A performance that nearly sank everyone

By Admire Mavolwane

WHAT does a banking conglomerate, a renowned cement manufacturer, a brick maker and farming implement manufacturer have in common? These are counters

which turned investors and shareholders into US dollar millionaires in 2007. The companies are Kingdom, Circle Cement, Willdale, and Zimplow. Other than that, the common thread ends there. Whilst some association between Willdale and Circle Cement could be implied by the complementarity of products produced, the performance of the two had nothing to do with bricks and cement.

Investors who bought into Kingdom — which will soon be part of the expanded Kingdom Meikles Africa Limited group — in January 2007, saw their net worth increasing by 3 422% in US dollar terms. The banking group’s market capitalisation appreciated from US$8,2 million to US$287,7 million in one year.

Doing the sums; it means that that in twelve months the counter gained US$280 million or US$23 million every month. This mesmerising performance was in the first half driven by what the market has termed the “Nigel effect” whilst the Meikles/Kingdom mega deal is largely responsible for the stellar second half performance. The “Nigel effect” manifested itself in the form of a recovery in operational performance at the bank driven by an impressive growth in deposit market share and the bullish stock market performance.

Whilst the performance of Kingdom, can be easily explained, market watchers and commentators are still wondering where Circle Cement got wings to fly so high. Although the company showed relatively stable operating profits and strong gains from its stock market investments, this feature was not unique to it. In fact there are other companies with much bigger share portfolios.

Circle’s market value started the year at US$12 million and soared high to close 2007 at a massive US$255 million. Whilst there is no doubt that in January 2007 the company was massively undervalued, by December last year, its valuations where looking over the top. In percentage terms, the company grew by 2 010%. This performance caught the eye of the writer of the now infamous “November 7 — price blitz phase II” document.

The author had this to say; If we take a hypothetical example of an investor who placed $1 000 000 into Circle Cement in January 2007, by end of October, the same investor had reaped more than $8 billion with no production of any kind. This form of inflationary money is unacceptable!” The document was later disowned by the authorities, including the office where it supposedly originated from.

So Circle Cement nearly sank the whole market, in a “concrete boots” style favoured by the Mafia.

If Circle’s performance was mysterious then Willdale’s, which sneaked into third position, is even more puzzling. Although the 12 months to September 30 2007 results were commendable with the company’s bottom line growing by 83 128% on the back of an impressive improvement in operating margins, this does not sufficiently explain the amazing share price performance. Like the other two, Willdale was worth US$1,1 million at the whistle but by the time the flag was being waived the brick -maker was valued at US$12 million.

The farm mechanisation phase II programme proved to be very beneficial to many steel fabrication plants. Prime, among the listed entities that have been benefited from this form quasi-fiscal expenditure are, Zimplow, Steelnet, and Gulliver. As a result the Bulawayo based Zimplow elicited renewed investor interest seeing that it is the foremost producer of ox-drawn ploughs. The closing market value of US$27 million is not bad considering that in January 2007 the company was worth a mere US$3 million.

Still on engineering firms, a few days before the Christmas break former ZSE-listed Zeco Holdings published its listing prospectus. The company is involved in both heavy engineering through its Bulawayo operation, which produces rail wagons and structural steel products, and light engineering through Critall Hope which manufacturers mainly door and window frames.

Zeco intends to come onto the main board through an initial public offering (IPO) of 809 million shares at an issue price of $24 927 per share. The offer opened on Wednesday this week and is expected to close on 25 January 2008. The shares on offer will represent 20% of the post IPO issued capital, whilst the original three shareholders will collectively account for the balance.

At listing, Zeco will have a market value of approximately US$21 million using the exchange rate on December 24, 2007, a day after the publication of the prospectus — as opposed to an independent valuation estimating the company at US$69 million. On that day, closest peer Gulliver was valued at US$5 million, whilst the other sectoral counterpart Steelnet, was worth US$14 million.

The problem of pricing an IPO is the time difference between the publication of the prospectus and the listing. Even the amount to be raised will by the time of listing have lost over three quarters of its value. May be by the time of listing the gap between Zeco and its counterparts would have narrowed.

Back to performance, inflation has of late ceased to be a credible benchmark leaving investors with the US dollar growth rates as yardsticks. On this front the market uses the parallel market exchange rate (PMR), which is illegal at law, but is known to be very functional on the ground and the Old Mutual Implied Rate (OMIR). The latter is more of a proxy exchange rate, calculated using economic laws and assumptions.

Below we tabulate the 2007 performance of the industrial index and the two bench marks.

The omens seem to be pointing to a repeat of this exchange rate beating performance in 2008, but like everything else, only time will tell.