EAdrian Saville, CIO, Cannon Asset Managers merging markets are capturing headlines for economic growth, led by the likes of China and India. Yet sub-Saharan Africa is one of the world’s fastest growing economic blocs and also one of the most overlooked when it comes to investment opportunities.
Sub-Saharan Africa offers exciting prospects to investors, given its low economic base, healthy growth and good commodity prices – factors that in their own right make the region attractive. But, increasingly, economic growth in sub-Saharan Africa is being facilitated by structural drivers: this is now in the architecture of the region and is not due to some good fortune or growth off a low base. In the architecture, we find one of the most powerful contributors to sustained socioeconomic progress, namely economic connectedness. This suggests that economies in the region are opening up and engaging in international trade, international capital f lows, the mobility of people and the f low of data and information.
For investors looking to build positions in sub-Saharan Africa, we have found some interesting and intriguing prospects. One of them is Equity Bank in Kenya, which facilitates small and medium-sized business development, as well as retail banking. While their loans to small businesses, in particular, are growing at a healthy clip, the bank is also very well capitalised. In terms of exact numbers, Equity Bank has a capital adequacy ratio of more than two times the statutory level, giving it an extremely solid banking foundation. In turn, the bank’s balance sheet is invested in healthy loans, evidenced by a return on assets of 5.5% and a return on equity of 30%, versus industry benchmarks of 2.0% and 15%, respectively.
Considering Equity Bank’s management, James Mwangi – the CEO and founder of the company – won the Ernst & Young World Entrepreneur of the Year award in 2012. He is the first African to receive the award and, in addition, he was named the 2012 Forbes Africa Person of the Year for “contribution to business, including creating employment opportunities and applying innovative mindset”. This lends two additional elements to the
1 500 investment case for Equity Bank, namely evidence of business dynamism, coupled with a high level of inside ownership.
The investment case for Equity Bank is aided further by the fact that the business sits on modest valuations, including a reasonable price-to-book ratio of just over three times, a single digit earnings multiple and a dividend yield of 4.0%. On this last factor, it’s worth noting that Equity Bank has paid dividends without interruption over the last five years, having grown its dividends by 44% per annum over this period.
Looking at these attributes, the business environment, the founders, the balance sheet, the opportunities and the current pricing, Equity Bank ticks all of those boxes and is worth consideration by investors.
When looking to take advantage of the exciting prospects offered by sub-Saharan Africa, investors should seek well-priced businesses that participate in the structural shift taking place in the region. This includes business enablers such as trade financiers, supply chain firms, data and voice carriers, business funders and the like. The case for Equity Bank satisfies these criteria and, in this way, presents itself as a great investment opportunity.
James Mwangi, CEO of Equity