These UK-listed businesses are investing heavily in frontier economies.
Many investors are attracted to emerging markets, lured by promises of high growth. But many UK-listed companies offer direct exposure to these economies, too. Here are three shares that might tickle your fancy:
Hikma Pharmaceuticals (LSE: HIK) is a fast-growing pharmaceutical company based in Jordan.
It generates over 63% of its sales from the Middle East and North Africa (MENA) region. Hikma is attractive for a number of reasons:
- firstly, pharmaceutical usage per head in the Middle East is playing 'catch-up' with Western norms;
- secondly, its growth drivers seem to be defensive;
- thirdly, it has a good market position in MENA; and
- finally, it gives you positive exposure to a weaker US Dollar. This last point is important if you hold a lot of UK exporters in your portfolio, because holding Hikma will balance the currency risk.
It operates with three separate divisions -- Branded, Injectables and Generics.
Branded is seeing low double-digit growth in revenues and its prospects look very strong due to its decent market share. Hikma's portfolio is well suited to the main health problems of the region, as they are strong in heart and diabetes drugs. However, one drawback of operating in MENA is that doing business there tends to require a lot of working capital. This is because distribution tends to involve a number of layers, so payments take time to work through.
The Injectables division has been restructured following a decision to curtail private label sales in the US. Hikma now expects strong growth in sales in 2010. However, 2009 told a different story. EU and US sales declined, but overall sales were only down 3%, due to sales growth in MENA.
The Generics division appears to have been turned around following previous difficulties. A recent update pointed to increases in prices, volumes and customers, following on from a strong performance in 2009. For 2010, it expects high single-digit sales growth.
Overall, Hikma's growth rates look strong and it has the scope to increase cash flow through better working capital management.
PZ Cussons (LSE: PZC) is an emerging markets focused consumer goods company. Emerging Markets (Asia and Africa) make up 79% of revenues and 54% of operating profits.
Africa (mainly Nigeria) makes up 42% of revenues. Recent results saw flat revenues, but operating margins and profits increased. Revenues were held back by a combination of political instability (the Nigerian President died) and banking controls caused a short-term liquidity 'squeeze'.
The company has just completed a major capital investment programme in manufacturing and distribution in Nigeria. Therefore, margins should expand going forward.
Revenues and profits rose in Asia, as it benefited from strong macro trends. Revenues fell in Europe but higher operating margins (14.2% vs 16.5%) saw operating profits rise. Imperial Leather and Carex performed well in the UK, thanks to brand positioning, whilst 'The Sanctuary' has proved to be an excellent acquisition.
Another interesting aspect to PZ Cussons is that it has dramatically improved its working capital position, meaning more cash can be freed up in order to generate growth. Its major capital expenditure programme is now complete, so I expect increased free cash flow generation in the next few years. Provided it keeps on track, it looks good value.
International Personal Finance
International Personal Finance (LSE: IPF) is a home credit lender focussed on emerging and frontier markets like the Czech Republic, Hungary, Poland and Slovakia, with expanding operations in Mexico and Romania. It is predominantly a woman-to-woman lending service, with appointed agents following a structured vetting procedure.
Its prospects will inevitably be guided by credit quality conditions in its countries of operation. This in turn, will be guided by overall macro conditions. Similarly, it has decided to access the public debt markets for its own medium-term financing requirements, but has found this tough going:
"We have sufficient committed bank facilities to fund the development of the business through to October 2011. Beyond that date, the total medium-term funding requirement of the Group is approximately £450 million including headroom. Our plan is to put in place new funding arrangements to meet this requirement before the end of 2010.
As part of this strategy and to meet a substantial portion of its future funding requirement the Group hopes to access the public debt markets and so has obtained a long-term credit rating of BB+ from Fitch and has established a Euro Medium Term Note programme. However, adverse conditions in public bond markets since the start of the Greek sovereign debt crisis have prevented this and it is unclear when conditions might improve."
This is not a stock for the faint hearted, but if you are looking for a stock capturing upside in credit conditions within frontier markets, then it could fit the bill.
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