Stock market continues to fall

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THE market remained bearish in July, falling a further 2,85% in the month to close at a total market capitalisation of US$4,03 billion. The industrial index fell 2,06% to 145,35 on the back of a 19,98% decline in Econet and a 1,49% drop in Delta, offsetting a 4,97% gain recorded in Innscor.

Financial Matters by IH Securities

There was some support returning to mid-caps in the month with Seed Co, OK Zimbabwe, BAT and Old Mutual recording gains of 8,40%, 2,50%, 0,43% and 1,67% respectively.

The mining index lost a further 11,15% due to a significant 76% decline in Falgold and an 18,92% loss in Bindura. Other significant losses were seen in Zimplow, down 40%, Fidelity Life, down 25,56%, Turnall, down 22,86% and Nampak, down 20%. The biggest gainers in the month were Zimpapers, up 66,67%, CFI, up 25,30%, African Sun and Willdale, up 20%.

Monthly flows

Activity picked up in July with turnover increasing 69,88% m/m to US$20,28 million; average daily trades in July was US$0,88m. Heavyweights made the biggest contribution to total value traded, with Delta, Econet and Innscor contributing 30%, 29% and 13% respectively. Total volume traded rose 77,63% to 117,64m shares.

Outlook

In the 2015 mid-year fiscal policy released last week, the Ministry of Finance revised original economic growth forecast of 3,2% down to 1,5%, the lowest forecast since dollarisation, on the back of a poor agricultural season.

While there is increasing evidence of notable discipline on the part of government, the statement also highlights the straight-jacket posed by operating in a dollarised economy especially in light of recent US dollar strength.

Ultimately, the ministry continues to be clear that recurrent expenditure in the form of wages continues to be at elevated levels (80% of total spend), and despite potential political headwinds associated with this, the Finance ministry has indicated that there will be an effort to cut the wage bill to 40% of total spend.

The recent Supreme Court ruling on labour laws might be a catalyst for this process and already some parastals, according to press reports, have aggressively axed part of their labour forces. We believe that any reduction in non-recurrent expenditure in favour of capital projects would be clearly positive.

Encouragingly, FDI appears to be on a positive trend and this we believe remains a short-term solution to the present liquidity challenges currently being faced.

As regards the support measures announced, in the listed space the clear beneficiary is likely to be Delta (TP US$1,25) with the introduction of a customs duty on soft drinks. The company’s recent quarter saw a 15% decline in CSD volumes on account of competition from imports.

Key recommendations

  •  Dairibord (Market capitalisation US$27,9m, Rating BUY, TP US$0,14), Despite some pressure in pricing and soft disposable incomes, there has been some significant restructuring in the business which has improved efficiencies and will contribute to margin uplift. Weak commodity prices should also bode well for inputs into the business. Dairibord trades on a PER (+1) of 12x and we believe it is oversold at these levels.
  • Econet (Market cap US$520,7m, Rating BUY, TP US$0,56), trades on a PER (+1) of 13.5x and EV/Ebitda (+1) of 2.9x. Despite short-term headwinds, Econet’s revenue diversification bode well for solid earnings growth in the medium to long term and we believe the stock has been oversold. EcoCash speaks to the growing informal market and has cumulatively transacted over US$11bn in the last 3,5 years.
  • Innscor (Market cap US$340,2m, Rating BUY, TP US$0,79), Innscor’s FY14 earnings performance was affected by US$7,2m in once-off costs and restructure provisions; therefore we do expect some natural margin uplift in FY15 earnings in the absence of those specific once-off items. We also see unlocked value as the business unbundles the fast foods business estimated in 4Q15 . Innscor trades on a PER (+1) 12.7x and EV/Ebitda (+1) 6.1x.

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