Category: Zimbabwe Stock Exchange

It’s been a remarkable month in Zimbabwe.

After 37 years that saw the southern African nation deteriorate from one of the continent’s most prosperous to one of its most destitute, President Robert Mugabe resigned from office on November 21 following a military takeover precipitated by his sacking of Vice President Emmerson Mnangagwa.

The dramatic turn of events has understandably raised hopes of much-needed political and economic reforms. And I’m already getting questions from readers who are keen to figure out how best to invest in the country.

So, is it time to buy Zimbabwean stocks?

In my view, the answer is no. But it’s most certainly time to familiarize yourself with the market.

Here’s why investors should stay on the sidelines for now.

• The new administration is not certain to implement needed political and economic reforms.
• After a huge run-up this year, the Zimbabwe Stock Exchange (ZSE) isn’t exactly cheap.

Risky Business

True, it’s hard to imagine that Zimbabweans will be any worse off after Mugabe’s departure. The past two decades have been nothing short of ruinous.

But it’s important to remember that Mnangagwa, his likely successor, has a deeply checkered past. Thousands of civilians were massacred in Matebeleland during his tenure as security minister in the 1980s. He was also implicated in the invasions of white-owned farms and in the brutal crackdown on supporters of the Movement for Democratic Change (MDC).

Even if Mnangagwa, while not a saint, proves to be a pragmatist and steers Zimbabwe toward economic recovery, Zimbabwean stocks are still tremendously overpriced.

The ZSE’s main index has posted a 128% gain since the start of this year. But the surge isn’t a result of improved earnings or a newly bullish outlook. Quite the contrary. With dollars increasingly scarce, local investors were worried about the potential for a return to the bad old days of hyperinflation and raced to invest in stocks as a way to protect the value of their savings.

When the military took over the government on November 14, inflation fears began to subside. And stock prices plunged. The ZSE’s Industrial Index has plummeted 38% since that date. And, as I write, it remains in near free-fall. Yet the market’s average price-to-earnings ratio remains at an exceedingly high 30.0. Thus, the prudent course is to wait for the market to find a floor.

This could take a matter of days, weeks, or months. It’s impossible to say with certainty.

What to Watch For

There are two things that would indicate that Zimbabwe’s stock valuations are migrating from highly speculative to long-term value territory:

• The ZSE Industrial Index falling from its current level of 329.6 to somewhere in the low 200s (ideally lower); and
• An official announcement that elections will proceed next year as scheduled. If this doesn’t happen, the new administration’s legitimacy will remain in question, as will its capacity to put the country on the track to economic recovery.

Three Stocks for Your Watchlist

If both of the above conditions are met, I believe there are a few companies that stand a good chance of yielding market-beating returns over the long-term.

Axia Corporation
(Current Price: $0.20; P/E Ratio: 14.3; Dividend Yield: 2.5%)
Axia operates Zimbabwe’s popular TV Sales & Home stores, which sell a wide range of furniture, electronics, and appliances. It also runs a trucking and warehousing business, and Transerv, which distributes spare auto parts.

The company’s earnings have been remarkably resilient in recent years thanks to inflation-wary consumers spending cash on tangible goods. The business will likely find it easier to import inventory in a post-Mugabe Zimbabwe.

OK Zimbabwe
(Current Price: $0.20; P/E Ratio: 27.0; Dividend Yield: 2.3%)
OK Zimbabwe operates one of the nation’s largest grocery chains. Similar to Axia, it should find it much easier to restock its warehouses with imported goods under the new regime and should also benefit from what is forecast to be a good agricultural harvest this year, which should put a bit more spending money in consumers’ pockets.

Econet Wireless
(Current Price: $0.86; P/E Ratio: 23.2; Dividend Yield: 1.7%)
Zimbabwe’s dominant telecommunications provider, Econet boasts a 49.4% share of the nation’s mobile telephone market. Similar to Kenya’s Safaricom, it is a pioneer in the field mobile payments and insurance. Mugabe’s departure raises the prospect of increased availability of foreign exchange, which should allow companies like Econet to more rapidly expand and enhance their services.

How to Invest in Zimbabwe

If you don’t already have a stockbroker in Zimbabwe, the good folks at IH Securities will be happy to help you open a trading account and to register with the Central Securities Depository.

You might also find the following article helpful:

How to Invest on the Zimbabwe Stock Exchange

Your Turn

Do you think Zimbabwean stocks are a bargain in these early post-Mugabe days? Let’s hear your thoughts in the comments.

89,700,000,000,000,000,000,000%

That mind-boggling, 23-digit figure was Zimbabwe’s rate of inflation in November 2008.

To put that in perspective, this means that the price of most goods and services was doubling every five days. Cash left in wallets lost measurable value with each passing hour and people needed armloads of the stuff just to buy groceries.

The government finally snapped the hyperinflationary cycle by scrapping the Zimbabwean dollar in favor of the US dollar. With new confidence that the value of their cash would hold its value, consumers began to save again.

But now, cruelly, it appears that price levels have shifted into reverse. On March 18, the National Statistics Agency reported that annual inflation for the month of February came in at -0.49%. Yes, Zimbabweans now live in a deflationary economy.

How on earth did this happen?

After years of decay to its agricultural and manufacturing sectors, Zimbabwe produces very little to export. This problem has been compounded by political turmoil and policies that force foreign companies to surrender control of assets, which reduce outside investors’ appetite for putting money to work in the country.

Therefore, with more money flowing out of the country than coming into it, the government is broke and the country’s finite supply of US dollars has become increasingly precious.

Rampant unemployment has left people with barely enough income to cover necessities, and businesses have been forced to reduce the cost of goods and services to entice them to surrender whatever disposable income they may have. This further erodes margins, which leads to more job cuts, and the vicious cycle repeats itself.

So, what does this bleak outlook mean for the Zimbabwe Stock Exchange?

As one might suspect, deflation’s not a great state of affairs for most stocks. Lower revenue typically means lower earnings which typically means lower stock prices.

The recent performance of the ZSE’s main index bears this out. It has dropped nearly 4% over the past 12 months and just shy of 13% so far in 2014.

But don’t despair. Zimbabwe investors can blunt deflation’s impact by avoiding certain sectors and concentrating their assets in others.

First, let’s look at some potential portfolio pitfalls.

Two Stocks to Avoid

1. Lafarge Zimbabwe (Website)

One of the root causes of Zimbabwe’s deflation is the dearth of industrial investment. Thus it stands to reason that companies which benefit principally from construction and infrastructure development will be facing a long, tough year in 2014. Profits at cement-maker Lafarge Zimbabwe plunged 24.5% in 2013 and management canceled the annual dividend. Investors reacted with a major selloff, and the shares sank like a concrete brick. They now trade 25% lower than they did at the start of the year.

Yet the company, which depends on the troubled mining industry for most of its sales, still trades at more than 21x trailing earnings in spite of the rocky road ahead of it.

2. Dairibord (Website)

Investors should also be wary of companies that produce staple foods for the local market. Dairibord is a prime example. Such companies must not only contend with food deflation of 2.2%, they must compete with imported South African products, which have become all that much cheaper thanks to a depreciating Rand.

Dairibord sold 8% less milk in 2013 than it did one year earlier, and it reported a $2.3 million earnings loss. The stock has already lost a third of its value in 2013, so most of the damage may already be done, but with no catalysts to the upside on the horizon, investors are likely better off waiting until the macro environment improves.

Five Stocks to Beat Deflation

Now that we’ve identified some portfolio pitfalls, it’s time to identify some safe havens. Here are five whose valuations should stay relatively buoyant in spite of deflation.

1. Econet Wireless (Website)

Zimbabwe’s largest telecommunications company looks like a great defensive investment. It maintains a near monopolistic hold on a product (wireless communication) that has become a necessity of life. Econet also boasts huge margins that will allow it to remain profitable even after slashing its tariffs and rolling out 4G network infrastructure.

What’s more, a new mobile payment service has caught fire. Ecocash registered 76% subscriber growth during the first half of the 2014 fiscal year, and total transaction value has surpassed $1.2 billion.

Still the stock trades at an undemanding 7.6x earnings multiple.

2. Delta Corporation (Website)

Delta, the country’s main brewer, is adapting to deflation by rolling out affordable substitutes to its premium beers. The reduced demand for its lagers will weigh on margins but its sorghum-based brew, Chibuku, has proven so popular that the company’s existing plant has been stretched to nearly full capacity. A second brewery is now on the drawing board. The company’s also experimenting with smaller package sizes that are less taxing on consumers’ wallets.

The shares have dropped nearly 18% so far this year, which, is an appropriate discount for the tough medium-term environment the company faces. Now, trading at 13x trailing earnings and a 3.1% dividend yield, the stock should be a relatively stable deflation bulwark.

3. Padenga Holdings (Website)

Another way to take a bite out of deflation is by investing in companies that export most of their products. Crocodile-farmer, Padenga Holdings, is one such firm. It’s one of the world’s biggest suppliers of reptile skins to the global luxury goods market. It also recently expanded its operations to the USA, further protecting it from economic travails at home.

Investors can purchase shares of the company for less than 10x trailing earnings, and management says demand is “exceptionally strong.”

4. Seedco (Website)

Like Padenga, Seedco’s geographic expansion dilutes its exposure to the Zimbabwean economy. One of Southern Africa’s largest producers and marketers of crop seeds, the company saw its sales sprout almost 30% higher during the first half of its 2014 fiscal year. Unfortunately, this big gain didn’t filter down to the bottom line as much of it was absorbed by provision for bad debts. But a capital injection from new partner, Limigrain, should help nurture Seedco to greater profitability quickly.

The share price is down 12% so far this year, giving the stock a trailing P/E ratio of 17.9.

5. Rainbow Tourism Group (Website)

Zimbabwe’s tourism industry is well-insulated from deflation and fared relatively well in 2013 in spite of election year uncertainty. Total tourist arrivals rose 2%. Rainbow Tourism Group operates hotels in Zimbabwe, Zambia, and Mozambique. It boosted its room occupancy rate by 9% in 2013 while growing revenue 6%. Management is keen to retire debt and build up a healthy balance sheet. That’s music to this potential investor’s ears.

The stock currently trades at less than 1.5x book value.

Your Turn

Which Zimbabwean stocks do you think stand the best chance of standing up to deflation? Let’s hear your thoughts in the comments!

Related Reading

Zimbabwe’s Five Best-Performing Stocks of 2013
The Zimbabwe Stock Exchange’s Fantastic New Website
How to Invest on the Zimbabwe Stock Exchange