Ensuring Financial Sector Stability....

"Ensuring Financial Sector Stability". What a fitting theme for the Monetary Policy Statement issued by the Reserve Bank of Zimbabwe today. As i read through the document and i am still reading it, (its only 57 pages for a change! straight to point) the underlying theme appears to capture exactly what is happening and what needs to happen in our beloved Zimbabwe.

Its interesting to note that the Global financial crisis has affected everyone in almost equal measure. The uncertainty in the world means few institutions are willing to offer lines of credit to anyone, which in itself means less money to our very own financial institutions and less returns to the lending countries. If Zimbabwe had its own currency would the situation be any different. I personally think it would be worse and i will try and show why. The reason Zimbabwe is where it is today is because Zimbabwe has very few options to play around with interest rates or any other policies to influence the RAND or USD. Its ironic is it not. Investors trust our policies because there is very little we can do. Lets face it our record with managing our own currency is well known and documented. We need more time to redeem ourselves and build confidence back in our economy. Surely it would help if we could print our own currency, its been easy for some countries to do "Quantitative Easing"- printing money in simple english. But has it helped? NO.

For us to have little control is a good thing, because it allows us to focus on other more important things. I think that this is a good thing and should allow our monetary authorities to concentrate on policies that encourage money that is already in the country to stay and attract even more money that is hunting for a good return on capital to come and stay in Zimbabwe. The capital account is in a mess despite the increase in our exports. Imports have ballooned and clearly authorities must find ways of encouraging more exports, assuming that all imports are necessary to close the gap. Strengthening our financial sector and ensuring that money flows freely is also a measure that should be pursued vigorously. After all most of the growth opportunities are here and will be for a long time to come because of the country's abundant primary resources. All the authorities need to do is to ensure that our banks are running properly and are well capitalised.

Its also interesting to note that the level of deposits in the economy has somewhat slowed down and struggling to break $3.3bn, despite significant economic growth. Government Revenue collections are on the rise too, surely this an indication that there is more money circulating in our economy. The smaller banks were singled out as being of less systematic importance - they account for 5% of total deposits in the country. Unfortunately in banking a bank failure is a bank failure and it affects the way we think about all banks. In one of the boldest moves yet the RBZ has given a deadline to under-capitalised institutions to make amends or be shut down. This will certainly lead to a few interesting transactions/or court actions or both in coming weeks! Watch the press! Depositors' funds need to be protected. Its the right thing to do. No capital no bank licence! Why extend and postpone bank failures.

A raft of measures to ensure that banks stay within their mandates was also announced. All this is welcome news and should give depositors some comfort. I hope its not too late though. The acknowledgement of a liquidity challenge whilst welcome is worrying and points to reduced participation of local investors in our markets because of these constraints. What i haven't picked up so far is how the country will attract more inflows into the economy to deal with this challenge. Limiting cash withdrawals for high value transactions of 10,000 will be useful in the short-term but it sends the wrong message to the banking public and may very well encourage them to keep cash at home. I hope that this will be lifted in a week or two.

The introduction of a International Financial Services Centre to ensure the free flow of funds in the country will be a welcome move and one that should be implemented without delay if Zimbabwe is enjoy Foreign Direct Investments and foreign cash inflows in general. For the uninitiated this has worked well in Botswana follow this link http://www.ifsc.co.bw or this IFC review http://www.ifcreview.com/default.aspx

The full monetary policy statement can be downloaded here http://www.rbz.co.zw/pdfs/2012%20MPS/MPS%20JANUARY%202012.pdf

Of Cautionary statements and Profit warnings

Quite a few companies have issued cautionary statements lately advising shareholders to trade cautiously for one reason or another. A few come to mind CFI, AICO and Radar. It is quite interesting to see corporate activity so early into the year, but who knows, some of these deals may not happen and trust me no one will even make an issue of it. It is just so common in Zimbabwe. Clearly for any company to caution shareholders it must be doing something, otherwise what is the use of causing investors anguish or excitement? Well in my experience cautionary statements have been issued and we have waited for months even years in some extreme cases before seeing any action.

Corporate transactions in Zimbabwe are affected by a number of things, management interest, regulatory approvals, valuation disagreements, shareholder issues etc. You see the era of hyperinflation left many people thinking their assets are worth more than they really are when it comes to concluding deals. I am hoping that this year will be different and we will see all parties accommodating each to save companies and ultimately jobs. We need some action here!

The Zimbabwe stock exchange sees very few earning warnings, save for Star Africa and Art who warned of losses before releasing their numbers. You really never see too many managers sticking their necks out! It is even less common to see companies warning shareholders that they will be posting results ahead of expectations. It is very rare and almost never happens!! Everyone wants to surprise the market and cash in i suppose when speculators and investors alike react in awe at huge profits and even dividend by pushing share prices through the roof. Its only a few days before we see the early birds posting their results. I have a very good feeling that most wont disappoint.

ZSE Movers and Shakers

It was generally a good week for Old Mutual and PPC, both counters recorded gains during the last fortnight and ended the week firm. African Sun which the local papers said is in the process of renaming its Holiday Inn Hotels and cutting off ties with the Holiday Inn brand was surprisingly firm too. Colcom was definitely trading in an oversold territory having dropped to 30c, as was Astra. Other notable movements up for the two weeks in review were Ariston and Zimpapers.

Deep in the red and now in an oversold territory is Econet. In 6 successive trading sessions the share dropped to 360c on Friday. The counter wasnt alone in this predicament!Fidelity and AICO after a fine run were being sold for a nice profit. The three counters had seen a good run which ended Friday on profit taking.

In the two weeks ahead watch out for a recovery in CFI, M&R, Econet and Truworths. They have all been oversold. Watch out for these stocks too in coming weeks Hwange @30c target 43c and Barclays @ 4c target 5.5c


If you require a better view of this photo please email me. You can also download it here

24,686,561 is no small number!!!

Just yesterday we were all whining about the low share volumes going through our exchange. Well today we were left with very few words to describe this epic trade. 24,686,561 Delta shares changed hands today. Such deals happen when you least expect them, and when analysed they make a lot of sense too,especially to the exchanging parties. For the seller its cashing in for the buyer its a brand new acquisition. I take my hat off to whoever bought these shares because they have made a sensible decision. Delta has not disappointed in terms of earnings in the last two years and it appears poised for an even better year with what has been happening in our economy.

To the seller, well they made their money and have decided it is time to exit and leave some on the table for the new owner of 24.7m Delta shares. This is what makes the market. Great stuff! It is not every day that a broker convinces a client to part with a cool $17.2m and another that it is time to exit and live to trade another day in one trade!! (unless of course it was a forced trade) Consensus estimates place the Delta share price at between 90 and 100 cents by March 2013. That means the new owner of the shares could be $7,5million richer if the Delta share price goes up to $1. This makes a lot of sense doesn’t it? Buy when everyone is reluctant to buy or keep solid business that have stood the test of time (in Delta’s case, hyperinflation, competition you name it)

I am particularly mesmerised by this trade because some investors seem to be convinced the same way i am that buying into selected ZSE shares now is the right thing to do. If there is anything that i have learnt through this Delta Deal, it is that no share overhang lasts forever when things are going right for a company. Someone clever enough to see value almost always comes and snaps up a bargain when they see one. The Delta deal is important as it highlights to stockbrokers and local fund managers alike that deals are still possible in Zimbabwe if we apply the right attitude and talk to the right people. If you decide that there is value in the share that you are buying or that you have made enough money and want to sell why wait? JUST DO IT as Nike says!

This is really exciting. Serious decisions are starting to happen and surely this deal is not the last one we are going to see on our bourse. It all began in December and now that we are two weeks into the year it seems the buying momentum continuing! In other trades today the stock market was firm. AICO which i also highlighted as a counter to watch remains firm and traded at 20c today, picking up a solid 4c in thin volumes. A number of other counters are also making a significant comeback, CBZ, MEIKLES, ZIMPLOW, INNSCOR and HUNYANI to name a few.

Investors await the release of 2011 financials

Corporate profits as reported by ZSE listed company could have risen to $500m in December 2011 if the financial results that will be reported in coming weeks are aggregated. This figure will be up by 50% from the year 2010 and must come as a huge surprise to investors who have all but ignored the stock market in recent months. Stock prices have plummeted and valuations plunged to levels not seen since October 2009. Since the dollarization of the Zimbabwean economy early 2009, listed companies have continued to report improved financial results. In 2010 alone listed companies generated a net profit figure of nearly $300m. This figure excludes the profits generated outside Zimbabwe by Old Mutual and PPC, and is fast becoming an important number to watch. Highlighting the importance of Blue Chip counters on the ZSE, nearly 90% of the profits are being generated by 10 companies namely Econet 39%, Delta 12%, Innscor 7%, CBZ 6%, Hippo 6% and Seedco 5%. It will be interesting to see whether financial counters which contributed over 15% of 2010 corporate profits will do any better in 2011. If the half year results released in 2011 are anything to go by and barring huge provisions for bad debts, it is very likely that their contribution will exceed 20% and stop shy of 25%. Will the dominance of Econet be challenged by Delta whose profitability continues to rise following its well timed expansion program. Time will tell! Another point to emerge from the above analysis is the lack of any meaningful contribution from our listed mining companies. Despite double digit growth at industry level, the 4 listed mining houses save for Falgold which has just turned the corner after reporting a $1.5m profit we have not seen anything corporate profits from them in the last 3 years. What is wrong here? None of these companies have been recapitalised over the last 10 years!!!!

2012

2012

What does the year 2012 have in store for us now that 2011 is behind us? Here are a few important stats to help us understand what the year 2011 was all about. The ZSE’s main industrial index closed in the red down 3.6%. Inflation was on the up and but was expected to be more or less contained by the end of the year.(lower than 4.5%) Money market investment rates were around 10-15% per annum as the credit crunch took centre stage.

These figures do little justice in showing what really happened in 2011. Following a lull in the implementation of the GPA, the economy seemed to stall but this was not evident in the numbers that listed companies continued to release. In fact production rose resulting in a number of our local companies operating two shifts to increase operating capacity. This did not bring much cheer to investors who appeared unmoved by these impressive numbers.The stock market lost value as investors simply ignored valuations.

What was their focus? Politics, politics and more politics! It wasn’t just about Zimbabwean politics it was about European politics and West Africa you name it! Anything to blame the lack of confidence on! The debt crisis and unrest in parts of Africa played havoc on investor expectations damaging confidence. Investors questioned the world order and wondered when and how the chaos would end. There were and still are few answers to these questions.You take your pick. The answer is the same. There is so much uncertainty in our world today and unfortunately markets require some sort of certainty to move, anything, something, to clutch on and support that investment decision.

There are very few signs that we are anywhere near finding an answer to the World Economic Crisis that has engulfed us. Turn on CNBC, Bloomberg, read the Wall street Journal, the Herald, the Financial Gazette, the story is the same. There is very little confidence in the current financial order.
But one thing is certain, the Zimbabwean economy is growing and that is one fact that no one can dispute. This is one positive that we are carrying into 2012 and one that gives me enough confidence to say that the ZSE is very much undervalued. We are talking about a market that has an average dividend yield of nearly 4% and an average P/E ratio of 6.75 times.

Having been away from the market for the last four weeks, I am shocked at the stock prices that I am seeing on the market for some quality stocks. Forget the traditional “Econet is cheap!" talk. I am talking about Astra at 1.5c, Old Mutual at $1.25 (when did Old Mutual last trade at a P/E of 5.6 times and a dividend yield of nearly 5%, SERIOUSLY!!). These valuations make no sense to me at all. When you look at the numbers from Old Mutual and a number of other listed companies there is lots of value in these counters, yet they remain irrelevant to what is going on now. Things have changed, haven’t they? There was a time when all you needed were numbers to support an investment decision. Those days appear to be long gone now and we all need something more.
That something is proving elusive to many. The following chart is a summary of my thoughts on the year 2012!

Happy investing. Stay away for the dogs!