Africa was and remains the world's poorest continent, with a very low standard of living and high rates of poverty. After decades in which it suffered from government corruption and bloody civil wars, Africa's GDP amounts to just 2% of the world's GDP, while its population amounts to 13% of the world's population. The continent, which was neglected and exploited by the Western World for years, has been showing signs of revival in recent years. From 2002 to 2007 the continent saw growth average around 5% a year, and according to a study published by OECD economists, GDP will grow by 5.9% in 2008, and growth will also top 5% in 2009.
Naturally, the figures vary greatly between countries. Oil or gas exporters, such as Nigeria and Ghana, are growing rapidly, and are likely to grow by around 6.8% in 2008, while the average growth in countries that import oil is expected to reach 4.9%. Countries that export other commodities have also benefited from the rises in prices. Until a decade ago, countries in Africa failed to derive the full the benefit from the vast wealth of minerals in the continent, due to, among other things, the theft of these minerals by European colonial rulers, and then the inability of the leadership to safeguard local economic interests from foreign companies.
Over the past decade we have seen a change here. The wealth of minerals still attracts foreign companies from across the globe, principally those countries that are large importers of minerals. However, the local leadership has shown that it is now far more capable than it once was of safeguarding its citizens' interests. Africa has benefited, in particular, from the economic growth in India and China on the one hand, with exports to these countries growing six-fold over the last five years, while remaining virtually unaffected by the slowdown in the US.
Israeli companies are also beginning to take advantage of Africa's momentum, with companies operating in the continent focusing on infrastructure, principally in oil and mineral-rich countries. In these countries, the economic situation has enabled the government to divert ever larger budgets into infrastructures. There is unquestionably a lack of proper infrastructures in Africa, both in transport and water, and the World Bank, one of the main backers of development in Africa, sees infrastructure development as a key strategy in the improvement of standards of living and promotion of growth in the continent.
Housing and Construction - roads and properties
The company with the most substantial exposure to Africa is, without doubt, Housing and Construction Holding Co.(Shikun u'Binui) (TASE: HUCN), one of whose main subsidiaries is Solel Boneh International Ltd., which has been operating in Africa for 50 years. The company's entry to the continent was not actually driven by economic considerations, but was designed more to strengthen the political ties of the newly founded Israel with mineral-rich African countries. The company's veterans recall that it was Solel Boneh which supplied the IDF with the map of Entebbe airport ahead of the operation to free the hostages held there.
Today, Housing and Construction is a private company with extensive real estate and infrastructure businesses, whose presence in Africa is motivated by pure economic interests. Most of Solel Boneh International's activity is concentrated in countries characterized by high rates of growth, such as Nigeria. This country has a fairly stable currency and a regulated capital market. It has tremendous potential for growth, as a result primarily of its natural resources, chiefly oil, the high revenue from which is contributing to the construction boom there.
The activity in Nigeria contributed 15% to Housing and Construction's revenue for 2007, which totaled NIS 4.5 billion. Solel Boneh International is the third largest player in real estate and infrastructure in Nigeria. Among the other countries the company operates in are Uganda, Kenya, Ghana, and Ivory Coast, which together accounted for 13% of the company's revenue, and in most of them it is a leading player. In all, the activity on the African continent accounted for 30% of Housing and Construction's revenue for 2007.
Housing and Construction's many years of experience in Africa, and the reputation it has built up over five decades of activity there, have helped it leverage developments in infrastructure to its benefit. Its experience has also helped it cope during periods of political unrest. And so, in recent years, we have seen a rapid increase in Solel Boneh International's revenue growth and orders backlog, with projects in Africa amounting to 40% of the NIS 7 billion orders backlog of the Housing and Construction group at the end of 2007.
The improvement in the company's activity in Africa has been seen not just in the larger orders backlog and revenue, but also in its profit margins, as a result of greater efficiency in its work methods, and the switch to new equipment. The company has also benefited from an improvement in payment ethics, which have enabled it to meet project timescales without incurring additional costs.
After many years in which European companies dominated infrastructure activity in Africa, we are now seeing the entry of Chinese contractors, although the increase in the range of projects has prevented intense competition. In light of this, the activity in Africa is characterized by gross margins that are substantially higher than those in the Israeli market (19% against 5% in 2007). The risk is also lower, with contracts signed with overseas clients containing a mechanism for compensation for increases in prices of raw materials, and in cases where the costs exceed the base costs stipulated in the terms of the contract.
Electra - powering Nigeria
Electra (TASE: ELTR) is Israel's leading company in the installation of electro-mechanical systems (electricity, water, air conditioning, elevators etc.) in buildings. In mid-2007, Electra acquired a Nigerian company called OTS, which has been operating in the electro-mechanical field in its country for decades.
Nigeria, a country with a population of 138 million, is not an easy place to operate in, given the political instability, corruption and acute poverty that exist there. However, the acquired company successfully navigated its way through all the upheavals in the country and continued to operate effectively, largely as a result of the fact that it focuses on international activity vis-à-vis international companies, which offer a more stable working relationship.
Electra brings to OTS invaluable Western know-how in electro-mechanics, years of experience, expert engineers, modern work procedures, IT, and financial support. All these have enabled the Nigerian company to make a quantum leap in its activity, improve the quality of its service, and bid for larger projects. The Nigerian company had an orders backlog worth $32 million when it was acquired, and we believe the merger with Electra will substantially increase this.
The Nigerian company's activity does not yet amount to a material part of Electra's business, but it represents an interesting opportunity, given the acute shortage of electricity and water infrastructures in Nigeria, which could enable Electra to enter these potentially lucrative fields in the future.
Tahal irrigating Botswana
Tahal Group BV is the infrastructure arm of Kardan NV (TASE: KRNV;AEX:KARD), which focuses principally on water infrastructures in developing markets such as Africa. What is the state of the water in Africa today? "Imagine what's it like to live life, knowing your next cup of water could be the one that kills you." This sentence, with which US environmental NGO "Water for People" opened its annual report for 2007, is the reality for millions of people on the African continent. As is well known, water is a very acute problem in Africa, and the shortage of clean water is clearly in evidence across the country. It causes disease and tens of thousands of deaths.
In arid countries across Africa, the global water shortage is even more noticeable than in other countries, and this shortage is set to continue to grow in the coming years. Contributing to this will be population growth, better standards of living, urbanization, and the demand for a better quality of water, as well global warming which will lead to drought, flooding, and a redistribution of water resources. According to a report by the UN, 20% of the global water shortage is the result of global warming.
International organizations, such as the UN and the World Bank, are trying to alleviate the situation by funding large infrastructure projects to produce clean water. Tahal, which specializes in water infrastructures, is bidding in tenders for these projects and has even won two important projects. One is a major project in Botswana, involving the building of an infrastructure to pump some of the water from the Zambezi River into more arid regions in the north of the country for agricultural irrigation.
The project, which is worth an estimated $700 million, includes the development of agricultural farms in the regions to which the water will be carried, and the agreement with the Botswanan government is for 15 years. The execution of the project is conditional on the agreement of other countries that the river passes through, and a feasibility assessment by Tahal.
Tahal's other project is smaller, and is for building a water supply system in the Angolan capital Luanda. At this stage, Tahal's activity does not amount to a material part of the Kardan group although the potential undoubtedly exists. Tahal recorded revenue of €75 million in 2007, and management believes that this could grow to €300-400 million within a few years. We estimate that Tahal currently accounts for 6% of the total value of Kardan NV's holdings, although realizing the potential by holding an offering could unlock substantial value for the group.
Not yet the next China
One cannot, of course, ignore the risks in Africa. Political instability and corruption are still commonplace across Southern Africa, and rebel insurgence, persecution, wars and devastation can break out at any given moment. In contrast to China, which grew thanks to the exploitation of cheap labor which helped draw foreign investment and industrial development, the economies of many countries in Africa are still based on natural resources.
If the governments of the region use their budget surpluses to improve transport and water infrastructures; to build health and education infrastructures, which will in turn increase life expectancy and reduce mortality rates, and to improve the quality of their manpower, there is quite definitely the potential for long-term growth in Africa. And as we noted at the beginning of this review, this potential has not gone unnoticed by the world, and that, of course, includes the Israelis.
Limor Gruber is sell-side research manager and research analyst at Psagot Ofek Investment House Ltd. Noam Pinko is an analyst in the research department.
Published by Globes [online], Israel business news - www.globes-online.com - on June 30, 2008
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