the formalized economies.

    Crowe: I know we may be getting a little ahead of ourselves here.

    Mann: We did. I’m sorry, that’s always my fault.

    Crowe: No. Because I want to go down this rabbit hole really badly.

    Mann: Yeah.

    Crowe: Having been using mobile money, not necessarily M-Pesa. Because this is one of the things that I find fascinating. If somebody solves it, they’re going to make all the money. One of the big challenges you have with these mobile money platforms across the continent is they are carrier specific. If I am using M-Pesa, I have to use that specific telecom company and I can only transfer money to the people on that carrier. Example. I’m here in Gambia, there are three different telecom companies. If I am using Africell and need to transfer money to somebody on QCell, I can’t do it. I actually have to carry on two SIM cards with two different accounts. The company that can figure out how to do a mobile payment platform across carriers is going to make all the money. Mobile money is the most strict version of a payment platform you could ever have. You can do a transfer of money using an old T9 Nokia brick phone. They use a bandwidth with it similar to how they found out they could do text over this data stream. They basically built a platform where you can exchange money for goods or from phone to phone, peer-to-peer, and there was very little interaction with an intermediary like a bank. Obviously, the telecom company gets a rip every time so they get to make a bunch of money off of it. But it’s just a more streamlined version. But there are, like I said, limitations to it. Typically, carrier dependent. Some of the fees depending on who you use can be pretty egregious sometimes. Figuring out that process is a very powerful tool in bringing banking to the unbanked and making it cross-national. That’s going to be a game-changer for this company.

    Sciple: I mean, that sounds almost like gen-one PayPal. One of the very first PayPal applications was that they could transmit money over the palm pilot. Sounds like the story you are telling here of somebody trying to crack that not of being the PayPal of Africa, that’s a big business there.

    Crowe: The reason I actually am interested in Jumia the company is not because of the e-commerce platform. It’s specifically because of their mobile payments platform. E-commerce is just the way that they’re serving it up and getting people within that ecosystem. If that can take off, I think that is an immensely more powerful tool and immensely more profitable engine for that company than anything they can do in the e-commerce world.

    Mann: Yes. I agree with you there to the degree that Jumia, which is actually a European company, that’s where they’re domiciled, but all of their operations are in Africa. To the extent that to me, their e-commerce that’s dead on arrival. There is a hospital that I work within, their address is a long […] road near some intersection. That’s the address. That is extremely difficult.

    Crowe: I could use GPS coordinates?

    Mann: Yes, exactly. Maybe you could use those three word coordinates, which is something that I’ve seen used as well. Be all of that as it may, that is a very hard nut to crack. A much better and a much more promising path for Jumia and whatever other potential long-term winners in Africa is going to be payment facilitation and that component of the back-office.

    Sciple: When you think about companies addressing our opportunity, Jumia is the big one. I mean, other companies that come to mind are PayPal, Square, these type of companies players in this market.

    Mann: Safaricom is one that we talked about earlier and the way that you would participate in Safaricom unless you have access to the Kenyan market, and very few of us do would be to own Vodafone which is its corporate parents. Which doesn’t give you very focused African exposure or African technological exposure. Millicom would probably be the best way to do it, as they are once again a European company. But they have a large footprint in Africa in telecom on the network side and then also on the MicroPayment side.

    Crowe: I believe it’s Orange, France Telecom. They have a very large presence in West Africa and a lot of the former French colonies, Senegal, Mali, that region is very high on the French Telecom aspect. I have this question for Bill, and I’d love to know the answer. What has prevented the American telecom industry with all the money they have taking a shot at some of these emerging markets? You can’t tell me it’s responsible capital allocation, because they just blew money on time Warner and whatever the heck you want to call that.

    Mann: I love the question. Some of it is regulatory. If you think about how the U.S. telecom industry was set up. During the ’80s and ’90s, we had the local telecom carriers rather than the long distance carriers. You actually see substantial investment by AT&T. They have actually made minority investments in other companies overseas. The really the best way to have done so with the American telecom companies isn’t through the carriers themselves. It’s actually through American Tower primarily. They have an enormous portfolio of assets in developing markets including in Africa.

    Sciple: I know, Tyler, there was a company that you wanted to talk about. Here was American Tower. If you think we’re going to have e-commerce or digital payments, or any of these things that requires you to connect to the Internet and some capacity and so mobile infrastructure very important for that.

    Crowe: Yeah. When we look at the cellphone towers specifically, this is what I find fast. I am a complete logistics and infrastructure dork when it comes to this stuff. But the way American Tower has worked for years is they went to the carriers and said, “Hey, do you want to own all these towers and be the only one paying rent? We’ll take it off your hands. We will take care of it.” Then they got all of these towers with just a single tenant. But they said, “Hey, why not just rent it out to three or four at the same time?” The Forex, the revenue, the returns on these things, and it’s been an incredible story in the developed markets like the United States and a little bit to a degree in I think India has been there other big play. They’re doing the same thing in Africa, and it’s very early innings. They’re buying from the telecom companies. They are all single-carrier tenants right now. The returns on those are not great. You just wait until you get a more mature telecom industry with multiple players all engaging on the same tower. The rates of returns on those like that data infrastructure is just going to be ridiculous. I shared a graphic with you guys on the rate for a gigabyte of data per country. You can see as more telecom companies enter the fold, rates drop like a rock. It’s going to happen when it does. A company like American Tower is going to be there and they’re going to make a lot of money.

    Mann: Yeah. I believe it is the case in lots of places that I work within Africa. I’d be curious about your experience. Tyler, you still pay per minute charge for connectivity, don’t you?

    Crowe: Everything is prepaid. When it comes to connectivity on a mobile platform, there are some postpaid options for enterprise clients. The reason I happen to live here, my wife works for the USP Score. The entire office has an enterprise postpaid system. They are happening. It’s very hard for an individual to get on a postpaid. It’s just not as available as we would have in the United States.

    Mann: If you stop and think of the implications of those types of barriers. We, at this point, in June, July of 2021, we think of nothing. Jumping onto a Zoom call, conducting commerce, having meetings. But if you’re in an environment where there’s that type of tolling, it’s a challenge, but it is also an enormous opportunity for companies like American Tower, because that economic model is going to break at some point, it has to.

    Crowe: To just anecdotally give you an example of that, I have my wired Internet connection from my house. Wired is a loose term because basically it’s wired to a satellite that goes to a cellphone tower. But I have that account as well as two hot spots that are backups in the event that one or two of them goes down for any one reason or another. That redundancy, something that we’re not used to in the United States is in comfort. If I am subscribed to Verizon, I don’t have to carry around an AT&T sim card just in case.

    Mann: Just in case, yeah.

    Crowe: It’s a friction thing that only exists in the emerging world that when those break, it changes a lot of things for people.

    Mann: In 2017, I spent a little bit of time in Djibouti. This is actually, Tyler, right before I spent time with you in Malawi. There are two pieces of infrastructure in Djibouti that are incredibly important for its neighboring country, Ethiopia, one of which is the port and the rail system that goes into Ethiopia. But running alongside of that is a power line and at the very top of the power line, and I have an amazing picture of this, is a cable and it’s on a loop. What that cable is, is the fiber optic cable that connects the country of Ethiopia with the rest of the world. When Tyler is saying,” Hey, in case these things go down,” this isn’t theoretical. In case things go down, it is like Thursday twice and then Friday again.

    Crowe: It happened here while we were away for a little while, COVID related. A Chinese fishing trailer cut the only fiber optic cable to the country.

    Mann: The only.

    Crowe: They were off the internet for a week and a half, the only.

    Mann: Yeah, so these kinds of things are real, they are costly in terms of capital returns, in terms of the amount, and the types of commerce that Africa can reliably do. But they are also for a company like American Tower, for a company like Vodafone, for a company like Naspers even, they are incredible opportunities.

    Sciple: I want to go back to the demographic stuff we talked about earlier, that the second level of factor of solving that problem and getting the cost of accessing data down and getting lots of folks connected is, as the cost of business formation goes down, you can develop a lot of these things a lot easier. As you said, putting these rails in place, really opens up lots of opportunities for growth into the future and things that you can’t predict now as you look at the current infrastructure or landscape, what’s possible. I think that’s what gets really interesting. You start compounding these things over time, and 15 years down the road, you’re firing on all cylinders. Before we started talking, we talked about the China story. If you look back 30, 40 years, China went from being a very undeveloped country to now one of the most developed countries in the world over the course of several decades, you could tell a similar story here. What are some things that you all will be watching when it comes to Africa, say over the next 10 years, some maybe guideposts and benchmarks to see how things are progressing?

    Crowe: There’s a lot of things to really unravel with this. But one thing I would love to see is actually seeing game plans from American consumer-facing companies with an Africa attack strategy. There is a middle-class population, it’s growing. It’s here, and there is a voracious appetite for American consumer brands. Living in the long way for two and a half years, for as long as I was there, I never saw less than 12 cars at the KFC drive-through. It was the only KFC in the country and you could never get a spot because it was that long. This appetite for American consumer products, brands, it is there and it is an opportunity just waiting to be unleashed. Another thing, I feel it’s been a barrier a lot for business, specifically American business, has been something like foreign currency fluctuation and the fact that there are a lot of currencies on the continent. Having to be in Nigeria, Naira or Senegal being the CFA. It’s been challenging. But, we’re starting to see progress toward more common currencies. There is a 15 nation group called ECOWAS, it’s the entire Western Africa region. By 2027, they are expecting to go on a common currency called the ECO, that’s going to be Senegal, Nigeria, Ghana, Mali, Burkina Faso, very fast-growing countries. It is hard to contemplate how fast Nigeria is growing as a population. Bringing these countries all together on a single currency could be a game changer not just for like Americans wanting to do business in this region, but just those countries doing business with each other. There is very little cross-border work because they’re all anchored to European currencies, and so being able to work on a common currency is huge.

    Mann: Right. To trade between Nigeria and Togo, and from Lagos to Lome is literally a 40 mile drive. You have to convert currency from Naira to, call it British pounds and then back to CFA in Togo. It’s expensive. There’s so many different things that are very expensive. One of the things that I’m looking at, Nick, and Tyler touched on this, and there’s a really interesting way that you can play and invest in Africa is by looking at the consumer brand companies that are big in Africa. They aren’t necessarily all U.S. companies. Nestle is one with a massive footprint in Africa. They even actually have their own publicly traded subsidiaries like Nestle Nigeria is its own publicly traded subsidiary. Anheuser Busch Inbev, the brewery companies, have massive African footprints. Unilever has a massive African footprint. These types of companies have gotten so much smarter and put so much more focus into the African markets in putting up brands and producing products that are relevant to the local markets. I think that that is a really underrated way to get great exposure to these economies. At the same time, as Tyler mentioned and I would emphasize, you’re getting exposure to Africa, but you’re getting European/American corporate governments and minority shareholder protections.

    Sciple: Excellent. Well, thank you all so much for joining me for this conversation on investing in Africa. I hope our listeners enjoyed it as well. I hope I’m still alive when this airs, I’m betting on it. I hope all our listeners will.

    Mann: I’d bet on it too. I’m not taking the other side of that.

    Sciple: Tyler and Bill, thank you both for joining me. I can’t wait to have you all on again sometime soon. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stock discussed, so don’t buy or sell anything based solely on what you hear. Thanks to Tim Sparks for mixing the show. For Tyler Crowe and Bill Mann, I’m Nick Sciple. Thanks for listening and Fool on.

    This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

    Bill Mann owns shares of Square. Nick Sciple owns shares of PayPal Holdings and Square. Tyler Crowe owns shares of American Tower, PayPal Holdings, and Square. The Motley Fool owns shares of and recommends American Tower, PayPal Holdings, and Square. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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