The Zimbabwe Stock Exchange trounced all other African markets during the month of May. The MSCI Zimbabwe index gained 4.5% while neighboring South Africa’s MSCI Index Fund fell 9.2%.
Could this be a signal that Zimbabwean stock values are ready to surge? To help answer this question, I asked a few Zimbabwe market experts to provide some insight on the exchange and to give me their take on nine of its most prominent shares.
The Big Picture
I first checked in with Matthew Searle, Sub-Saharan Africa Analyst with Business Monitor International, to get an overview of the economy and to ask whether now is the time for foreign investors to consider investing in Zimbabwe.
Searle believes the country’s economy is “brimming with potential” after a decade of contraction. Why? He cites Zimbabwe’s “rich endowment of natural resources,” “well-developed infrastructure base,” and “competent workforce (particularly at the management level).”
But stock valuations don’t fully reflect this bright outlook.
“There are very good reasons for this,” says Searle, “for one thing, several policy decisions (such as the ongoing indigenisation drive) have kept foreign direct investors and funders at bay. While I don’t think that this is necessarily having too much of a detrimental impact on investment into the stock market, it does mean that the dollarized economy, which is reliant on real inflows for liquidity, is starved of capital, making it very difficult and very costly for firms to access working capital and to fund expansion and this is hurting profits.”
The other factor that worries foreign investors in particular is political risk. “There is a huge amount of uncertainty about when and in what environment the next elections will take place and whether the security services will respect any result other than a victory for President Mugabe’s ZANU-PF party,” Searle explains. “There are also concerns about who will end up succeeding Mugabe at the helm of ZANU-PF and how destabilizing the battle to succeed him might be.”
Searle concludes, “Ultimately, if you believe, as I do, that Zimbabwe’s political trajectory will remain positive and that policy concerns will be addressed in the process, the Zimbabwean equity market is certainly worth a punt. However, the risks are significant and there is almost certain to be a great deal of volatility before its potential is realised.”
Zimbabwe’s Blue Chips
Next I asked David Amira, an analyst at Lynton-Edwards Stockbrokers, Lloyd Mlotshwa, Equities Research Analyst at IH Securities, and Phenias Mandaza, Research Analyst at EFE Securities to walk me through the Zimbabwe Stock Exchange’s most active listings.
We began with the exchange’s most heavily traded shares.
Delta Corporation[table id=68 /]
Delta dominates the Zimbabwe exchange’s trade volume like Kobe Bryant dominates the Laker’s offense. It’s not uncommon for the brewer to account for 75% of weekly trade value.
The company has posted exceptional earnings growth of late with profits nearly doubling over the past 24 months. So, the question is how much longer such rapid growth can be sustained.
Amira believes the shares still have “tremendous” growth potential. “At the moment something like 10% of the population is employed, so bringing the majority of the country into the mainstream economy will have a dramatic effect on Delta’s business,” he says.
Mlotshwa agrees. “We expect continued earnings growth in the short to medium term, primarily driven by margin expansion, Delta’s strategy is to shift the value mix from mainstream lagers to premium lagers, which yield a higher margin.” Moreover, Mlotshwa believes new bottling equipment will result in “improved efficencies reduced fixed costs.”
Econet Wireless[table id=69 /]
Zimbabwe’s leading telecom, Econet Wireless looks amazingly cheap compared to its African peers. I asked David and Lloyd why this might be.
Amira blames Econet’s valuation on Zimbabwe’s poor image with foreign investors. “Econet is cheap when compared to the likes of MTN and Vodacom across the border in South Africa,” he says, “This is mostly due to the risk element associated with investing in Zimbabwe. Econet has good fundamentals, however, and once investors begin to see the situation in Zimbabwe with less aversion, the price will correct.”
Adds Mlotshwa, “Econet is a bit of a mystery stock. The valuations are certainly attractive and it would easily be considered one of the cheaper telcoms on the continent. There are many theories as to why the price has not reacted including dissatisfaction with disclosure practices and corporate governance issues.”
Mandaza believes the company’s lack of a dividend payout depresses the price. He says investors are “wondering whether it was the poor quality of profits” that prevented management from declaring a dividend in spite of rapid earnings growth this year.
Innscor Africa[table id=70 /]
With operations stretching from Zimbabwe to Kenya and Senegal, Innscor is a well-diversified African conglomerate. Its specializes in food manufacture, restaurants, and retail, but dabbles in the tourism industry, too.
“I rate Innscor highly because they serve the whole spectrum of the population, making them a strong growth prospect should disposable incomes improve,” says Mandaza.
Amira likes Innscor’s strategic focus on fast foods. “Fast foods is an area we believe will continue to grow, especially due to the fact that Zimbabwe’s urban population is growing, and is becoming more affluent,” he explains.
Pearl Properties[table id=71 /]
Pearl owns a portfolio of 41 commercial and retail buildings throughout Zimbabwe and concentrated in the major cities Harare and Bulawayo. The firm has continent-wide ambitions, and management’s vision is to build it into Africa’s dominant real estate company.
Investors don’t appear to be completely sold on the dream, however. Pearl’s stock trades at significantly less than book value.
“Some market participants argue the book value of Pearl is itself too high, having been calculated using rental yields and not on property market indicators,” says Mlotshwa.
Mandaza seconds this view. “Asset valuations should be called into question given the low activity on the property market,” he cautions.
Seed Co[table id=72 /]
Seed Co develops a wide variety of hybrid seeds that it markets throughout Southern Africa. It recently announced its intentions to enter the Nigerian market next year. Management predicted the move will be a “game-changer.”
The company has struggled to collect payment from some major clients recently. It is owed $15 million by the Zimbabwean government and another $7 million by Zambia.
Mlotshwa likes the company’s “solid business model” and its 70% market share in Zimbabwe, 50% market share in Malawi and 46% market share in both Zambia and Tanzania.
Mandaza rates the stock “very highly.” “African economies are agriculturally driven,” he says, “I believe this could be a strong growth story.”
Barclays Zimbabwe[table id=73 /]
Both Mlotshwa and Amira believe the price of Barclays, one of Zimbabwe’s leading banks, is weighed down by the spectre of indigenisation. Zimbabwean law requires that all companies be majority-owned by shareholders indigenous to the country. Barclays Plc owns 68% of its Zimbabwean subsidiary, meaning that it is out of compliance with this law. Negotiations between the government and company management over how to resolve this issue are ongoing.
In spite of this, Amira sees “solid” earnings growth for the company.
Mlotshwa believes its performance has been hamstrung by a “cautious” lending policy. “Their loan to deposits ratio remains well below 30% versus the average loan to deposit ratio in indigenous banks of around 75%. This of course has affected their profitability,” he says.
OK Zimbabwe[table id=74 /]
OK Zimbabwe is the country’s leading grocery store chain with a 35-40% market share. It posted excellent results recently, with earnings more than doubling over the past twelve months. I asked the local analysts what they saw as the chief risk to the company’s investors.
Amira says, “The risks in OK are the same as in any other company on the ZSE – political. Being a food retailer they are less prone to downturns in the economy, and with general employment levels rising, we expect sales to continue to grow ahead of GDP growth.”
Mlotshwa added the threat of competition. “The main threat would probably be in the form of chains like Pick n Pay which has bought 49% of local food retail chain TM Supermarkets and is currently rebranding and refurbishing stores. However this threat is a long way off considering the amount of time it will take to redo a significant number of stores,” he said.
Mandaza sees an additional risk for OK Zim shareholders. “Investors may be worried about the dilutive effect of the convertible loans that the company received when recapitalizing,” he explains.
Dairibord[table id=75 /]
Dairibord is a former parastatal and Zimbabwe’s leading producer of milk, cheese, and ice cream.
“It has the natural advantage of operating in a market where demand far outstrips supply. Monthly demand for milk in Zimbabwe is above seven million liters per month. Currently, 4.5 million liters are produced locally, and another million liters are imported. This leaves a clear under-supply in the market and a natural growth opportunity,” says Mlotshwa.
Mandaza touts Dairibord’s “strong brands that can hold their own against imports.”
CBZ Holdings[table id=76 /]
The former Commercial Bank of Zimbabwe operates real estate and insurance divisions in addition to a full range of banking services. As of this writing, it trades at less than half of book value. I asked the analysts why.
Amira said, “Zimbabwe’s banking sector was rocked by a liquidity crisis towards the end of last year. Being the largest bank in the country, CBZ was hit hard. Luckily the crisis was resolved quickly, and CBZ is now beginning to bounce back.”
Mlotshwa added, “Non-performing loans have become a very real and present threat, yet most indigenous banks do not appear to have adequate provisioning. CBZ as the largest indigenous bank both by deposits and loans was perceived as being under the most threat, however a trading update recently issued seems to reflect stability in the bank.”
The Analysts’ Faves
So which stocks do our analysts like best?
Mlotshwa favors companies that specialize in fast-moving consumer goods, and he highlighted OK Zimbabwe, Innscor, Dairibord, and Delta specifically.
“My favorite stocks are in agriculture and retail,” says Mandaza. He lists Dairibord, Delta, Innscor, OK Zimbabwe, and Seedco specifically.
Amira preferred not to give specific recommendations, but remarked, “my feeling is that the Zimbabwean economy is undergoing a slow recovery, which will happen over a period of time. Once we have enabling policies in place which encourage investment, then things will happen much more quickly. The more liquid stocks like Delta, Innscor and Econet are favoured by most investors due to their stability and size. They would be a good starting point for investors looking to gain exposure to the Zimbabwean story.”
[Disclosure: I have no position in any stock mentioned in this article, and I have no intention of taking any within the next 72 hours.]