Nigeria : Post-Election Investment Opportunities

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As the dust settles following Nigeria’s election in April, there is general optimism that foreign direct investment flows will pick up quickly. President-elect Goodluck Jonathan is expected to press ahead with the federal government’s economic reform agenda. Investment analysts have a positive outlook for the country but caution that much more than a credible election is needed to sustain the market.

‘We believe that now is a very good time to invest in Nigeria across a number of sectors. While the recent national elections, the fourth since the return to civil rule in 1999, were not flawless, they were generally well organised and were judged free and fair by independent international observers. With a strong mandate, President Goodluck Jonathan has an opportunity to continue driving reform and entrenching practices of good governance. This, combined with growing oil production, relative stability in the Niger Delta and high oil prices, is all positive for investment in key sectors,’ says Michael Lalor, a director at Ernst Young South Africa.

Not all companies put on hold their investments due to political uncertainty. The Rezidor Hotel Group sees a lot of promise in Nigeria’s hospitality industry and is currently developing six hotels. In 2013, the group will open its first Park Inn by Radisson in Apapa.

‘Nigeria’s business climate is improving. Improvements in banking, telecommunications, airport arrivals and the removal of banned products such as furniture are benefiting the hotel industry. The increasing numbers of business travellers means greater demand for hotel rooms,’ says Andrew McLachlan, Rezidor’s vice president of business development for Africa and the Indian Ocean Islands.

Nigeria has gained popularity as a tourist and business destination and consequently, major international hotel chains have either increased their investments or are intending to invest for the first time. Still, a lot of opportunities exist to build new hotels, quality golf resorts and resort hotels, among other tourist facilities.

Ernst Young anticipates that investment in greenfield projects is going to grow strongly over the next few years. Great changes are expected in the infrastructure development landscape when projects begin to roll-out, thereby creating lucrative spin-off opportunities for well-positioned companies.

‘Besides oil and gas, power, and other key infrastructure projects, we see several other sectors, notably, telecommunications and construction, continuing to grow strongly. Growth should also pick up in financial services (with the sectoral restructuring almost complete) and consumer products,’ says Lalor.

Telecommunications

Nigeria’s telecommunications sector is expected to earn $11-billion by 2013 up from $8.42-billion in 2008. Greater growth will come as more people afford to buy mobile phones and as operators boost coverage to allow them to use phones in more ways and in more places. Industry experts say the latest generation of phones – iPhones, Blackberrys and Androids – will become the channels for internet access because they will eventually be more affordable than computers.

Investors in telecommunications face lesser difficulties in the challenging business climate because of the nature of the sector. For instance, users do not need infrastructure such as new roads to use their phones. Operators are also finding it easier to get financing, particularly for reception towers. Sharing mobile phone towers has helped trigger growth in the market as this speeds coverage by reducing costs.

Private equity firms are keen to invest in tower companies because they are able to predict revenue into the future, owing to the fact that tower companies often sign long-term contracts with several operators.

However, the sector’s growth is expected to slow down in the future as prices come down. Lucrative opportunities will be in the provision of software and related services.

Banking

Investment analysts Renaissance Capital (RenCap) forecast a 15% growth for the banking sector in 2011 on the back of a relatively smooth election process and AMCON’s efforts to restore confidence in the beleaguered sector. RenCap believes the sector is poised for a new era of growth and recommends the stocks of six banks to potential investors.

However, the analysts named macro-economic and political risks as key concerns, particularly with oil remaining a key factor for the budget and revenues.

For Ernst Young, key shorter term risks are macro-economic rather than political, primarily inflationary pressures relating to increasing food prices. ‘Obviously if there was a sharp decline in the oil price, this will negatively impact growth and investment prospects. Overall though, from an investment perspective, any risks – real or perceived – can be managed and are outweighed by the vast opportunities that exist in the Nigerian market,’ says Lalor.

According to investment managers, Stanlib, Nigeria’s banking sector is very liquid, meaning balance sheets have less risky assets in government’s and other bonds.

‘Banks should begin financing industrial companies and small to medium enterprises that require expansion capital. While there are many existing long-term investment opportunities in infrastructure development and in the oil and gas sectors, we favour companies and banks that have exposure in the non-oil economy. The sectors with the most potential include agriculture, consumer and retail, food and beverages, and manufacturing sectors,’ says Thabo Ncala, co-portfolio manager of Stanlib’s Africa Fund.

Consumer goods

With population growth expected to hit over 200 million by 2050, relative stability and a rebound in oil prices, Nigeria presents one of the best opportunities for consumer goods companies. The sector has grown in recent years and companies have expanded their brand lines and manufacturing capacities to meet the rising demand.

According to CSL Stockbrokers, the consumer goods sector is expected see double-digit growth in sales in line with the country’s economic performance. A number of niche players, attracted by the positive growth prospects, have also entered the market. Despite the existing challenges in the business environment, CSL forecasts a positive long term outlook for the sector on the back of the federal government’s efforts to diversify the economy, the rebound in oil prices and production and the attention to fiscal discipline, which bodes well for consumer purchasing power and the fast moving consumer goods sector.

Maritime

Nigeria is a natural hub for sea transport in West Africa and its maritime industry transports over 75% of the country’s imports and exports. Clever investors could turn the many challenges that face the industry (ranging from the lack of manpower, infrastructure, financing to security) into opportunities. The federal government has a reform strategy for the industry, which involves promoting the Local Content Act, the cabotage trade and policing of the coastline and offshore locations. Some of the existing investment opportunities are in ship building and repairs, establishment of industrial zones, logistic bases for the oil and gas industries, maritime academies, stevedoring, leasing of equipment and estate management.

New dawn for Nigeria?

Goodluck Jonathan pledged a “new dawn” for Nigeria shortly after he was declared president, promising to effect changes that would restore confidence in Africa’s biggest oil producer. It remains to be seen if the administration will move quickly to ensure key pieces of legislation for instance the Petroleum Industry Bill (PIB) and the bill to create a sovereign wealth fund are enacted before its term in office ends.

‘The presidency seems to support reforms that can improve Nigeria’s competitiveness and recognises that the power sector requires urgent reform and investment. We believe that the PIB will be passed soon and this should accelerate reforms in the oil and gas sector. Therefore, pending bills and implementation of the current strategies should go on during 2011,’ says Ncala.

In : Finance

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