A Positive Outlook for Africa’s Top 500 Companies

Africa's top 500 companies grew 18% last year

African companies avoided the worst of the 2008 financial crisis. Now they are preparing to fend off commodity-price fluctuations and the impact of the European debt crisis.

The annual ranking of the top 500 companies tells the tale of corporate Africa’s sprightly rebound from the financial crisis of 2008. As a new year brings little respite fromthe eurozone downturn, executives hope they can marshal the same momentum to keep balance sheets steady.

Based on annual reports for the financial year ending in 2010, total turnover for Africa’s top 500 companies stood at $689.9bn, an 18 percent increase on the previous year and 75 percent higher than the $393.3bn of five years ago.

The recovery brought with it encouraging profit margins for many African businesses, and only 29 companies in this Top 500 list lost money.  For the first time, the cumulative revenue of the top 100 companies overtook that ofUS conglomerate Walmart.

But Africa’s corporations still have a lot of growing to do: Walmart’s $421.8bn annual turnover is nearly twice the size of Nigeria’s 2011 GDP of $247.1bn, and the $58.8bn turnover of Africa’s biggest company, Algeria’s oil giant Sonatrach (#1), makes it a global minnow.

Demand from more affluent African consumers has driven growth for telecoms operators, agribusiness firms, breweries, car makers and supermarkets. Meanwhile, the African Development Bank predicts that the continent’s middle classes will grow from 355 million in 2010 to 1.1 billion in 2060.

The African success story is partly about multinationals with a continental footprint. As supermarket giants Shoprite (#7) and Pick’n Pay (#11) undertake expansion plans across the continent, local chains are also growing in strength: in the first half of 2011, OK Zimbabwe (#421), recorded revenue growth of 61 percent and posted profits of $3.9m.

Extractive industries still dominate the list, with the oil and gas sectors contributing 18.7 percent of turnover. Miners have increased their share of the top 500’s total turnover from 6.9 percent on last year’s list to 9.4 percent on this one.

Three of the biggest climbers in terms of turnover are miners: South Africa’s zinc and copper miner Metorex (#192) experienced revenue growth of 75 percent, while Gabon’s manganese miner Compagnie Minière de l’Ogooué (#155) and South Africa’s platinum miner Lonmin (#60) grew by 58 percent.

Uncertainty in the commodity markets could limit profits in the coming year, but price slumps are unlikely and analysts predict that oil will continue to sell at more than $100 per barrel.

Southern African companies dominate the ranking, contributing 60 percent of the turnover. At 28.2 percent this time around, North Africa’s share remains steady but is sure to drop next year.

Annual reports in 2012 will show the dent the Arab Spring made in companies’ operations.

Of the 500 top companies, only 235 are listed on a stock exchange. Initial public offerings (IPOs) are long and complex processes where companies must adhere to tougher levels of corporate governance and transparency. Illiquid local bourses with few companies and limited pools of investors are often dominated by local subsidiaries of foreign-owned companies rather than home-grown firms.

South Africa’s bourse plays host to Africa’s largest companies, and seven of the top 10 firms are listed on the Johannesburg Stock Exchange (JSE).

Changes to investment regulations proposed in late 2011 by South Africa’s finance minister Pravin Gordhan could lead more companies to use the JSE as a springboard for investment on the continent. Regulations have restricted the amount that local investors could invest in foreign-domiciled companies.

Now, these rules are due to be be amended, and inward-listed shares on the JSE will be classified as domestic assets. “It’s definitely an opportunity for companies that want to list and definitely an opportunity for foreign-domiciled companies to be classified in [such] a way that they can be included in the index,” says Geoff Rothschild, director of government and international affairs at the JSE.

As equity funds abandon emerging markets, it will be a difficult climate to launch African IPOs. The test will be whether local and regional investors have the capacity to step in to fill the gap, something that they largely failed to do after the 2008 crisis.

Alongside the global uncertainties of the eurozone crisis and volatile commodity markets, African executives will face country-specific problems. In Kenya, high interest rates, high inflation and electioneering leading up to the end-of-year polls will affect the macroeconomic outlook.

Stanley Ngaine, chairman of stockbrokerage Sterling Capital, says that despite good results from companies in recent months, high interest rates could hurt company performance. “It’s going to be an extra cost to the manufacturing sector and also it could impact on the bad-loans portfolio for the banking sector.”

As risk-averse banks push up interest rates, larger firms turn to corporate bonds. In 2011, Eskom(#6) launched a 10-year bond that took in $1.8bn in January. That was followed in February by a $750m issuance from Transnet (#21) and a $705m bond from paper manufacturer Sappi (#16) in April.

Bankers predict that there will be more to come, and Standard Bank says it expects to arrange R10bn($1.2bn) of corporate issuances between December 2011 and April 2012. Still, outside South Africa corporate bond issuances remain a rarity, and much work is needed to improve financial infrastructure and investor appetite before companies can count on these markets to raise cash.