Holly Cook: Welcome to the Morningstar series, Three Stock Tips. I'm Holly Cook and joining me today is Oliver Bell. He is Manager of the T. Rowe Price Middle East and Africa Fund.
Oliver, thanks for joining me.
Oliver Bell: Good morning.
Cook: So, three stock tips, in a very interesting area of investment, what would be the first company that really interests you?
Bell: I think the first one that comes straight to mind is really what's transforming Africa and perhaps leading the world and that's mobile telephony and mobile money payment systems. So if we to take a company called Safaricom in Kenya. This is a company that really is now transacting 27% of GDP in Kenya through mobile phone, moving money through mobile phones.
They have more active subscribers using this mobile money system than there are entire bank accounts in the system. So it's a phenomenal change in what's going on across Africa. And if you think about how that might develop in terms of formalising a relatively informal society, so there's clearly a lot of informal trade going on by bringing in – using these mobile phones to transact money. In fact, you're going to start allowing governments perhaps to take tax and there are ramifications further down the line.
So I think that to me, Safaricom is a company that has 60% to 70% market share of this, it is leading the world. If you took a look at Kenyan adults, 70% move money using the mobile phone, but only 40% have bank accounts. So it's clearly the way forward. And it's leading the light for the rest of Africa and you're starting to see copying across the continent.
Cook: So is there a flip side of this story? Because that sounds very positive, what would be the main risk?
Bell: I mean the main risk is this is a first and if you look at why it hasn't taken off in some other countries is the regulator hasn't perhaps – the banks have been stronger and therefore haven't allowed the phone companies to transform the society using this technology. So the risk really, which probably comes down to regulatory risk, is do the regulators allow a dominant player such as Safaricom to continue in this vein?
I would argue, it's now become a systemically important company and that by deepening the financial penetration within the country, it's actually in the interest of the regulator and the government to allow it to continue.
Cook: So a Kenya-based mobile money transfer is your number one.
Bell: Yes.
Cook: What would be number two on your list?
Bell: If we switch over to the Middle East, perhaps the Gulf Cooperation Council in Dubai. I mean, Dubai was in the news for all the bad reasons if you go back five years. And it has had a remarkable transformation and in fact today it's extremely exciting. There are many reasons for that.
I think one of the main reasons is it's been seen as a bit of a safe haven from the surrounding Arab Springs. So it's been a big beneficiary of that. And if you look at who's been buying the property, it will be the wealthy Egyptians, wealthy Libyans, wealthy Syrians, wealthy Pakistanis, people who are perhaps worried about the future of their home countries, want to park some money somewhere that's safer, have a bolt-hole to escape to.
So what that has done is absorbed all the excess supply that was there in the financial crisis in Dubai only five years ago. And so it's very well placed. So the stock that I think that's very interestingly placed within that is Emirates NBD (EMIRATESNBD), which is the largest bank in Dubai. So this is the one that was in the eye of the storm. And what we've seen is that it is now in a position where it's starting – its nonperforming loans are very high, but you're starting to see those government related entities that are the bulk of the nonperforming loans, starting to become more credit worthy and they are actually starting to repay these loans.
So what you're seeing is that the bad side of Dubai is starting to repair, at the same time we've got all this growth coming through. So this is a bank that will benefit from the repair of Dubai, but also the growth going forward.
Cook: And so, though they're repairing, would those nonperforming loans be the main risk associated with the stock or is there something else you need to be aware of?
Bell: Yes, I suppose, I mean, actually the risk to some respect is probably more that Syria, Egypt, Libya will get better. Pakistan gets better. So if that's the case then maybe that money that's flooded in starts flooding out. I mean, I would think that's probably a key risk. But you're right, we're still at that point where the visibility on the government-related entities isn't the highest. And so you could argue that the credit risk is still there. But I think with the back support of Abu Dhabi, who have really said, we're happy to ensure that Dubai doesn't go bust, I think we're fairly safe there.
Cook: So we've been to Kenya and Dubai. Where are we going for your third pick?
Bell: I think we're going to down to South Africa. So, one of the themes of our portfolio would be very much South African companies having a first move advantage into Africa. I think it's a very important part. It's often overlooked. There's a company that perhaps doesn't hit many radar screens, so a port and logistics operator called Grindrod (GND). Now the bulk of its assets at the moment are in South Africa but it's got a very important strategic stake in the port in Maputo in Mozambique.
Now just to touch on Mozambique, so Mozambique is the 14th poorest country in the world today, but has found more commercial gas than Australia. So it also has an awful lot of coal that it is trying to export, but it's got bottlenecks through the infrastructure, which is where Grindrod comes in. So within five years, two companies are going spend three times current GDP in Mozambique in order to get the gas out of the ground, or out of the sea, I should say.
But Grindrod is a part of the port that is going to double its capacity in the next six years, in order to get the coal that it's got out of the country into the export markets. So, again a major beneficiary of everything that's going on in Mozambique, but with a core operation that's also doing quite well in South Africa.
Cook: So this is a company that's going to facilitate a resource-rich country actually exporting those resources?
Bell: Yes. And just bear in mind this is a country that up until 2011 was basically relying on foreign aid and 2011 was the first year when foreign direct investment overtook foreign aid for this country. So there is a massive transformation that will happen in the next five to 10 years in Mozambique.
Cook: And with that transition, is there potential for volatility as well. Would that be the risk associated there?
Bell: Yes, I suppose. With all these things, these are blank canvas countries that have got a lot of development to take place and there is a lot of things that need lining up in order to make sure that the port can double in capacity. They're actually reliant on Transnet, the rail system in South Africa, to link up with the port, et cetera. So there are lots of operational issues, shall we say, that need to be overcome, I'm sure. And so it's not always going to be plain sailing. But I think the direction of travel is there, it's just how long it actually takes.
Cook: Oliver, thanks very much, some really interesting companies for us to look into. For Morningstar, I'm Holly Cook. Thanks for watching.
