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Forget other emerging markets. Why these African stocks have enormous growth potential

Image source: Getty Images.

UK investors may not have easy access to the tech stocks that American investors have, but by dint of Britain’s colonial past and London’s attractiveness, the LSE does boast a fair few genuinely exciting emerging market-focused growth stocks. And while many emerging market investors are first and foremost looking to Asia, they shouldn’t neglect companies catering to the continent that is forecast to account for half of global population growth in the next few decades – Africa. 

One such company is Vivo Energy (LSE: VVO), which is the licensee of the Shell service station brand in 15 African countries that together boast 277m consumers. The company currently runs 1,800 service stations stretching from Botswana to Morocco that are experiencing rapid urbanisation, vehicle usage and economic development.

By running stations for a trusted brand name, Vivo is well-placed to benefit from these trends. Indeed, in the first half of the financial year, it recorded a 4% uplift in the volume of petrol it sold to consumers. But petrol and associated vehicle products like lubricants and car washes aren’t the only driver of growth as Vivo is placing a great emphasis on Western-style retail sales and restaurants at its service stations.

The shift towards these profitable retail operations helped boost gross profits 6% during the period to $312m with adjusted EBITDA increasing 8% $204m. And with net debt at just 1 times full-year EBITDA, the group’s balance sheet is in good shape. Together, solid cash flow being generated from operations as well as access to debt funding provide a solid base for Vivo Energy to continue expanding operations in current countries and beginning them in other ones.

However, despite Vivo’s solid growth prospects the company’s exposure to a wide variety of developing markets, any would-be investors should do extra due diligence before considering investing.

More wealth equals better health? 

This is also true of another fast-growing African business I’ve got my eye on, Integrated Diagnostics Holdings (LSE: IDHC). As its name suggests, IDHC runs 383 medical diagnostic testing branches in Egypt, Jordan, Sudan and, recently, Nigeria.

Just like Vivo, IDHC is taking advantage of rising populations, incomes and health problems to sell its services to increasingly wealthy customers. In the first quarter of its financial year, the group’s revenue rose 29% year-on-year to EGP446m with net profit up 24% to EGP110m.

As these results show, the company is not only growing quickly but is also profitable. Indeed, for the full year, management is guiding for 20% revenue growth and EBITDA margins in excess of 40% at its operations outside of Nigeria, which have just begun and are currently lossmaking.

Although its 12 Nigerian locations are not profitable at the moment, the long-term potential for IDHC in Africa’s most populous country is understandably impressive. And as Nigeria beefs up, the company is still growing steadily in its home markets with new branches opened in each of its three core markets in Q1 and a solid increase in the revenue per test it received during the period.

IDHC has pretty solid growth prospects, but UK investors should be extra cautious considering the currency woes that have hit the company’s USD and GBP results stemming from Egypt’s turbulent political and economic environment. 

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.