Taking Stock with Barbican Asset Management

PG counter has great potential

PG Industries (Zimbabwe) Ltd (PGIZ), one of the counters which fall under the investment sector of our Barbican Equity Model, released its super interim results for

the period ending September 30.


The investment sector comprises those companies listed on the local bourse whose core business contributes to the Gross Direct Fixed Investment (GDFI) com-ponent of the gross domestic product (GDP).


On October 1 2002 the PGIZ was structured into three subsidiaries all of which are wholly-owned by the group. These are PG Merchandising Ltd, PG Glass (Pvt) Ltd and Zimboard Products (Pvt) Ltd.


The exercise was executed as a way of unlocking shareholder value, giving a leeway for subsidiaries to participate in alliances which will be to their benefit and to give the subsidiaries much control on their operations.


PG Merchandising Ltd comprises PG Timbers, PG Building Supplies, DST, Johnson & Fletcher and Creative Paints. This subsidiary mainly supplies all the required building materials and furniture to the local and foreign market.

On the other hand, PG Glass has got PG Safety Glass, PG Retail Glass and PG Glass-Warehouse & Distribution under its armpit.


The subsidiary concentrates on the supply of glass. Zimboard Products is mainly involved in the processing of wood and has got Fireboard, Particleboard, Value Added and Forestry & Logistics as its divisions.

Worth mentioning is the acquisition of Getsap Investments (Pvt) Ltd, trading as Zimtile, for $4,21 billion effective July 1.


The group owns a 70% stake in this subsidiary.


Shareholding structure


PGIZ’s top four shareholders as at March 31 were Laserson Investments, Prestige Investments (Pvt) Ltd, Old Mutual, and PGIZ Holdings Ltd.

Currently PGIZ has 276 million shares circulating on the market.


However, worth noting is the fact that the majority of shareholders are corporate investors.


This is a good indication of the counter’s stability.


Financial performance


The country’s economy has continued on the downfall. This has seen most firms either downsizing their operations or closing down.


However, against this background PGIZ has performed well above inflation rates.


Turnover has been on the increase with a growth of 905% to $66,3 billion as at September 30.


Of considerable impor-tance is the strengthening of its foreign market with export sales of $24 billion being realised.


This represents 38% of the total turnover. With access to the scarce foreign currency, which provides a hedge against the weakening local currency, the group has managed to capitalise on this opportunity.


Zimtile, a recently acquired subsidiary, performed very well by producing an operating income amounting to $1,9 billion over the three months since acquisition.


The group’s earnings per share recorded a 1 232% increase, a figure far much above expectations.


In line with the interest of shareholders, return on equity has increased from 51,45% as at September 30 2002 to 80,34% as at September 30.


Return on assets has also picked some points to the current 24,13%.


This is in line with the restructuring exercise of unlocking shareholder value and indicates some efficiency in the use of shareholders’ funds.


Strengths and opportunities


Reputable brand name: PGIZ has been operating in Zimbabwe for over 50 years. This has resulted in it establishing a good name in terms of service delivery and the quality of products they offer.


Foreign markets: PGIZ enjoys a good foreign market clientele and has plans to further expand into some new markets. This is expected to boost its foreign currency reserve, which will act as a hedge against the weakening local currency.


Inflation: This has left property as one the few investment vehicles that are known for outperforming inflation. This has resulted in increased demand for property from both local and foreign investors.


Challenges


The hyperinflation currently characterising our market has resulted in continual weakening of our local currency and high fluctuations in interest rates. Thus borrowing as a source of finance can no longer be considered to be that much lucrative.


Valuation


At the time of releasing its interim results, PGIZ was trading at a historic P/E ratio of 6,58. The counter was also trading at forward P/E ratio of 0.44x. This gives support to the view that the counter is currently trading at a discount.


Conclusion


Based on the above valuation and the fact that property has continued to be one of the investment vehicles which hedges against inflation, we view the counter as being undervalued.


With a view that the counter is expected to significantly move upwards, a buy is recommended.

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