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2021 tobacco season winners


Zimbabwe’s 2021 tobacco selling season started on an upbeat note as sales volumes and average sales volumes exceeded prior year comparative figures since day 1 of the selling season. As of April 20, 2021, Tobacco Industry and Marketing Board (TIMB) statistics reveal that total volumes sold to date of 20 million kg exceeds prior year’s comparative figure of 10,8 million kg by 84,5%.

In addition, the average price achieved so far exceeds the prior year’s average price of USD2,27/kg by 10,2%.

Given the above, 2021 looks like a good year for tobacco players. More specifically, there are some players listed on the Zimbabwe Stock Exchange that we think investors should keep an eye on.

When it comes to selling the golden leaf, the tobacco sector enrols the services of various stakeholders who facilitate some services that buyers and sellers cannot provide for themselves. This is because of inadequate capital or expertise by individuals, among other reasons.

As a result, there are specialised service providers who close these gaps and make it affordable for both buyers and sellers. We focus on three such service providers who could record gains from the strong selling season, namely TSL Limited, Nampak Zimbabwe and Unifreight Africa.

TSL Limited is a diversified service provider with extensive exposure in the tobacco sector. The business has four main segments which are

  •  properties
  • logistics
  • agriculture
  • services

The business’s auction floors operations, which are housed under the Agriculture segment, recently expanded into tobacco towns Karoi and Marondera after getting the requisite approvals to decentralise.

The business holds 75% of auction sales in the country and, given the approvals to decentralise, could trigger a reversal of auction floors’ falling market share in the country.

TSL also manufactures and supplies tobacco packaging that is essential in transporting tobacco from the farm to the selling floors.

Through its Propak Hessian subsidiary, the company offers tobacco wrapping paper and hessian wraps which allows it to tap into sales activity on contract floors.

Performance of this subsidiary is largely dependent on volumes delivered to the selling floors.

Given the increase in tobacco output this season, the subsidiary is likely to report an increase in sales volumes in the FY2021 year.

The division reported a 22% increase in sales volumes compared to prior year in TSL’s FY21 trading update.

TSL’s Propak Hessian is not the only major packaging company in the sector. Nampak Zimbabwe Limited’s Hunyani Corrugated Products division also supplies specialised packaging boxes such as the large double-wall board cases for tobacco exports.

The two packaging companies are usually focused on different levels of the value creation process for the golden leaf which makes them less of competitors in the packaging sector, should investors be wary of Nampak’s margins.

TSL’s BAK Logistics also offers transport, warehousing, and logistics services in the sector. TSL, in partnership with Old Mutual Zimbabwe’s Life Assurance division, recently invested in a state-of-art 10 000 sq.m warehousing facility.

Unifreight Africa is another player on the bourse that stands to record a better performance this year.

The logistics business is one of the top transporters of the tobacco crop from auction and contract floors to local processors and export customers.

Unifreight’s sales tonnage is highly correlated with Zimbabwe’s tobacco sales tonnage, and the improved sales forecasts from TIMB warrant positive sales performance for the logistics business in 2021.

The promising selling season holds upside for farmers who have fetched a better average selling price in the first seven days of selling.

In addition to the higher expected sales tonnage of 200 million kg, tobacco farmers stand to have more in their wallet at the end of the selling season which they can use to purchase next season’s inputs.

Enter TSL’s Agricor subsidiary. This subsidiary supplies the necessary fertilisers and chemicals for the tobacco crop throughout the season.

We note that there are other listed companies that stand to gain indirectly from the current tobacco season. OK Zimbabwe and Meikles Limited’s Pick n Pay outlets in tobacco towns (Marondera, Bindura, Rusape and Karoi) will benefit from the tobacco farmer’s improved disposed incomes.

Given their strategic proximity to the tobacco farmer, they are likely to see notable performance from their stores in these tobacco towns.

Axia Corporation’s TV Sales & Home outlets in these towns are also likely to benefit in the same way as the above-mentioned retailers.

We note Edgars’ presence in the two towns, but we remain pessimistic of the pass-through benefits to the business given the influx of cheaper second-hand apparel in the country.

Our estimates point to demanding valuation multiples for Unifreight and TSL, and cheap valuation multiples for Nampak.

We opine that the market prices for Unifreight and TSL have rallied beyond fundamentals and expectation from the current tobacco season.

However, we remain bullish on Nampak. The interbank auction system has allayed FX shortage fears in Nampak, and this will circumvent the business’ supply-side constraints.

In addition, Nampak taps into the FMCG sector through its packaging products which will complement the business’ performance outlook in 2021.

Delta Corporation, the country’s largest alcoholic and non-alcoholic beverages manufacturer, uses Nampak’s packaging in some of its products. The investment theses for OK Zimbabwe, Meikles Limited and Axia Corporation hinge on improved performance in the tobacco sector and the broader agriculture sector.

Zimbabwe’s agriculture sector is anticipated to drive the agro-centric economy’s recovery in 2021 because of better rains.

There are additional reasons for investing in these indirect beneficiaries of the tobacco sector, and we maintain that they are good choices for investors on the Zimbabwe Stock Exchange.

Mtutu is a research analyst at Morgan & Co. He can be reached on +263 774 795 854 or tafara@morganzim.com

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