Mega deals return to a battered market

• Financial Market Report (August 16-22 2007)

• Financial Market Report (August 9-15 2007)

• Financial Market Report (August 2-8 2007)

• Financial Market Report (July 26 -August 1)

• Financial Market Report (19 July - 25 July 2007)

• Financial Market Report (29 June - 6 July 2007)

By Lance Mambondiani

"He who observes the wind will not sow, and he who regards the clouds will not reap…. In the morning sow your seed and in the evening do not withhold your hand for you do not know which will prosper – Ecclesiastes 11: 4-6

OVERVIEW

PREDICTING the markets is a hubristic business especially in countries with a judicious mix of policy complications. Raising investor optimism is even harder especially when the fundamentals appear to be a drumbeat of bad news. When investors declare doomsday pessimism, you are almost reminded of the old adage that ‘a pessimist is an optimist with experience’.

To invest or not to invest, that is the question? The price control debate and economic policy gyrations in Zimbabwe reflect textbook Adam Smith’s ‘invisible hand’ and discussions on the role of governments in correcting market failure. Whether the ‘direct interventionist’ approach in which the ‘grabbing hand’ of the state can play an entrepreneurial role, creatively combining with the invisible hand of the market in order to guide development is still debatable, even in a country, which famously ridicules ‘textbook’ or ‘voodoo’ economics.

Indications are that the government is preparing a gradual relaxation of price controls. So far, 42 private abattoirs have been re-registered. Retailers have been allowed to put a maximum mark up of 20% plus 15% vat on the price of commodities. The financial impact of the price control on the fiscus could have been a factor in their relaxation. Reports suggest Zimra will lose Z$13,1 trillion in potential tax revenue as a result of an inevitable fall in company earnings. The loss to business is estimated to be Z$38,5 trillion of taxable income. Unlike land reform, price control affected the government directly in its pocket.

Official inflation figures now indicate the June inflation at 7 634.8%. This stratospheric inflation rate, the highest in the world has significantly undervalued market assets. There are many good assets and companies in Zimbabwe trading at huge discounts to replacement value. Investors with an eye on the future, particularly citizens in the diaspora are encouraged to watch the market closely, lest we wake up an economic colony of South Africa.

One market analyst reminded investors the old yarn about how, ‘after the dust had settled and the eyes had opened, the settler had the land and the native the Bible’. Zimbabwe may yet be the last country on the alphabet of countries, doomed by forecasters, yet mega deals, in real U$ values are currently being consummated amidst the chaos. Exiled capital is often mistaken in seeking to wait until conditions have improved, by then, there may only be crumbs left for the picking.

STOCK MARKET UPDATE

The main industrial index continued to spiral into a nosedive during the trading week. Investors would be forgiven for thinking the market is suffering volcanic tremors of the sub prime jitters on Dow Jones. The ZSE is never known to be affected by international trends, its direction is linked inextricably to internal fundamentals.

Investors had failed to take into account how far and how fast asset prices fall when everyone wants to sell at the same time. Unaffected even by the start of the reporting season, the index was shedding off marginally closing last week softer with the benchmark easing 223,350.19 (0.69%) to close at 32,335,072.74. Most counters were quoted unchanged representing subdued trading with losses recorded in Tanganda, which shed $4000 to $36000, Kingdom lost $3000 to $36000 and Cottco trading lower at $14000.

FIGURE 1: ZSE WEEKLY PRICE INDEX

Source: Coronation Advisory

On Monday, August 20, the index eased 0.87% with sustained losses in Kingdom and Tanganda and DZLH. The index recovered 1.17% to close at 32,107,841.57 on Wednesday amidst widespread gains across the industrial board. Impressive results in listed financial counters spurred CBZ to firm $5,000 to $12,500, while FBCH put on $1,100 to $8,600 and ZBFH jumped $500 to close at $14,500.

Although the gains remain marginal, investors would be hoping the worst is now behind them with the government easing price controls and strong company earnings cheering the market on. It may be too early to talk about a rebound; clear and present danger may yet come in the much-awaited monetary policy statement.

The central bank, often used to having the ‘last word’ has not even spoken yet. If the tide has turned, investors with fear of the deep may still reassess, reprice and leave the market in a tailspin. The rebound will be for those who remain patient; ‘the race is not to the swift, nor the battle to the strong…but time and chance’ may yet still happen to all.

Coronation Buy recommendations: Zimplow. Kingdom, CBZ, Innscor, Dawn, NMB, FBC and ABC

STOCK MARKET OUTLOOK

Pearl Properties – IPO Results.

The Pearl properties IPO caught the flu with the IPO results indicating an under subscription. A total of 80% of the shares amounting to 191 443 872 were subscribed far from a total of 238 157 310, raising Z$804 billion against a target of Z$928 billion. Underwriters took up the remainder of the shares. The counter listed on the 22nd of August at 4200, suffering the ZPI syndrome of stunted growth for which we thought it had been immunized.

However, in the medium term, the counter is expected to recover with the market. Unlike its peer counter, Dawn properties, Pearl properties has a diversified portfolio of properties ranging from Industrial, Retail and Office sectors. Immense value may be realized based on capital appreciation and rental income. The subdued trades in the counter are however in tandem with the current market trends. We recommend this as a medium term HOLD.

Other News

Trust - Trust Holdings Limited is planning a rebound on the ZSE in the shape of an investment conglomerate. The company’s recently published results indicates a 10 900% balance sheet growth from Z$1.1 billion in 2005 to Z$109 billion during the year to December 2006, posting a net profit after tax of Z$77 billion. The group has made public its plans to relist on the ZSE by the end of October 2007 with negotiations currently underway with ZSE officials. Relief may soon be on its way to investors who have not been able to trade their shares following the company’s 2004 suspension.

NDH is believed to be gearing for a conversion of its discount house license to a merchant bank. The company is soon to be in the market with a rights issue to raise additional cash to support its operations. The company, emerging from the ENG exposure has two main units, the discount house and NDH Equities (Private) Limited. The financial sector appears to be on a calculated rebound after the 2003 financial sector crisis.

Kingdom Merger – Details have started to filter into the market about the structure of the conglomerate to emerge out of the Kingdom merger. The mercurial Nigel Chanakira will head the conglomerate, with a combined market capitalization of Z$46,8 trillion, styled Kingdom Meikles Africa Limited (KMAL). The group will be a monster institution by far the biggest conglomerate on the ZSE since its establishment. The group has also announced it is immediately seeking to raise US$100 million most likely to facilitate regional expansions. This is coming shortly after ABC Holdings successfully raised US$20 million from IFC for its own regional expansions – are we about to witness a second onslaught by Zimbabwean banks into the region.

INTERNATIONAL MARKETS

Credit concerns continue to hang over international markets causing market jitters to persist. Markets however rose on Monday after collective rallies on the Dow Jones and the S&P 500 at the end of last week. This came after the Federal Reserve Bank announced a cut in the rate at which banks can borrow from it from 6.25% to 5.75%. Over the past weeks, central banks have lent tens of billions of dollars to restore confidence in the market. The Bank of England made an emergency loan of GBP314 million. The banks standing facility which allows banks to borrow unlimited amounts at a penalty rate of 6.75% was accessed for the first time since the liquidity crisis began. Although the credit worries have lingered on, it is hoped the move by most central banks will restore confidence in the market and cause the markets to firm.

EXCHANGE RATES

One of the positive impacts of price controls is that they have managed to stabilize parallel market exchange rates, which were on a surge since April 2007. The rate movement movements between June and July 2007 have been marginal.

FIGURE 2: ZWD/GBP PARALLEL RATE MOVEMENT