The irony of cheap assets not interesting foreign investors

YOU have got three types of foreign investors, not speculators or glorified gamblers: the Carl Icahns , the Warren Buffets and the Sir John Templetons.

The Brett Chulu Column

Carl Icahn, the quintessential United States shareholder activist feared by chief executives and boards, lives by hunting for undervalued firms and buying into them. In 2013, he sent one tweet that he was buying into Apple, signalling that Apple was undervalued. Apple’s market capitalisation moved up by US$19 billion following his sweet tweet.

Here is US$19 billion from a Zimbabwean perspective: it can pay our national debt standing at US$11,237 billion, resuscitate moribund Ziscosteel and finance our national budget for a year and a half. All that from a single 40 odd-word message.

Buffet, the Oracle of Omaha: like Icahn, he is a value investor — he buys into undervalued firms and holds on to his investments — he practically does not cash out. The late Templeton, knighted by the Queen in 1987 for his phenomenal acts of philanthropy, was your typical contrarian investor: he bought into companies during times of economic distress.

He did that in 1939 when Hitler’s armies were steamrolling nations of Europe. He had only US$10 000. He instructed his stockbroker to buy US$100 worth of stock from each of all companies on the New York Stock Exchanges whose stock price was a US dollar or less. In times of economic distress stock prices of even blue chips can drop to a dollar or less. He bought 104 of those companies. He made losses from just four. That was the seed that catapulted him into the billionaires’ league.

Cheap assets, no takers

Where are we going with all this? Most Zimbabwean assets right now are so undervalued that the Icahns and Buffets of this world should be salivating. The pessimism and economic distress enveloping Zimbabwe are the perfect conditions for the Templetons to make a play on Zimbabwean assets.

The mid-term monetary policy statement made a startling disclosure: foreign investment dropped from US$32,8 million to US$6,8 million, a frightening plunge of 79,2% when compared to the same period last year. Rwanda, with a Gross Domestic Product of US$8 billion, attracted foreign direct investment (FDI) of US$1,779 billion in 2016. That FDI is 22,2% of GDP. It is massive.
Ours, with a generous assumption that FDI will recover to the US$387 million we attracted in 2011, will be a paltry 2,76% of GDP.

Zimbabwean assets are undervalued. Some of the largest listed entities are worth more dead than alive. FBC Holdings, a financial enterprise whose management is generally respected despite some corporate governance infractions such as staffing board committees that require independent directors with directors that appear not independent, has been trading at about 50% of its market value; its net asset value (NAV) is well below its market capitalisation.

CBZ Holdings, arguably the largest financial entity in the country with assets under its management inching towards US$2 billion, has a market capitalisation that has been bound between 71% and 76% of its booked value. Our bellwethers have also seen a steady decline in their market-to-book values. Delta, touted an all-weather stock, is a case in point.

Delta’s market-value-to-net-asset value ratio was 3,06:1 in 2012. In 2013, it rose to 4,08:1. In 2014, it declined to 3,50:1.

In 2015, it plunged to 2,84:1. In 2016, it further plummeted to 1,42:1. This is despite the fact that dividends per share have progressively ticked up from 2,08 cents in 2012 to 4,70 cents in 2016.

These kinds of valuations for bellwethers are too good to be ignored by the Icahns and Buffets of this world. Investors like Buffet are not distracted by short-term bloodbaths in the markets — they hold their investments for the long haul with horizons of more than 30 years.

If Templeton were alive, he would tell you that he liquidates his holding in one asset if another asset promises a huge upside. Zimbabwe’s winter may be long, but spring always follows winter. The question is: why are foreign value investors with cash piles seeking a productive home unmoved when it comes to Zimbabwean assets with such bargain basement valuations?

Are we not underselling Zimbabwe’s investment case to the foreign value investor? It looks like the type of foreign capital supplier we have been attracting is one who is in for the quick buck; your mutual and hedge funds always under pressure to beat the market and thus move in and out of stocks at the slightest whiff of danger. Where is the patient value investor who is not perturbed by temporary political and economic whirlwinds?

Unrecognised opportunities

Has our investment story been told well? You look at our GDP numbers; they are grossly understated. Here is a simple way to understand GDP: add up all the wages/salaries workers receive, all the profits companies earn and all the rentals paid in a single year — that’s roughly your GDP. Now here is our challenge: only the wages/salaries, profits and rentals in the formal sector get to Zimstat.

In my study of the commuter taxi industry that produced a classic grounded theory called invisible entrepreneuring, it became apparent that the Zimbabwean commuter taxi industry generates close to US$1 billion, year in year out. Of that US$1 billion, about US$250 million goes into the wages of the drivers and conductors and nearly US$500 million is the profit for the kombi owners. We have about US$750 million that is not included in our official GDP. That is just one semi-formal sector. With unemployment hovering above 80%, a lot of wages, profits and rentals in the economy are not counted in our GDP.

You have to ask yourself a question: a value investor perusing our economic statistics will likely underestimate the size of our economy based on the official GDP. Wised-up investors know there is a lot of value in the bottom of the pyramid. All you need to do is follow the money in the informal sector; it will show you the workarounds people are adopting to fulfil their needs.

Money in the informal economy is going to Tanzania, Dubai, China and Japan. Stem that leakage by understanding what value informal players get from these countries and provide it here. There are opportunities to provide solutions to the workarounds informal players are employing through formal industries.

If there is one thing that is crystal clear in the world of top investors, it is that money is made when there are bloodbaths. That is what Zimbabwe is right now. I fully agree with the common narrative that high country risk premium, policy inconsistency, property rights vagueness are unnerving foreign investors.

However, that is an incomplete analysis. There are value investors out there who know that no matter how long and deep winter is, summer will always come. Where are they?

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer reviewed academic journal.

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