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By Kumbirai Makwembere
A FAVOURABLE perception from market watchers helps create a positive view of a counter, induces a buying sentiment and in turn impacts positively on the share price.
Similarly, when perception towards a counter is negative, investors mostly avoid the counter, which usually results in the share price weakening. The latter scenario can explain the current trend in the Econet share price. Econet recorded a profit after tax of US$73,9 million in the six months to 31 August 2011. Ideally such huge profits should excite the market on all fronts.
The earnings by Econet alone are accounting for more than 50% of the profits that have been recorded by all listed counters so far this reporting season. The interim profits for Econet are 36,6% above Delta’s full year earnings of US$54,1 million. Delta is the largest counter on the ZSE, with a market capitalisation of US$844,7 million, twice that of Econet. Since the onset of the multicurrency regime, Econet has spent US$470 million on network expansion, yet the market capitalisation is hovering around US$366 million.
Regardless of the positives highlighted above, Econet’s share price continues to weaken. The counter continues to underperform the market and year to date to 11 October it has lost 22,85%, compared with a small loss of 2,45% in the mainstream index. In 2010, the counter lost 2,65%, compared to a decline of 0,47% on the industrial index. At the current price of US$3,68, Econet is trading 33,6% below its peak price of US$5,55 reached on the October 21, 2009.
A comparison with peer telecoms companies in the region shows that the counter is grossly undervalued. As at October 11, 2011 Econet was trading at a rolling PE ratio of 4,11x when the average PE of other telecoms providers in the region is 13,23x! MTN was trading at a PE of 16,9x, Safaricom in Kenya had a PE ratio of 9,1x and Zain was trading at a PE of 13,7x. What therefore could be the reasons for the depressing trend on the local counter when valuations are this undemanding?
The main factor that might be depressing the share price could be the perceived poor corporate governance structures at the telecoms provider. The current scenario whereby the board chairman, Tawanda Nyambirai, has got influence in TN Financial advisors as well as in Nyambirai & Mtetwa legal advisors, both of which are usually used by Econet in most of its transactions, does not fit well with best corporate governance practices. F
urthermore, the recent revelation that TN Bank is going to partner Econet in rolling out Ecocash is also likely to impact negatively on the company’s public image. Although the Companies Act and the Zimbabwe Stock Exchange regulations do not have explicit rules to govern relationships where there is conflict of interest, best practices under corporate governance stipulate that there should be a separation of duties on company activities, which is obviously lacking in such a setup. Ideally, the chairman should have stepped down if the companies he is associated with are required to advise Econet at such a high level.
This negative perception of the lack of sound corporate governance at the company might also emanate from controversial transactions undertaken by the company that are believed to particularly favour the best interests of the majority shareholder. The recent dilution of the shareholding in Ecoweb through bringing on board Liquid Telecommunications Holdings, a member of Econet Wireless Global group, is a case in point. In the financials to 31 August 2011 it was revealed that Ecoweb, in which Econet Wireless Zimbabwe still owns a 51% stake, will now be accounted for as an associate since the new equity partner now has management control. Ecoweb is expected to start contributing significantly to revenue and profitability through the sale of broadband services and one wonders the logic of bringing in an equity partner at this point in time.
Two years back, the company again made headlines for the wrong reasons. It was working on a transaction in which Econet Wireless Global, the corporate parent of Econet Wireless Zimbabwe, would supply network expansion equipment, manufactured by ZTE of China and valued at US$93,9m, to the Zimbabwean operation. Shareholders queried the valuation of the network equipment to be supplied as they felt it was on the high side. Regardless of the protests by shareholders, the transaction sailed through, which could have resulted in some disgruntled shareholders selling off their positions.
Another highly disputed transaction took place as far back as 2003 when Econet Wireless Limited acquired a 14% stake in Mascom from TSM, a vehicle owned by Strive Masiyiwa, the major shareholder, through the issuing of 739 843 680 Econet Wireless Holdings Class ‘A’ shares. The transaction valued the 14% stake at US$14 million, which market players felt was too high.
This was undertaken prior to the 10 for 1 consolidation in 2005. A year after the acquisition of the 14% stake in Mascom, the shareholding was sold back to Econet Wireless Global at the same value of US$14 million. This was regardless of the growth on Mascom operations evidenced by subscribers increasing from 289 996 on September 26, 2003 to 365 308 on June 30, 2004.
Most of the transactions that are undertaken by the company are funded through issue of shares ,which continuously dilutes the minority shareholders. In the 12 months to 31 August 2011, shares in issue rose by nearly 6 million from 90,7million to 96,4million, representing a dilution of 6%. This was despite a share buyback to the tune of US$7 million. Management attributed the large dilution to the shares that were issued to Econet Wireless Global for a loan which is being paid for through a combination of cash and shares.
Market players are also of the opinion that Econet is cagey when it comes to giving information that helps in the evaluation of the performance of the company. On presenting their full year results to 28 February 2011, management refused to disclose the average minutes of use requested by one analyst thrice. In a similar move, on presenting interims to 31 August 2011, management were also shy in disclosing the amounts that they are owed by other telecomm providers as interconnect fees. Once a company becomes publicly listed, management should be prepared to give the public relevant information that they request.
The company again did not explain the move to pay the dividend of US11,8 cents for the period ended August 31, 2011 in four installments of US2,95 cents. This can be a signal that the company wants to manage its cashflow position. Alternatively, this can be a management strategy to support the share price as investors willing to get the dividend payment will be forced to hold their scrip till the fourth record date in February 2012, which strategy has been shown not to work.
Recently Econet resolved to disinvest from Afre and RTG with the company chairman claiming in one weekly newspaper that their motives are misunderstood by other shareholders. Is it that Econet is misconstrued or could it be the fact that the company simply fails to get along with other shareholders as it always tries to pursue its own agenda which may not necessarily be in the best interests of the company that it controls.
The responsibility to change the market perception rests solely with the company management. Some executives on our local bourse have goneto great lengths in trying to educate the market on their business models and as well as clarifying some issues. Until Econet does the same the share price is likely to continue drifting southwards mainly due to negative perceptions.
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