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Sagit Column – Stocks & Market Update

By Admore Chakurira

THE short trading week and a lack of local company or economic news meant that it was a fairly quiet week and trade on the Zimbabwe S

tock Exchange (ZSE) was generally thin.

There is not much economic news to watch at the moment but the Consumer Price Index (CPI) data due out early next week or today, will be a major focus for interest rates.

After recent hikes in some commodity prices, the inflation rate might increase, though this is unlikely to be reflected in the month of July’s figure.

The anticipated results released might also see activity on the market picking up. Due to the turbulent environment it might be wise for investors to make brave and non-traditional asset allocation decisions and to stick with them when investing on the markets.

Investors should be flexible to adjust expectations to what the market gives. They must remember that it is never too late to sell a stock.

Running on empty

Tedco Ltd revealed its intention of raising cash by way of a rights issue (two for every one held) subject to shareholders’ approval.

The rights issue seeks to raise nearly $11,7 billion to recapitalise the group which had suffered from high interest rates and static demand as a result of high stock holding. Gauging by the rejection by shareholders of the initial document, the offer should receive considerable support as most appear to be locked in for the long haul.

Usually such transactions are priced at a discount to the market with the offer at $22. The scrip is currently trading at $22, having been trading in the $20 to $40 range since early this year. It appears the directors and management of Tedco are of the opinion that the share is undervalued and thus the price already has an embedded discount.

However, a market re-rating of the counter is unlikely in the short-term due to negative perceptions and lack of confidence in some sections. That said, rights issues and IPOs with a few exceptions occur at two times. In a bull market, they rush out in full force to take advantage of maximum investor enthusiasm.

But when a company issues shares in a bear market to a lukewarm or cold reception, it confirms one thing: maximum desperation for the company. This is not the only company facing the same cash squeeze, a lot more companies appear to be in intensive care unit.

Aggressive accounting?

A glance at most current annual reports, the surge in audit fees sticks out. There has been a clamour over audit fees which has opened debate on auditors’ compensation and the quality of work. Audit fees generally skyrocketed by more than 10-fold, which is way above the official inflation rate for the same period. Are extraordinary compensation handed out for ordinary work?

Most of the auditors’ clients didn’t manage a turnover growth of that magnitude (more than a 1 000% increase!).

Questions have been raised about the quality of audit work in the current environment with most audit firms being accused of chasing their fees compromising the quality of the audit especially given the skills flight besieging the sector.

While auditors have said their job is not to investigate fraud, surely it’s not also to rubberstamp “creative accounting” which in some cases they appear to have done.

Some shareholders believe that they have been whipsawed as unskilled personnel have been deployed to carry out the audit.

The need to maintain one audit firm for a couple of years for the auditors to understand the business seems to have fallen through as in most cases new personnel from the same audit firm visit the same client after every audit.

Certain sections of industry are generally lamenting the lack of understanding of its business operations by auditors. That said, most of the companies have not changed auditors for many years! A considerable number of local firms have adopted aggressive accounting. Although the accounting treatment might appear to be within the guidelines, the rationale is suspect.

Can shareholders endure being whipsawed? In an era where investors are voting with their feet than with their proxy, it is difficult to envision a sea change in audit performance and their associated remuneration.

Some believe that investors to some extent deserve it as shareholders have stopped acting like owners and are now behaving like squatters as a result of measuring their holding periods in weeks not years.

With the economy, investors and the markets sitting in purgatory, it will be interesting to see what the audit fees pan out to be this year (2004/5) given that most companies are “bleeding”.

Maybe going forward companies will focus more on volumes than margin.

Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the author(s), and do not necessarily reflect the opinion of Sagit Financial Holdings Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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