Market maintains downward trend

THE market maintained a downward trend, falling yet again for the eighth consecutive month; total market capitalisation closed 0,80% lower at US$3,6 billion.

Financial Matters by IH

The industrial index was down 0,83% to 130,83; Delta, down 1,2% offsetting gains in Innscor, up 2,46% and Econet, up 0,19%. The mining index dropped 3,24% to 23,57 on the back of a 7,14% loss in Bindura.
The month’s top gainers were Fidelity Life, up 22,78%, CBZ, up 19,05%, Afdis, up 17,5%, Ariston, up 15% and NMB, up 12,5%. The top fallers were Turnall and Zimpapers, both down 20%, RTG, down 19%, NTS, down 15% and Colcom, down 12,21%.

Monthly flows
Activity was a bit more subdued in October compared to the previous month as turnover fell by 25,84% to US$12,88 million; average daily trades in October came in at US$585,52k. Econet, Afdis and Delta made the biggest contribution to total value traded, contributing 25%, 24% and 13% respectively. Total volume traded dropped 39,06% to 63,79 million shares.

Outlook
October was defined by severe power deficit issues in Zimbabwe as water levels at Kariba Dam continued to fall affecting the country’s hydroelectricity generation. As a result, there was a notable increase in daily power cuts; mining and industrial companies were particularly affected as government reduced supply by close to 40% in order to service residential areas that were getting 18-hour power cuts.

The Energy ministry has encouraged companies to begin directly importing their own power as a mitigant. We expect power issues to persist until new thermal plants have been commissioned, or the water levels at Kariba Dam have improved; therefore output across most industries will be subdued in Q3 affecting revenues; operating costs are likely to be impacted by higher generator use affecting margins.

Econet released its 1H15 financials during the period showing continued pressure on the Zimbabwean consumer; with Delta and OK results both due this month; we expect to see a sustained trend of downward trading to more accessible pricing points.

Despite present headwinds, we do believe that there are names which have been oversold and still hold solid business models that have medium to long-term value. We lean towards names in defensive industries with dominant market share positions, low leverage and relatively healthy operating cash-flows, that have room to re-configure internal operations to streamline costs.

Key recommendations

  • Econet (Market capitalisation US$438,71m, Rating BUY, TP US$0,43). Econet downsized last month and seems on target to reduce Opex by 15% over the year. We believe going forward that Econet’s revenue diversification is the correct strategy to protect share and support earnnigs. Econet is trading on a PER (+1) of 13,6x and we believe it is oversold at current levels.
  • Dairibord (Mkt cap US$29,71m, Rating BUY, TP US$0,12), trades on a PER (+1) of 17,7x and EV/Ebitda (+1) of 5,2x. Dairibord’s investment into new categories is expected to push volumes in 2H15 along with the fact that the summer months in H2 make their strongest period.
  • CBZ (Mkt cap US$68,59m, Rating BUY, TP US$0,20), we maintain our view that CBZ’s 1H15 earnings performance exceeded expectations as the diversification of their income streams began bearing fruit. Non-performing loans were marginally lower h/h, but we believe their strategy going forward in improving asset quality will leave the bank with a cleaner book come FY15. CBZ currently trades at a P/Bk (+1) of 0,20x.

    The Inter-Horizon (IH) Group is a Zimbabwean homegrown financial services boutique firm that offers brokerage and advisory services to local and international clients.