Building the African Dream: Two Kenyan Infrastructure Stocks

As you travel through East Africa, the visual is powerful: construction activity is everywhere. South African portfolio manager Jonathan Kruger described it best when he noted that Africa’s most popular bird is the Yellow Crane.

Of course, not all construction equates to good investment. There are plenty of bridges to nowhere and high rises that go up without regard for traffic impact, flood plains, or zoning.

This problem is not unique to Africa and finds expression across the globe, from Spain to Dubai, from China to India, from South Florida to Phoenix. The challenge to investors is not to identify the infrastructure opportunity on a macro level – which stares you right in the face in sub-Saharan Africa – but to find the right investments that combine sensible infrastructure with robust capital structure.

On a recent trip to Kenya I had a chance to meet with two companies that focus specifically on building out Africa’s infrastructure. The first I visited was Centum Investment Company in Nairobi, a publicly traded investment company that provides investors access to a portfolio they may not otherwise have access to, one which includes private equity and real estate and infrastructure holdings.

From 2009 to 2012, Centum grew its net asset value 137%, a rate that’s roughly in line with the increase of its share price. The company’s near term goal is to grow the value of its assets under management from the current Ksh20 billion to Ksh30 billion (approximately $350 million). Though ambitious at first glance, they’ve managed to grow from Ksh6 billion in 2009, so their target may very well be within reach.

On the infrastructure side of things, they have focused on commercial development. The company has a couple of high profile commercial projects in the works, and they do the soup to nuts, everything from land acquisition and development, to packaging the assets into REITs.

Photo by Erik Hersman

Photo by Erik Hersman

To give you a taste, the first phase of its Two Rivers Project in Nairobi will feature a five-star hotel, a three-star hotel, 84 deluxe condos, 132 apartments, 484,000 square feet of retail space, 131,000 square feet of premium office space, a 215,000 square foot office park, a public square, a piazza, and a half-mile riverfront. They are doing a similar project in Uganda called the Pearl Marina.

While these projects are truly a bet on the rising African middle class, Centum’s diversification provides shelter should their vision of East Africa’s Orange County-esque transformation move slower than expected. With an investment portfolio that includes bottlers, financial services, geothermal power plants, and listed equities, Centum has its bases covered.

I next visited TransCentury, which is also headquartered in Nairobi and has operating profit of $20 million, assets of $250 million and operations across East, Central, and Southern Africa. It operates three divisions, including power infrastructure, transport infrastructure, and engineering. Perhaps best known for its power infrastructure, TransCentury supplies cables, transformers, and grid gear in the markets it serves. This alone, makes it an attractive opportunity, as the Kenyan grid suffers from underinvestment and has a capacity of only 1.4GW – or roughly 20% of Los Angeles’ capacity – for a country of 42 million people.

While the power division alone would make this an interesting investment, the company also co-owns Rift Valley Railways, the Kenya-Uganda railroad concession. Currently, due to years of neglect, the rail line can only handle 1.5 million tons per year, whereas at its height it could handle 4.5 million tons. The goal is to get back to the 4.5 million ton level in five years.

Jan Schalkwijk, CFA, Portfolio Manager at Africa Capital Group

Jan Schalkwijk, CFA, Portfolio Manager at Africa Capital Group

To achieve this, the company has hired America Latina Logistica (ALL) from Brazil to design and execute the strategic turnaround. ALL operates 13,200 miles of rail in Brazil and Argentina and has done so successfully since rail privatization in Brazil in 1997.

A third TransCentury division is focused on engineering, which is a natural fit for the infrastructure investment that is taking place across sub-Saharan Africa. The company’s engineering projects range from crane operations and logistics, to weigh-bridges, generators, geothermal plants, wind farms, oil and gas infrastructure, and grid substations.

In three years, management believes the company will generate $100 million worth of EBITDA (up from $15 million today) and trade at 8x EBITDA. This implies a 10x increase in market cap. If the company delivers only 50% of that, investors will conclude three years hence that they made a very profitable investment.

Infrastructure is a key pillar of the sub-Saharan Africa investment thesis. The hopes and dreams of Africa’s rising consumer class need to be powered by electricity, transported by road and rail, and anchored by new homes and workplaces. Where consumer preferences change over time, the infrastructure demand is less fleeting and more predictable. As such, I’m very optimistic about the opportunities that are available today in the infrastructure sector, as the continent embarks on a multi-decade build out.

Jan Schalkwijk, CFA is an investment analyst with Africa Capital Group and the founder and lead portfolio manager at JPS Global Investments.

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