Sub-Saharan Africa Stock Markets 2010 Review & 2011 ... - Imara

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EQUITY RESEARCH ZIMBABWE FEBRUARY 2011 2010 REVIEW AND 2011 OUTLOOK An Overview of 2010 A new dollarised economy. The year 2010 on the ZSE was eventful. The adoption of a multi-currency regime in 2009 provided a solid base for the economy and individual companies as it basically brought about sanity and optimism across the whole economy. For companies, it meant the end to price controls and hyperinflation. Foreign exchange risks also became manageable as the country adopted more stable currencies. The main hold-up was Indigenisation Laws. In line with the positive trend that has been set in 2009, 2010 started with considerable promise. Our initial forecasts at the beginning of the year were that the economy would grow by a high rate of around 11% backed by improvement in capacity utilisation to about 55%, with the GDP amounting to over USD 7.0bn. However, the Indigenisation Act which came into effect in March 2010, dampened the growth prospects. We also noted that a number of capital projects were suspended as a result of the uncertainties relating to the regulations. Recapitalisations and restructurings were the order of the day. The year 2010 was marked by a wave of corporate transactions as companies adopted restructuring programs to reset themselves on a growth trajectory. A number of rights offers and private placements were concluded as a strategy to earn an advantage in a new competitive environment. Some of the companies that successfully raised capital included ART, Nicoz Diamond, NMB, OK Zimbabwe, PGI and Star Africa. Top 5 Gainers and Losers Opening Closing % Change Company Price Price (USD) ZSE Industrial Index 151.88 151.27 -0.40 Zimplow 2.50 6.70 168.00 Pioneer 0.25 0.60 140.00 National Tyre Service 1.35 3.20 137.04 African Banking Corporation 20.00 45.00 125.00 Turnall 3.00 6.70 123.33 PGI Zimbabwe 9.25 2.50 -72.97 Caps Holdings 3.00 0.70 -76.67 African Sun 12.00 2.20 -81.67 Zeco 1.00 0.15 -85.00 TN Holdings 6.00 0.77 -87.17 Source: ZSE Top Ten Shares by Market Cap. Company (LCm) (USDm) % of Total Delta 826.15 826.15 18.60 Econet 810.74 810.74 18.25 Innscor 324.80 324.80 7.31 Hippo 270.23 270.23 6.08 SeedCo 227.07 227.07 5.11 Barclays 188.35 188.35 4.24 Meikles 134.96 134.96 3.04 Hwange 123.81 123.81 2.79 CBZ Holdings 123.15 123.15 2.77 Old Mutual 102.01 102.01 2.30 Source: ZSE Industries still operating below full capacity. Lack of adequate working capital largely impacted the manufacturing sector as there were limited favourable short term loans available on the market. Capacity utilisation thus remained low averaging around 45%. With no lender of last resort, the local banking sector was cautious on lending in a bid to avoid NPLs. For most of the commercial banks the loan to deposits ratio remained low (below 50%). This also resulted in high lending rates (c18% pa) as demand for credit outweighed supply. 1.30 1.20 1.10 1.00 0.90 ZSE vs S&P Africa Frontier Market Index Despite various constraints, good growth was registered in the consumer, mining and agricultural sectors. The Ministry of Finance estimates that the 8.1% forecast growth rate for 2010 was backed by a 47% and 33.9% growth rate in the mining and agricultural sectors. The ZSE managed to close 2010 at a market cap of USD 4.2bn, while the daily value traded for 2010 averaged USD 1.6m versus USD 2.1m in 2009. 0.80 Jan-10 May-10 Aug-10 Dec-10 Industrial Index S&P Frontier Index Source: IAS 27
Market Outlook for 2011 Top Picks for 2011 The political outlook in 2011 is marked by uncertainties revolving around elections. While the main political theme in 2010 had to do with the new indigenisation laws in Zimbabwe, we believe that the “talk” of elections in 2011 will be the main theme in political and business circles. We have read divergent statements relating to the possibility of elections in 2011, with the three main political parties echoing different views. This, in our view has revealed the disunity within the Zimbabwean Government itself. Will the GPA dissolve? The Global Political Agreement (GPA), involving the three main political parties in Zimbabwe had an initial two-year tenure and therefore expires in February 2011. As such, this has sparked speculation that the inclusive government will be dissolved. However, from events on the ground, our view is the talk of 2011 elections is a bit premature. Elections would naturally result in the dissolution of the inclusive government (GPA). On that note, we re-iterate that to-date certain milestones provided for in the GPA have not yet been attained. In addition, there is need to allow for the completion of constitutional revision before elections can be held. Furthermore, specific conditions necessary for the holding of a free and fair vote in Zimbabwe have not been agreed on. On that basis, elections could be deferred. Generally, our view is that there will be increased political bickering in the next months, given heightened political gatherings and electioneering. In our opinion, most of the statements from these gatherings are unlikely to be investorfriendly. Do not listen to what they say, watch their footsteps. While we are not advocating that investors disregard all the statements echoed by politicians, we urge investors to take most of the statements with caution, given the discrepancies of reality on the ground and newspaper headlines. For example, while the Indigenisation and Economic Empowerment Act was signed, we continue to witness a number of deals involving foreign firms in various sectors of the economy. Of interest would be the acquisition of Zisco Steel by Essar Group of India and the investment in Premier Banking Corporation by ETI, a Pan African entity. Be a bull but graze near the gate. We remain longterm bulls on the Zimbabwean economy and are strongly convinced that long-term investors should seek exposure as a recovery play, with significant upside off a very low base. However, investors should seek exposure in companies with limited debt, strong growth prospects and with defensive business lines. According to the Ministry of Finance, growth rates of 8.1% and 9.3% are expected in 2010 and 2011, respectively. Most companies are valued well below asset replacement value, and have considerable headroom for volume growth. COMPANY Price P/E P/BV Recom. Hist T+1 T+2 Hist T+1 T+2 AICO 19.50 0.0 19.5 19.5 1.2 1.1 1.1 BUY ART Holdings 1.35 0.0 13.5 12.9 0.4 0.4 0.4 BUY CBZ Holdings 16.51 11.0 10.5 10.0 1.8 1.7 1.6 BUY CFI Holdings 14.60 0.0 14.6 9.7 0.3 0.3 0.3 BUY Dairibord 19.00 13.2 12.6 12.0 2.3 2.1 2.0 BUY Dawn Properties 1.20 30.5 12.0 11.4 0.5 0.5 0.4 BUY Delta 73.00 18.5 17.6 16.7 5.3 5.1 4.8 BUY Econet 500.00 7.1 6.8 6.5 5.4 5.1 4.9 BUY Hippo Valley 140.00 12.8 12.1 11.6 1.6 1.5 1.5 BUY OK Zimbabwe 8.00 0.0 16.0 15.2 4.7 4.5 4.3 BUY RioZim 200.00 0.0 20.0 18.2 1.3 1.2 1.2 BUY Seedco. 123.00 17.9 17.1 16.3 4.3 4.1 3.9 BUY Star Africa 4.90 0.0 9.8 9.8 0.0 4.9 4.9 BUY TA Holdings 25.00 0.0 12.5 10.0 0.7 0.7 0.6 BUY The 2011 Hot Stocks For 2011 our top picks include AICO, CBZ Holdings, Dairibord, Delta, Econet, Hippo, SeedCo and OK Zimbabwe. However investors should watch out for any corporate actions as most of these companies have indicated the need to raise capital. AICO, for example has indicated a USD 50.0m recapitalisation. Retail stocks in particular are likely to perform well on the back of increased disposable incomes. Counters such as Delta, Innscor and OK Zimbabwe would benefit from this. Additionally we also urge as buys companies with minimal gearing. These include Econet, CBZH Holdings, and Zimplow. For agricultural stocks, soft commodities prices are performing well on the international scene mainly due to supply shortfall of some commodities such as cotton and sugar. This should bode well for AICO and Hippo. Other investments to look out for. The luxury consumer industry is now recovering in line with the global economy. We see this resulting in better pricing for commodities such as crocodile skins. Newly listed Padenga Holdings is likely to benefit from this. In addition, given the demand for infrastructural rehabilitation, construction companies are well poised to take advantage of the opportunities and counters likely to gain include M&R, Lafarge and PPC. We also consider the PGI Zimbabwe Convertible Debentures to be attractive. The CD has a term of 60 months and a coupon rate of 10% p.a. In view of the fact that the CDs will be convertible at a conversion price of USD 0.033, there is a high probability that the market price will be higher than the exercise/strike price; making it an attractive call option (i.e. holders will convert the Debentures at a price lower than its market value). 28
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