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.
Which Zimbabwean stocks do you think stand the best chance of standing up to deflation? Let’s hear your thoughts in the comments!
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7 thoughts on “5 Deflation-Busting Zimbabwean Stocks (and 2 to Avoid)”
BAT is another one which mostly exports from Zimbabwe. Innscor also has operations in a large number of sectors to minimise exposure to any particular area.
Innscor’s an interesting one to watch. It struggles with some of the same dynamics that Dairibord does. Their margins have been hit hard by high imported grain prices and price reductions at their restaurants, but cash flow remains firmly in positive territory and the stock has already dropped 22% so far this year. I suspect we’ll see margins squeezed again when the company reports its 2014 results in spite of management’s efforts to protect them. But I might be tempted if the share price drops much further.
Hi Ryan, I don’t agree on your view regarding Dairibord. What you wrote was true for 2013 but might not be true for the future. Although it may take some time, I do see two catalysts which might change the companies fortune mid term:
1. With effect from 1 January 2014 and the government has started to implement a levy on dairy imports of finished products of US$0.25/litre milk. The duty will largely level the playing field in between imported dairy products and local dairy products.
2. Milk intake has been Dairibords main problem in the past. The company has started a heifer program which will over time increase the milk intake substantially.
Thanks for your insight, Joerg. These are good points.
I confess I wasn’t aware of the import duty on dairy, but it appears to have been at least temporarily suspended. http://www.bh24.co.zw/gvt-suspends-import-duty-on-powdered-milk-bottler-grade-sugar/
Yes, but that is only the case for milk powder (and not for dairy products and fresh milk. The local diari companies (including Omega Dairi owned by Mrs. Mugabe) use the imported milk powder to increase their milk production which is 75per cent below the pre crisis production peak.
WHAT ABOUT DAWN PROPERTIES
Is liquid telecom a part of econet Zimbabwe?