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Financial Matters: Economy closes year in decline

THE market has maintained an almost 12-month downward trend since February last year as it fell once again in January — total market capitalisation closed 8,45% lower m/m at US$2,94 billion.

IH Securities

The industrial index was down 10,28% to 103,04 weighed down by losses in Delta, down 24,98% and Innscor, down 320,91%, offsetting an 8,91% gain in Econet. The mining index retreated 17,66% to 19,53 as Bindura dropped 34,64%.

The month’s top gainers were Starafrica, up 33,33%, CFI, up 21,2%, Turnall, up 10%, Proplastics, up 9,52% and Powerspeed, up 9,09%. Other significant losses in the month were seen in MedTech and WIlldale, down 50% and 25% respectively.

Monthly flows
Activity was depressed in January as turnover dropped by 30,37% to US$11,36 million; average daily trades for the month came in at US$568 150. Econet, Delta and Simbisa made the biggest contribution to total value traded, contributing 47%, 29% and 10% respectively. Total volume traded fell 66,11% to 62,90 million shares.

The ministry of Finance has forecast a GDP growth of 2,7% for 2016 mainly on account of mining, tourism and stability in the financial sector. There are significant downsides to government forecasts, emanating from adverse weather patterns, as the rainy season started late and weakening commodity prices, in particular metals, likely to result in the economy underperforming.

Inflation closed the year at -2,57% as the deceleration reflected price corrections, tight liquidity, depreciation of the rand against the US dollar and weak aggregate demand. Inflation is expected to stay around zero in 2016, mainly as a result of the appreciation of the US dollar amidst the increase in interest rates.

As a result we anticipate corporate earnings will remain relatively flat in 2016 as it is in our view that corporates have largely adjusted to this new “normal” in the macroeconomic environment which effectively started post the last elections in 2013.
Our immediate preference at this time is companies that have de-rated significantly from their five-year historical PER averages assuming relatively more stable earnings from late 2016 going forward.

Key recommendations

  •  Delta (Market capitalisation: US$658,09 million, Rating BUY, TP US$1,02), though we expect top-line to remain under pressure in 2016, we are starting to see a deceleration in the rate of volumes decline across portfolios. We estimate Delta trades in PER (+1) of 8,58x and EV/Ebitda of 4,26x.
  • Innscor (Market cap US$112,13 million, Rating BUY, TP US$0,54), trades on a PER (+1) of 4,93x and EV/Ebitda (+1) of 1,57x and believe it is oversold at current levels. Strategically, it is our view that the current unbundling process will unlock value in the group by creating more efficient stand alone units, albeit liquidity may become an issue.
  • Simbisa (Market cap US$85,84million, Rating BUY, TP US$0,30), trades on PER (+1) 13,65x to FY16 and an EV/Ebitda (+1) of 5,41x to FY16 which places it at a discount to comparable companies. We believe that the aggressive growth strategy within SSA QSR space bodes well for future earnings.

Inter-Horizon (IH) Securities (Pvt) Limited is a securities trading company facilitating trade on the Zimbabwe Stock Exchange.

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