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DUET GROUP Dr Ayo Salami, CIO of Duet Africa Funds

Africa – The Next Frontier of Growth Investment

Source: Economist

Changing perceptions of Africa

May 13th 2000 March 2nd 2013

Global Land Mass and Proportion of World’s Resources

Square Miles:

China 3,705,390

United States 3,618,770

India 1,266,595

Europe 1,905,000

Argentina 1,065,189

New Zealand 103,736

Total 11,664,680

Africa 11,707,000

Proportion of global resources in Africa:

Land Mass 20%

Diamonds 90%

Gold 50%

Phosphate 90%

Platinum 40%

Petroleum 8%

Natural Gas 12%

Source: Academic Centre for Education Development; Ayittey, George B.N. Africa Betrayed, 1993, Palgrave Macmillan , ISBN: 0312104006

Africa in perspective

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4f

Gro

wth

(%)

Growth in Real GDP Population (growth) Growth in real per capita GDP

Since 1995, Real GDP growth has exceeded

population growth

Source: World Bank Data

Population and GDP Growth (Sub-Saharan Africa ex South Africa)

17 consecutive years of growth in real per capita GDP

Macro overview

0%

25%

50%

75%

100%

2000 2009 2020

<$1,000 $1,000-$5,000 $5,000-$10,000 $10,000-$25,000 >$25,000

Ho

useh

old

s (

%)

57%

More than 50% middle class by 2020

Sources: Euromonitor, Standard Bank Research

Consumer expenditure in SSA was approximately $800bn in 2010 and is expected to reach $1 trillion by 2010. Consumer

spending is growing at approximately 4% per annum.

Rise of the African consumer

Sources: United Nations Population Division

Compared to Develop Markets, the Sub-Saharan Africa (SSA) has

a much younger population growing at a faster rate: This supports

economic growth and consumption.

Developed Markets are not getting younger. Sub-Saharan

Africa (SSA) offers a young and growing population.

Young Population

African growth is supported by a young population

Sources: UN Habitat, Standard Bank Research

0%

25%

50%

75%

100%

1950 1965 1980 1995 2009 2020 2035 2050

Rural population Urban population

Urbanisation is bringing people closer to economic opportunities

By 2050 about 60% of the people in SSA will live in cities compared to 40% today implying that 800 million more people will

live in urban environments.

Urbanisation

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25

30

2007 2008 2009 2010 2011 2012 2013

USD

bn

Nigeria Pension Assets

In 2002 when pension reform was introduced,

Nigeria had pension assets of less than USD1bn.

Assets are approaching USD30bn and growing at

CAGR of ca.30% per annum

0

150

300

450

600

2000 2002 2004 2006 2008 2010

Fixed telephone lines Mobile cellular subscriptions

15m

540m

At the beginning of the 21st century, over 70% of

Africans had never heard a phone ring. Today,

mobile penetration is approaching 60%.

Source: Duet Asset Management, Pencom Nigeria

Capital and technology enabling rapid change

Nigeria Basic Facts

Population: 170m Economy: USD500bn (largest in Africa and #23 in the world with a vision is to become a top-20 economy by 2020) GDP Per capita: (USD2,800, # 128 in the world)

Democratic transition (third republic) began in 1999. There are

three branches of Government at the Federal level

• President (elected for four year term with 2 term limit)

• National Assembly : Senate 109 members, House of

Representatives : 360 members

• Independent Judiciary

36 state Governments (Governor with a state assembly)

2015 witnessed the first transfer of power from a ruling to

opposition party in Nigeria’s history

Source: Independent Electoral Commission

Nigeria Election results

1999 2003 2007 2011 2015

PDP 62.7 61.94 69.82 58.89 44.96

APC 53.96

AD 37.22

ANPP 32.19 18.72

CPC 31.98

Others 0.08 5.87 11.46 9.13 1.08

President Buhari – Version # 2, is a former military ruler (1984-1985) and during his previous 20 month rule, he gained a reputation as an

incorruptible and austere leader. This is probably his greatest strength and his source of appeal.

He took a rather simplistic approach to governance that reduced all of Nigeria’s multifaceted challenges into a single issue – “Indiscipline”. He

promptly launched a “War against Indiscipline”. Civil servants turning up late for work were made to perform frog jumps. Traffic offences and

queue-jumping were punished by public floggings.

He cut the budget deficit by downsizing the civil service by ca.30%. He broke off relations with the IMF (refusing to devalue the currency), but

subsequently introduced an austerity programme with greater severity than that demanded by the IMF.

He severely curtailed press freedom and threw over 500 politicians into jail on allegations of corruption for which they were never charged. For

gregarious people like Nigerians, this was shock therapy and there were few complainants, when he was ousted in a palace coup in August

1985.

For his second term in office, Mr Buhari can be expected to run a more interventionist Government and anchored on 8 broad points

– War on Corruption

– Food security to position agriculture as the main supplier of raw materials for domestic industrial processing and manufacturing

– Accelerated power supply to expand electricity generation and distribution of up to 40,000 megawatts in four to eight years (current capacity is about 5,000 mgws)

– Integrated transport network

– Free education

– Devolution of power from the Federal Government

– Affordable health care

– Accelerated economic growth

Nigeria : Political Overview

Slow down in growth from 8.5% in the last decade to ca.6% due to combination of base effects and lower oil prices. However average of 6%

growth in a low oil price environment demonstrates that the economy is not driven by oil.

Nigeria : Economic Growth

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80

90

100

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GD

P G

row

th

Cru

de

Oil

GDP Growth Crude Oil

Avg Nig : 4.0% Global : 3.1%



Source: World Economic Database (IMF)

Oil sector represents only ca.10% of GDP, demonstrating that the economy is not dominated by oil.

While GDP growth has been positive in the last 19 quarters, oil sector growth has been positive in only 6 quarters.

Nigeria : Structure of the Economy


0

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25

30

Agricu

lture

Trade

Cru

de o

il

Man

ufactu

ring

Telecom

Real Estate

Oth

ers

Techn

ical services

Co

nstru

ction

Finan

ce

Edu

cation

Pu

blic A

dm

in

Pu

blish

ing an

d B

road

casting

Transp

oratio

n

-20

-15

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11-Q

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15-Q

3

GDP Growth Oil Growth

Easy oil revenue resulted in inefficient collection of taxes

For the first time since the 1970’s the Government is aiming to raise more than 60% of revenues from non-oil related

sources

Nigeria : Tax Efficiency Declined


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% o

f G

DP

Go

vt R

eve

nu

e (

USD

bn

)

Govt Revenue % of GDP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015F 2016F

Oil Revenues Non-Oil Revenues

Source: Budget office of the Federation

Nigeria : Significant Scope for Revenue Improvement


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Israel

Brazil

Sou

th A

frica

An

gola

Egypt

Ch

ile

Malaysia

Ke

nya

Ind

ia

Gh

ana

Ethio

pia

Tanzan

ia

Ind

on

esia

Nige

ria

Tax to GDP Ratio (2015) Nigeria does not have a revenue problem, it has a tax

collection challenge. Low oil prices may finally provide the impetus for longer term reform.

The new head of the Federal Inland Revenue Service (FIRS) was spectacularly successful, when he headed the Lagos State Revenue Service.

While the Government has ruled out raising tax rates, increasing the VAT rate from 5% to 10% could generate additional USD4bn (40% of the deficit for 2016).

Current focus is on tax compliance: -

FIRS claims to have identified 360,000 payer of Corporation tax in 4Q15 following commencement of an tax compliance audit and the figure will reach 500,000 by 1Q16. if successful, this will increase the number of taxpayers by almost 2.5x.

Eliminate the issuance of duty waivers

Recovery of stolen funds

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Govt Exp Deficit (% of GDP)

Nigeria : 2016 Budget is expansionary


Government implementing counter-cyclical expansionary budget in 2016.

Depending on the oil price, the final deficit is likely to be between -2.2% and -3.5% of GDP

30% increase in Expenditure


With one of the lowest debt ratios in the world, the Government has the room to implement its counter-cyclical

expansionary budget. There is no requirement for emergency funding.

Nigeria : Debt Ratio is Very Low

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% o

f G

DP

Gro

ss G

ovt

De

bt

(USD

bn

s)

Gross Govt Debt % of GDP

0

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40

60

80

100

120

Un

ited

States

Egypt

Un

ited

Kin

gdo

m

Brazil

Israel

Ind

ia

An

gola

Ke

nya

Malaysia

Sou

th A

frica

Ind

on

esia

Ethio

pia

Ch

ile

Nige

ria

Debt to GDP (2015)


Nigeria : Debt Burden is Sustainable

Domestic debt, $54.7

Multilateral $7.6

Bilateral $1.7

Eurobond, $1.5

External $10.7

83% of Nigeria’s debt is domestic debt

87% of the external debt is concessional borrowing from multilateral and bilateral agencies.

Commercial external debt is only USD 1.5 bn (2.3% of total debt).

The current budget deficit can be funded from domestic sources without resorting to external borrowing

Source: Debt Management Office

Nigeria : Objectives of the 2016 budget

Stimulate the economy to achieve a real GDP growth rate of 4.2% in 2017

Reduce the cost of governance, extract efficiencies in the public service and enhance collection of internally generated revenues

Increase government expenditure on infrastructure

Fund the budget deficit and negative trade balance cost effectively

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013 2014 2015 2016

Satutory Transfers Debt service Recurrent Capital Expenditure

Expenditure Profile

Source: Budget Office of Nigeria

Nigeria : Addressing Infrastructure deficit

Increase capital expenditure to 30% of spending (currently 12.3%)

• 2015 spend on travel + stationary + consumables = NGN18.9bn

• 2015 spend on Road = NGN 19.8bn

N1.8trn to be invested: Transport, Roads, Housing, Power, Health

Source: Budget Office of Nigeria

35%

16% 4%

11%

4%

1%

3%

3%

3%

20%

Works Power and Housing

Transport

Agriculture

Defence

Interior

Communication

Health

Education

Water

Others

Allocation of 2016 Capital Budget

Nigeria : Funding the Deficit

Projected budget deficit of N2.2trn (USD 11bn) in 2016 (-2.16% of GDP)

N1.8trn borrowing to be structured to achieve cost effectiveness and acceptable debt sustainability ratios:

• N635bn ($3.5 - $4bn) to be raised from multiple external sources including multilateral agencies and export credit agencies

• N1,2 trillion (USD6bn) to be raised in domestic market

Paradoxically, the projected increased deficit in 2016, may not add much upward pressure on domestic yields. Since the introduction of the Treasury Single Account (TSA) in September, about NGN1.1 trillion (USD5.5bn) of T-bills have matured which was not rolled over.

In 2016, an estimated NGN1.9 trillion (USD9.5bn) of Open Market Operation (OMO) bills will mature and if the CBN continues with its current policy (post-June 2015) of not rolling-over maturing OMO T-bills, then domestic banks alone can fund the deficit.

Pre June-2015, when excess liquidity in the financial system was around NGN200bn, additional Government borrowing of NGN1.2 trillion would create ripples and some upward pressure on yields. However with excess liquidity now running at around NGN800bn and with the possibility of an additional NGN1 trillion being injected into the system in 2016, it appears that the domestic borrowing requirement for 2016 can be comfortably accommodated.

Oil Dependent Currencies

Source: Minister of Finance

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

0

100

200

300

400

500

600

700

800

900

Iraq

UA

E

Qatar

Saud

i Arab

ia

Ve

nezu

ela

Ku

wait

Libya

Iran

Ind

on

esia

Nige

ria

Algeria

An

gola

Co

lum

bia

Brazil

Kazakh

stan

Ru

ssia

Fore

x M

ove

Sin

ce J

un

e 2

01

4

Oil

pe

r C

apit

a

Oil per capita FX ChgSource: OPEC, Bloomberg

Nigeria : Current Account Deficit


-5

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25

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C/A

De

fici

t (%

of

GD

P)

C/A

De

fici

t (U

SD b

n)

C/A Deficit % of GDP


Nigeria : Longer term reforms

Implementation of Treasury Single Account

Ongoing initiatives to increase internally generated revenues (expand the base and increase the number of taxpayers)

Refinancing of short term obligations into longer tenured instruments

Direct revenues from revenue generating projects financed will be used for debt service


Profit Opportunities

Growth

Macro

Politics

Consumer Demand

Young Population

Attractive Valuation

Diversification

Africa offers significant profit opportunities – robust economic growth, rising consumer demand, strong

corporate earnings, well-capitalised banks without toxic assets, relatively cheap stock markets

Sub-Saharan Africa is one of the fastest growing regions of the world. GDP growth for 2014 is expected to

be 5.4%, whilst global growth is forecast at 3.6% and 2.2% for advanced economies (source: IMF WEO)

Improving macroeconomic fundamentals – low budget deficits, low inflation

Improving political situation with majority of countries having democratic governments

Robust domestic demand and is not predicated on huge stimulus packages, corporate bail-outs or

incredibly low-interest rates

Young population: 50% of the population under the age of 30

Current valuations provide an exceptional buying opportunity – trading at P/E 2014 15x, Div Yield 4.3%,

EPS growth of 15%

Uncorrelated with global markets providing the opportunity for portfolio diversification

Africa: The investment case

Disclaimer

This document, which is being provided on a confidential basis, has been issued by Duet Asset Management Limited, which is authorised and regulated by the Financial Services Authority (“FSA”). The information in this document does not constitute, or form part of, any offer to sell or issue, or any offer to purchase or subscribe for interests in any fund or company, nor shall this document or any part of it or the fact of its distribution form the basis of or be relied on in connection with any contract. Interests in any investment funds managed by Duet Asset Management Limited will be offered and sold only pursuant to the offering memorandum relating to such funds (the “Offering Memorandum”) which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications) and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and any Offering Memorandum, the Offering Memorandum shall control. Interests described in this document shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. An investment in any Duet Asset Management Limited investment fund is speculative and carries a high degree of risk and is not suitable for private investors. Duet Asset Management Limited has not taken any steps to ensure that the interests referred to in this document are suitable for any particular investor and no assurance can be given that the stated investment objectives will be achieved. No representation is made or assurance given that such statements, opinions, projections or forecasts in this document are complete or correct or that the objectives set out in this document will be achieved. Duet Asset Management Limited cannot accept responsibility for errors appearing in this document. The law may restrict distribution of this document in certain jurisdictions therefore; persons into whose possession this document comes should inform themselves about and observe any such restrictions. The interests may not be marketed, offered, sold or delivered, directly or indirectly, unless in accordance with all laws applicable to such marketing, offer, sale or delivery of the interests in any relevant jurisdiction. Opportunities for redemption and transferability of any interests described herein may be restricted so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The interests, which is under the sole investment authority of the investment manager may not be diversified which may result in higher risk. Leverage may be employed in the portfolio, which can make investment performance volatile. An investor should not make an investment unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits.

duet group - mayafiles.tase.co.il · pdp 62.7 61.94 69.82 58.89 44.96 apc 53.96 ad 37.22 anpp 32.19...

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