From ZSE to VFEX with Padenga

BY TAFARA MTUTU

The latest export incentives that are hinged on listing on the Victoria Falls Stock Exchange (VFEX) seem to be on the verge of seeing another listing on the USD-denominated bourse — Padenga Holdings Limited. In a press statement earlier this year, the Minister of Finance and Economic Development Mthuli Ncube said that companies that list on the VFEX will retain 100% of their incremental export proceeds, up from the prevailing foreign currency retention ratio of 60%.

This incentive is aimed at export-oriented businesses that have been lamenting the losses that they are incurring from receiving ZWL balances on 40% of their USD revenues. In its latest financial statements, Padenga expressed that, “the export retention framework at 60/40 resulted in Dallaglio receiving a discount to the global spot price on its gold sales of approximately 12%”.

The VFEX was launched in October 2020 as a USD-denominated stock exchange that would offer companies a platform that could raise real dollars needed to execute their various strategies, among other goals.

The bourse was anticipated to open its platform to investors with counters that were once listed both on the ZSE and other international exchanges. These were SeedCo International (also listed on Botswana Stock Exchange), Old Mutual Limited (also listed on Johannesburg Stock Exchange and London Stock Exchange) and PPC Limited (also listed on the Johannesburg Stock Exchange).

While the SeedCo International listing was successful, other counters are yet to be on board pending the conclusion of discussions between the local government and the respective management boards.  The bourse has only traded twice since inception, largely because of low liquidity and confidence in the exchange. Although the exchange offers access to real USD investments, its high liquidity risk profile generally imposes high opportunity costs to equity investors.

Since listing on the VFEX, SeedCo International’s share price has been stagnant at US18c per share while the ZSE’s market capitalisation has moved from US$2,2bn to US$8,6bn using the official rate. Based on Morgan & Co Research’s Colanomics Implied Rate of 76.8 on October 23, 2020 and 104.9 on June 4, 2021, the stock exchange has moved from US$2,3bn to US$6,9bn. Regardless of which rates are used, the point is clear — investors on the ZSE have achieved better real returns compared to their peers on VFEX to date.

The high opportunity cost usually disadvantages the short-term speculative investor but remains lucrative for the long-term investor who can hold long positions on the bourse until liquidity improves.

Padenga Holdings is an export-oriented business that sells crocodile skins and meat and operates gold mining entity Dallaglio. Its crocodile operations were significantly affected by lockdown restrictions in global markets and underpinned a shock decline in earnings of 84,4% in the FY2020 year. However, we anticipate that the business’ operations will rebound in FY2021 given the proactive management that has already begun recalibrating its products to match the unique preferences in the Asian market, among other measures. We also note that revenge spending will spur sales growth in the business as lockdown measures continue to ease on positive Covid-19 vaccination data in export markets. Revenge spending is a phenomenon that is characterised by periods of excessive spending following prolonged periods of black swan events such as the Covid-19 pandemic that curtail normal spending habits. Revenge spending is typically punctuated in elastic luxury markets and is funded by foregone expenses such as commuting, gatherings and vacations. Further, in the case of this pandemic, an injection of stimulus packages in developed economies will also complement the anticipated spending spree.

According to Bloomberg economics, it is estimated that, as of January 2021, Americans had amassed roughly US$1,7 trillion in excess savings that they accumulated during the pandemic.

We reckon that Padenga could recoup forgone crocodile skin and meat sales in FY2020 this year as restaurants and luxury retailers slowly bounce back to normal operations.

The performance of Padenga’s gold operations continues to be sustained by strong gold prices which are expected to remain firmly above US$1,700/oz throughout 2021. The mining entity is almost done with commissioning the Eureka Gold Mine in Guruve which will drive an additional output of gold per month by December 2021.

The stock remains a solid investment based on fundamental analysis because it operates successful businesses that typically thrive in different economic environments. During periods of economic expansion, demand for elastic goods such as luxury products is usually strong, and this sustains Padenga’s earnings especially from the crocodile operations.

Similarly, gold outperforms during economic downturns because of investors who flock to the prime safe-haven asset in what is known as flight-to-safety. The net effect is that Padenga is almost guaranteed profits whether the economy is expanding or contracting, and this reduces the volatility of its earnings and cash balances, which are crucial to the solvency of any business.

We opine that the stock’s share price on the ZSE has been weighed down by short-term and speculative investors who wish to steer clear from the challenges of the VFEX. This, however, provides an opportunity for long-term investors to take positions in Padenga at a cheaper price.

If the proposed transaction is signed off by investors in its Extraordinary General Meeting slated for July 2, 2021, the stock will offer access to an export-oriented USD investment through ZWL balances. Padenga’s dividends will likely be paid in USD once the listing moves to VFEX, and this could be a low-hanging incentive for investors seeking passive income in real dollars through their ZWL balances.

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