There is a huge deal in town right now. Yes, something big is brooding. The Nigerian insurance sector has once-in-a-generation opportunity. Simply, when the Nigerian Stock Exchange introduced yesterday a new pricing system by amending the Pricing Methodology Rule, most traded insurance companies saw their stocks drop below 50 kobo. Hitherto, the minimum floor for listed NSE firms was 50 kobo. Under this new Par Value and Share Price Methodology, the number is now 1 kobo.
Since that yesterday, the market forces have started working, and stocks of many listed insurance firms have dropped below 50 kobo. They had been on 50 kobo for years as the old rule made it impossible to drop further. Now, that is gone, and these firms could lose further value. It is very unfortunate of course – nothing to celebrate here. Yet, it is also a problem to be fixed.
Nigerian stock market had a very good year in 2017 but that was driven mainly by category A and B equities; the Category C had marginal impact.
In coming months, I expect most of these insurance firms to move hands. Otherwise, they would be delisted. In short, expect strategic trading at high levels. And if the bulls move, outright acquisitions would happen.
Now, how do you fix these companies when you buy them? It is not going to be easy. But that would not stop me from presenting a roadmap. I would be sharing some components in the subscriber area.
I made public the One Oasis Strategy last year. It has become a key element when I analyse firms and how they could approach market entries. The One Oasis Strategy is about finding how to create solutions which can find their first customers within the business. Amazon Cloud has the ecommerce operation as its first customer thereby removing any market demand risk. Samsung Semiconductors has the Samsung mobile devices business as the first customer. With those assured internal customers, these firms deploy resources, irrespective of the market dynamics, because they have found the first customers already, in-house. But over time, the products are now made available to the general public.
Indeed, oasis is very critical and every company has oasis. Your best product is the oasis in your business. Every other product feeds on that best product. If you build your investment around that main product, you will find success, because those investments will have a clear “customer”, and that reduces market risks. In other words, if your new business investments are geared to support the best product, and the best product is doing well, it means the risks on the new investments will be easily managed. Provided the best product continues to do well, demand on the new investment is assured. That is the One Oasis Strategy.
Every product is like the animal that returns to the oasis for water. Every product is like the humans that depend on the oasis for habitat. Provided that the oasis is there, and doing well, their survivals are guaranteed. Yet, as those new products do well, they could find new customers, beyond the first customer (that best product). That means, you can introduce them to the markets for other customers to buy, even when they are supporting the best product, which is the most important reason the original investments were made.
In business, you need to identify your best product (the oasis) and get other products to build habitations around it. I’d spent time in a very fascinating software powerhouse in Lagos: ATB Techsoft Solutions. ATB Techsoft is one of the largest emerging software companies in Nigeria today with excess of 20 great products with applications across industrial sectors. I would be sharing more on this company in coming days. But in a conversation, I asked the MD of the company to find an oasis within his firm. He came back after one week with an answer: its oasis is FinUltimate.
Finultimate offers the most comprehensive portfolio of applications software designed to help financial services companies improve operational effectiveness, profitability, product innovation, distribution / delivery channel growth, customer relationships and enterprise information management.
Now, with FinUltimate, it can deepen other products into the market. What he did is what I expect every entrepreneur to do. Now, from more than 20 products, the company is positioning all as one, even when having the capacities to deliver better results to customers in sectors like education, banking, logistics, education, insurance and more. Yes, for ATB Techsoft, the world now is FinUltimate, and it can take up your software business needs. FinUltimate is homegrown, with elasticity to capture any specific customer needs because it was created in Magodo Lagos in a rapidly expanding business.
While speaking at the World Economic Forum …, Maersk’s chairman Jim Hagermann Snabe revealed the extent of a recent cyberattack’s damage to the shipping giant’s IT systems. The NotPetya ransomware worm forced the company’s tech team to reinstall “a complete infrastructure” over 10 days, he said. The crew set up “4,000 new servers, 45,000 new PCs, and 2,500 applications” to the tune of $250 to $300 million.
Leaders of Egypt, Ethiopia, and Sudan convened in Addis Ababa to break a diplomatic deadlock over Ethiopia’s plans to build a hydroelectric dam on the river. Egypt fears the dam could lessen the amount of water it gets from the Ethiopian highlands. (Fortune newsletter)
In these unrelated cases, we can see one thing: connectivity. In the case of Maersk, the firm had networks of connected computing systems which were compromised by a ransomware. Typically, for most ransomware, the only solution is to rebuild a system infrastructure, from scratch, where you decide not to pay the hackers. Too bad for Maersk, it is possible a cloud-based infrastructure could have prevented the level of mayhem it experienced.
For Egypt and Ethiopia, this simply explains the interconnected nature of our world. Most times, we do not appreciate all these elements. Templeton Investments has this popular advertisement where it explains that markets are connected; that one event in one country could impact what happens in another. It used an example on how an agriculture policy in one nation could affect the seafood sector in another. Yes, a dam project in Ethiopia could cause severe dislocation in Egypt’s economy in years.
The Mind of an Entrepreneur
Winning markets comes through awareness. The brilliance of Aliko Dangote happens because of his high level of awareness to link market frictions and opportunities. The same goes for Jim Ovim, Tony Elumelu and others. For these men and others, they do not need to have (directly) experienced something to know the impact of that thing. Yes, Dangote might not have gone grocery shopping in years, but he has awareness of the range of food prices. He may not be directly connected to the operational elements within a sector, yet, he has awareness of what is happening there. Without awareness, any entrepreneur would struggle. Connecting the dots is what makes it possible to understand how markets are moving and what the emerging opportunities are. You must invest to have the capacity to connect pieces of (unrelated) events and things, in order to stay ahead of competitions as markets shift.
As I travel around the country, there is one thing that seems purely universal in Nigeria: massive unemployment. Unemployment has reached the level where government must declare a state of emergency to fix it. I mean, it is very alarming that extremely brilliant young people in Nigeria cannot find jobs.
In my typical way, I would offer a suggestion to the government. Here is a summary of a strategy I do think could boost economic growth and get people back to work.
Forget Free Market; Stimulate the Economy with State Guarantees
My suggestion to the President is to listen less to people that tell him that free market would drive all vibrancy in our economic system. The private sector is working but we are not growing enough companies due to funding paucity in Nigeria. The implication is that most firms are not following their growth trajectories. Without those trajectories, the firms cannot hire for expansion. So, we are on paralysis because many companies which are entering their 10-15th birthdays are trapped within a banking system that does not have much assets to offer loans. You should not fault the banks; they have capital adequacy ratios to meet in an economy which is just coming out of recession.
To fix the growth stasis, the government should use state guarantees to unlock $10 billion in loans to at least 50,000 companies in Nigeria at average business loan of $200,000. Under this scheme, government would guarantee 25% of all business loans made by commercial banks. In other words, government would cover any loss by up to 25%. With this, banks would drop their tight credit criteria and allow some companies which might not have qualified for loans to qualify. This is basically playing at the borderline of creditworthiness with the guarantees flipping it for businesses.
Under this scheme, I expect loan growth to hit at least 30% within a quarter. That would put many companies on the path to move to the next level of their business lifecycles. As they grow, I expect them to hire. That would help in fixing the massive unemployment in the land.
Scene from a job fair in Nigeria (source: Cable)
Historically, government had focused on funding new companies. While that has merit, the reality is that new companies take time before they can add workers. The strategy now would be to stimulate already operating businesses which need capital to grow. Here are some elemental components of this plan:
BVN is a must: All the businesses that need loans must have BVNs to ensure the identities of the promoters are documented.
Digital Payment: Government would push as much as possible to get many of the companies to collect payment digitally (not just online). The goal is to have real insights on cashflow, and how the firms are doing. Also, digital receipts would make it possible to collect the right tax from them.
Existing companies: Focus on existing companies and help them expand, over funding startups. Companies must be at least 3 years old to qualify.
Banks decisions: The banks would have 100% control on the credit decision and administration. Only the banks would determine the companies they would lend to; after all they are going to lose 75% of the money if things go bad. But with the 25% of potential loss covered, they would be encouraged to reduce their criteria. Government would bound the maximum amount which can be loaned to a single firm or promoters under the scheme.
Software automation: The whole process of this scheme must be wholly transparent to the business community, banking sector and the government. I recommend creating a software system to make that happen.
Projected Impacts
I project the following as impacts: Each of the 50,000 benefiting companies would add 10 employees within a year for a total capacity of 500,000 (direct) new jobs. The boom in the economy as result of this expansion (the new workers would spend money, the banks would expand, the firms doing business with these 50,000 companies would expand, etc) would result to additional 1 million jobs.
So, within a year of the initiative, government would have created very good 1.5 million jobs. And it can do this without losing a dime if the loans perform well.
Nigeria is a very exciting country. I pay attention to those numbers from the National Bureau of Statistics. But no matter what the bureaucrats publish, we have a way to test them, to a certain degree, as a way of validating what to use in business decision making. It is not a perfect model but most times, it helps us remove ambiguity in some decision-states. I do talk to foreign investors, who are investing in Nigeria, and I like to ensure that I am fact-prepared to offer insights.
Photos of parked airlines
The following are some of our processes:
Photos of Ships at Ports, from Marina Lagos: Every month end, I have two friends who work in different high-rise buildings along Marina in Lagos take photos and send to me. They take photos of ships coming and leaving Nigerian ports. We have seen that the density of these ships have correlated with economic dynamism in Nigeria. Yes, the density also correlates to the general feelings and confidence of businesses and citizens, irrespective of the official statistics. During recession, the density of the ships dropped significantly. As the economy recovered, the number of ships rose.
Airlines Scheduled Flights: At month end, count the number of scheduled flights in the leading airlines. What we have noticed is that when flight demand increases, airlines add more flight schedules. During the recession, they reduced the numbers significantly. We use that flight frequency to indirectly model the health of the economy. We focus on Lagos, Kano, Abuja and Port Harcourt in/out routes
Photos of Parked Aircrafts: There is a positive correlation between the health of the economy, and how many aircrafts airlines are leasing and putting into services. Usually from 7pm when most of the local aircrafts have parked, you can get a good insight on the confidence level of airlines by looking at how many aircrafts they have in service. Most of them are parked in Lagos and Abuja which are usually the take-off airports to other destinations in the morning.
There are two other things which I will not share here. Yes, they are trade secrets in our business. Pardon me for that.
When we have collected the data and photos, we run them through a code to make sense of them. What happens is that we get really great insights about the economic health of Nigeria. You would be surprised how these indicators track consumer confidence and business sentiments. That drives strategy and also positions us to see what is happening in the economy more efficiently. Our clients get the benefits because we help them feel the optimal state of the economy.
You do not need to be an economist to build a model to extract data to help you. In places like Nigeria where data collection remains primitive, entrepreneurs must be creative as they make decisions in the allocation of capital. The data you invest upon should not be based on what some bureaucrats in Abuja and Washington DC are publishing. Most times, they are off by months as the collection process is inherently slow.
