Equity Analysis / Global

Will Africa's poor drive consumer spending after Covid-19?

  • Covid-19 may have blunted the African poor, but they remain the main engine of consumption on in the continent
  • We return to our proprietary metric that rates companies on their ability to target the poor – the PEP factor
  • Nestle Nigeria (NESTLE NL), Unilever Nigeria (UNILEVER NL) and East Africa Breweries (EABL KN) rank high on our metric
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Covid-19 has devastated the lives of Africa's poor. In many countries, the lockdowns have halted the income of day labourers, and curbed their spending. 

Day labourers work primarily in construction, transport and hospitality. They are an engine of consumption, but the World Food Programme (WFP) has warned that a quarter of billion people could face a food crisis if the lockdown eases.

Some countries are beginning to ease lockdowns, and companies across the continent have been proactive in dealing with the new reality. Unilever Nigeria has been packaging hygiene products (Sunlight Soap and Lifebuoy) in small unit sizes to target the bottom of the pyramid. With the easing, the pivotal role that the African poor pays in consumption growth will again be apparent. 

How can African companies better target the poor? 

Companies can successfully target the poor by selling products in small units, accepting low margins per unit and targeting high volumes. 

They can achieve superior margins by segmenting their product mix to the poor. Unilever India and Petra Foods have successfully targeted the poor using this strategy.

The management theorist CK Prahalad has argued that the poor occupy a lucrative part of the consumer story in emerging markets. He developed this framework in his book The Fortune at the Bottom of the Pyramid – Eradicating Poverty Through Profits (published 2004).

Three distinct aspects of the thesis about the fortune that exists at the BOP level are:

  1. Consumers who live at the bottom of the income scale collectively represent billions of dollars’ worth of demand.
  2. These consumers will account for much of the growth in global demand in the future.
  3. Companies that target the poor need to frame their business model appropriately. Prahalad summarises his approach as, “if we stop thinking of the poor as victims or as a burden and start recognising them as resilient and creative entrepreneurs and value-conscious consumers, a whole new world of opportunity will open up.”

Targeting the poor can be profitable even in the midst of Covid-19. This economic opportunity is valued globally at US$13tn a year, according to the World Bank.

Three Pillars of the Bottom of the Pyramid

To target the bottom of the pyramid, companies must adopt three strategies. 

1. Small unit packages

Consumer firms must be proactive to target the BOP. The unit price must cater to people whose daily disposable spending is less than US$4. For instance, Unilever Nigeria sells shampoos in single-use sachets that carry less than 25ml of liquid. These are priced at below US¢40. Shampoo in small sachets has proved popular even during the lockdowns. 

There are several examples of small unit sizes providing an avenue to target the poor in developing countries. Sachet marketing is a prominent category:

  1. In Brazil, Unilever produces Ala, a brand detergent. This caters to people who previously washed using detergent in the river water.
  2. In India, Unilever produces Sunsilk shampoo in units of US¢2–4.
  3. In Tanzania, Key soap is sold in tiny units for a couple of US cents.

2. Low margin per unit

Instead of imposing a premium on the poor, targeting the poor requires an expectation and acceptance of low margin. The gross margin per unit of shampoo may be half the margin that can be derived from high-end customers.

3. High volumes

While margins may be lower, the BOP presents scale opportunities. Annual shampoo consumption in Nigeria is just 120ml per capita, which is a fraction of Western levels. But, the country has a population of 195mn, which means that the total shampoo market that Unilever Nigeria can address is already similar to the Belgian shampoo market. 

The PEP factor?

Consumer companies have unique challenges in Africa. One is the need to target the BOP through a combination of small unit sizes, high volumes and low margin per unit. The companies that employ these strategies enjoy superior growth to their peers.

We employ a proprietary framework that rates a company’s ability to target poorer customers, as well as the company’s financial health. Our metric is called the Productive Exposure to the Poor (PEP) framework. The PEP assigns a single score for each selected company based on its ranking under seven criteria. 

Our PEP framework is available to Insights Pro subscribers.

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Equity Analysis / Pakistan

Pakistan banks: Covid-19 could drive a shift to digital payments

  • We think a lack of awareness about digital payment channels has been a reason for Pakistan’s high cash utilisation level
  • But now Covid-19 could trigger a long-lasting shift in consumer behaviour towards digital payment
  • Most of our covered banks have ramped up their IT expenditures
Rohit Kumar @ Tellimer Research
8 April 2020
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Pakistan is heavily cash-based. We think a lack of awareness about digital payment channels is a key factor for the economy’s high cash utilisation level, in addition to a large undocumented economy and banking transaction taxes on non-filers.

Covid-19 could provide a lasting push to digital payments. We believe the following developments could trigger a long-lasting shift in consumer behaviour away from cash and allow for a sharp growth in digital payments: (1) Recently, the State Bank of Pakistan waived digital banking transaction fees to facilitate cashless and branchless transactions; (2) funds from the government’s relief package for low-income workers are likely to be disbursed through mobile wallets like Easypaisa, JazzCash; (3) fear of transmission through the use of physical banknotes is also encouraging individuals and businesses to seek out alternative methods of payment. 

Most of our covered banks have ramped up their IT expenditures in 2019. For the sector, we estimate IT expenses growth was 25% yoy in 2019, and that these costs were equivalent to 20bps of total assets and 8.9% of total costs. 

The bulk of IT expenses are software-related. Among our covered banks, c50% of IT expenses comprise software-related activities (software maintenance and amortisation), while c30% are hardware-related and 20% are network charges. We believe banks with higher focus on software-related activities would be more likely to deliver product innovation and an enhanced consumer experience. 

IT expenses breakdown – 2019

Source: Company accounts, Tellimer Research

Branch expansion is more measured than five years ago, with scope for a further slowdown. Banks grew their branch networks by an average of 4% in 2019; this is roughly half the 2014 growth rate. Slower growth prospects may be one factor, but we think technology adoption is also a contributor. For conventional banks, we think branch networks could ultimately start to shrink (as we have seen in Nigeria and Malaysia) as alternative channels (mainly mobile phones) become more popular. Note that active mobile wallet accounts grew by 2.2mn in H1 19, compared to just a 0.8mn addition in the number of bank accounts.

Figure 4: Branch Expansion yoy

Source: Company accounts, Tellimer Research

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Flash Report - Equity / United States of America

Jumia: What Africa's Amazon tells us about the e-commerce opportunity

  • There is momentum behind EM e-commerce, and it will continue after the Covid-19 era
  • Jumia has prepared itself for the supply chain disruptions and currency impact
  • Beaten down EM e-commerce such as Jumia could ascend further if a deep-pocketed suitor comes calling
Nirgunan Tiruchelvam @ Tellimer Research
7 May 2020
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Covid-19 has hit the world economy very hard. Apart from the 260,000+ lives lost, the pavement is littered with traditional retailers going bust: JC Penny, a famous American department store chain founded in 1902, filed for bankruptcy on Monday; Neiman Marcus, founded in 1907, followed suit today; and J.Crew seems set to join them.

But the virus is a godsend for EM e-commerce players. Most notably, Jumia, Africa's answer to Amazon, has risen from its slumber. After losing over 90% of its value in the eight previous months, it rose by 54% in April. 

Chart: JMIA US monthly performance (%)

Source: Bloomberg

Four key points:

1) The main driver of Jumia's upsurge is the general momentum behind EM e-commerce. Traditional stores have been out of action and Jumia has been a huge beneficiary of this in its main markets of Nigeria, Egypt and Kenya. Moreover, the company has aggressively courted higher engagement with its platform by increasing the number of its grocery providers. 

2) Jumia has been well prepared for the supply chain disruptions and currency impact of Covid-19. It has cut costs in terms of headcount and other overheads. 

3) Beaten down EM e-commerce such as Jumia could attract attention. EM e-commerce is an alluring prospect for tech giants such as Facebook and Amazon. The latter have net cash reserves of US$54bn and US$81bn, respectively. 

Africa’s internet penetration is on an upward trajectory, driven by smartphone usage (the continent is a ‘mobile-first’ market where people typically first access the internet via their mobile devices). The Jumia brand has managed to grow in popularity over the years and is currently regarded as the largest e-retail firm in Africa.

4) EM e-commerce is on the rise, but watch out for the cash burn. In the post-Covid-19 world, the market will be far less forgiving of cash-burning e-commerce ventures. Jumia itself is on course to deplete its cash by FY 21. 

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Macro Analysis / Global

Comparing fiscal responses during the coronavirus pandemic and global recession

  • As countries begin to ease their lockdown restrictions, investor attention will focus on economic recovery
  • The global monetary response has been fairly uniform, but the fiscal response has been more uneven
  • For frontiers and smaller EMs, it has averaged 2.7% of GDP, compared with 5% for bigger EM and over 20% in the G7
Stuart Culverhouse @ Tellimer Research
13 May 2020
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Countries are beginning to ease their lockdown restrictions – by our count, over 40% (c85) have announced some form of lockdown-easing measures in recent weeks, including the UK at the weekend; although a proper cross-country comparison is made difficult as measures vary by country (and it depends on how strict policies were in the first place). Investor attention will now begin to focus more on the prospects for an economic recovery, and its speed and trajectory  will it be V-, U- or even L-shaped? 

This recovery will depend on numerous factors, of course, but some of the most important drivers are the various stimulus measures that governments and central banks around the world have taken. The global monetary policy response has been largely uniform, across both developed and emerging markets, with many central banks easing in various guises, but fiscal measures have been much more uneven. 

These fiscal responses cover many areas, seeking to limit the extent of the downturn, targeting health spending, protecting the most vulnerable, businesses and workers, and providing the conditions for a rapid return of activity when countries emerge from hibernation (or suspended animation – the chart below shows the remarkable collapse in economic activity) when conditions allow. 

Figure 1: Real activity index* (% yoy) 

Source: Tellimer Research. *Brookings-FT TIGER series. 

In the full version of this report(for Tellimer Insights Pro subscribers), we show the variation in fiscal responses across the globe, based on information from the IMF's policy tracker, which reports the measures taken by 192 countries (or the individual country reports where necessary)  from this, we calculate each country's fiscal response based on announced measures, with the caveat that we do not yet know much about implementation or take-up of many of these measures and whether costs will turn out to be more or less than expected.

Market conditions have stabilised in recent weeks, in part based on these global policy measures, as evident among EMs from declining bond spreads (the EMBIGD spread is down by c20% from its peak on 23 March), an easing in capital outflows (or even the return of some inflows) and the opening of the new issue market (albeit mainly for high grade). But how this continues will depend in large part on the success of the measures these countries have taken to date. 

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Equity Analysis / Pakistan

Pakistan banks: Stress testing on revenues & asset quality

  • If the coronavirus pandemic extends for a prolonged period, banks will face pressure on both revenues and asset quality
  • Stress testing concludes earnings are most vulnerable to a spike in loan provisions vs. margin compression
  • Even in a stressed scenario, IMS Banks trade at a forward P/E /P/B of 0.77x /7.47x which is not particularly expensive
Raza Jafri @ Intermarket Securities
19 March 2020

Pakistan banks are down 30% in March’ 20 vs. a 20% decline for the KSE-100. If the coronavirus pandemic extends for a prolonged period, banks will face pressure on revenue (both funded and non-funded lines) and asset quality (including impairment on equities). The SBP has not yet announced any relief measures for banks.

We stress test our models to gauge possible earnings ranges in a bear case scenario. Banks earnings are most vulnerable to a spike in loan provisions (ignoring the potential for availing FSV benefits). Margin compression is less of a concern even though the offsetting prospects via higher loan growth and capital gains are slim. Systemic CAR of over 16% appears adequate but some smaller banks, not in our coverage, could potentially be vulnerable.

Assuming swift margin compression, lower fee income and a cost of risk similar to the last downcycle (2008-11), our base-case 2020/21f EPS estimates come off by 30/39%. Even on this stressed scenario, the IMS Banks Universe is trading at a forward P/B of 0.79x/0.77x and P/E of 7.75x/7.47x – not particularly expensive, which may help arrest further large declines in share prices and possibly compel value buyers to build positions. 

SBP cuts policy rate by 75bps – monetary easing begins

The SBP cut the policy rate by 75bps to 12.5% in the March 2020 monetary policy. This is the first rate cut in almost four years. The SBP has also shifted the interest rate corridor up by 50bps; this move will serve to cut banks’ earnings by c 5%, all else the same, as it reduces the quantum by which savings deposits (40% of overall deposits) will reprice. Following the 75bps cut in the policy rate, margin compression would have begun to come through from 2H20 but the shift in the interest rate corridor brings this timeline forward. 

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