Shares in South African builders look cheap, even though big World Cup projects are over, because of planned infrastructure spending there and in the rest of Africa, Charlemagne Capital's Africa portfolio advisor said.
Sharat Dua said even if South Africa was not growing as fast as frontier African economies, the expansion of its middle class would resume now recession had ended and well-run firms would also benefit from increasing exposure to other parts of Africa.
Charlemagne's Magna Africa fund which Dua helps run holds major South African construction stocks Aveng, Group Five and Murray and Roberts. It also has a stake in road specialist Raubex.
"These companies are also the ones who have the experience and expertise to be building up the rest of Africa and infrastructure is what we know Africa is short of," Dua said.
"Some of them, in particular Aveng and Group Five, are backed by net cash which is about 50 percent of the market capitalisation of these companies so there is definitely potential for a rerating there."
The $60 million fund invests across Africa, with its biggest holdings in South Africa, Nigeria and Egypt. It was up more than 17 percent from the start of the year to the end of May after rising nearly 56 percent in 2009.
Although some of its stakes in South Africa are intended to benefit from growth in the rest of Africa, through companies such as Standard Bank and telecoms firm MTN, Dua said South Africa itself had strong prospects after emerging from recession.
"Up until the onset of the crisis, South Africa was moving around 300 000 people per annum from the lower income groups into the middle class group," he said. "That path is resuming this year."
STILL VALUE
Liquidity is a constraint for Magna Africa because it is committed to being able to exit 75 percent of its positions within five trading days, leaving fewer countries to invest.
One where it can is Nigeria, where the All-Share index is up 25 percent this year although over 8 percent off an April high.
"Nigerian banks badly bottomed out at the beginning of the year. They did recover to some extent but we still see value there and across the board in Nigeria," Dua said.
"Lending was more or less on a freeze for the last quarter of last year and probably most of the first quarter... but we've met some of the banks in the last two to three weeks and lending has certainly restarted. The majority of them are now talking of 10 to 15 percent loan growth this year."
He identified Guaranty Trust Bank and Access Bank as more conservative banks that looked healthy. The central bank last year bailed out a number of other institutions which had been weakly capitalised. He also saw strong potential in local oil firm Oando.
He rejected suggestions the fund could be at risk from a market bubble forming again in Nigeria, as it did in 2008, or elsewhere in Africa, saying Magna Africa was rigorous about leaving positions once they reached a target price.
In Egypt, he saw Commercial International Bank as having good prospects on the back of expanding retail banking.
He highlighted the bank's move into payroll banking, meaning it could sign up all a firm's employees, keeping them as customers and giving it the security to lend to them. - Reuters