Is Tanganda ZSE’s prodigal son?


Meikles Limited got the attention of investors when the company’s management announced its intention to unbundle the Tanganda Tea Company business on April 15, 2021. Tanganda was once listed on the Zimbabwe Stock Exchange (ZSE) before it voluntarily delisted in 2007 and merged with ZSE-listed Meikles Limited. The business has since been operating as Meikles’ agriculture subsidiary.

The Tanganda business produces tea, macadamia nuts, avocadoes, coffee and bottled water and exports most of these. Meikles’ other main businesses in Zimbabwe include the TM Pick n Pay chain and the Victoria Falls Hotel which it co-owns with Arden Capital’s African Sun. Meikles’ share price moved from ZW$41,85 per share on April 14, 2021, to ZW$59,79 per share on April 28, 2021.

The unbundling transaction entails Meikles and Tanganda splitting into two standalone businesses, with the latter coming back on the Zimbabwe Stock Exchange. The ownership structure of Tanganda will be the same as the shareholding structure of Meikles, that is, a shareholder with 500 shares in Meikles before the unbundling exercise will have 500 Meikles shares as well as 500 shares in Tanganda after the exercise. The question in many investors’ minds is: “What will be the market price of both Meikles and Tanganda’s shares on the ZSE in the event that the transaction is signed off by investors?”

A prudent way to ascertain the current value of Meikles Limited would be to calculate the sum of its parts through a combination of absolute and relative valuation models. However, given the considerable resource requirement inherent in absolute models, we focus on relative models only, specifically models based on the price-to-earnings and price-to-book ratios.

Relative models value a business using figures from comparable listed companies. The two models were selected because they each focus on a business from two distinct perspectives. The price-to-earnings model values the business from an income statement perspective, while the price-to-book model focuses on the business from a balance sheet perspective.

In order to ascertain a holistic value of Meikles’ operations, the peers used in the analysis were taken from comparable companies in global markets and the peer averages were adjusted for country risk. The peer companies used to value the Tanganda business were based on food and agriculture companies from the United States and France that produce one or more crops in Tanganda’s basket as well as close peers in the sector. These peers produced an average price-to-earnings ratio of 41.4x.

Given Zimbabwe’s country risk premium of 10,6% versus the US and France’s country risk premiums of 0% and 0,48%, respectively, a haircut of 10,36% was applied on the peer average to result in an adjusted average price-to-earnings ratio of 37.1x.

In light of Tanganda’s inflation-adjusted after-tax profits of ZW$230,4 million, this yields a relative price of ZW$33,83 per share for the Tanganda business. The same methodology was applied in generating a relative price using the ratio.

An adjusted price-to-book average of 1.98x was applied on Tanganda’s inflation-adjusted net asset value of ZW$4,2 billion and resulted in a relative price of ZW$32,46 per share for Tanganda. The average of the two models indicates a relative value of ZW$33,15 per share for Tanganda.

A relative valuation of the supermarket business was conducted in a similar manner to the valuation of the Tanganda business. However, the peers used were global comparable mass market retailers in South Africa, US and Canada, and the valuation was adjusted for Pick n Pay South Africa’s 49% stake in the business. The peers produced an average price-to-earnings ratio of 20.5x and a price-to-book ratio of 4.4x.

A discount of 9,6% was applied on these ratios because of Zimbabwe’s higher country risk profile of 10,6% relative to the average country risk profile of the peers’ respective countries of 1,0%. This resulted in an adjusted price-to-earnings ratio of 18.5x and a price-to-book ratio of 3.9x, which yielded respective relative values of ZW$30,06 and ZW$42,30 per share for the TM Pick n Pay business. The average of the two models indicates a relative value of ZW$36,18 per share for Meikles’ 51% stake in TM Pick n Pay.

The rest of Meikles’ business’ (hotels, properties, guard services, etc) were valued at their combined net asset values of ZW$2,4 billion, or ZW$9,47 per share, resulting in a sum-of-the-parts valuation of ZW$78,80 per share of Meikles before the unbundling.

However, we note that this exercise could be enriched with the use of absolute valuation models such as the Discounted Cashflow and Dividend Discount models.

As at the time of the writing of this report, Meikles closed the day at ZW$88,00 per share. We opine that the price on the bourse also incorporates the future growth prospects of Meikles’ operations, which the relative valuation exercise did not incorporate, as well as inflation expectations.

Further, export-oriented businesses, like the Tanganda business, command a premium on the ZSE given their access to foreign currency and limited exposure to local macroeconomics. This has been the case with Padenga Holdings (before its jump to the Victoria Falls Exchange earlier this month) and Ariston Holdings.

The unbundling exercise will enable Meikles investors to get separate exposures to the group’s major sectors — fast-moving consumer goods and food and agriculture. Other investors whose investment appetite is exclusive to either of these two sectors will have an additional investment opportunity that is in line with their investment themes.

  • Mtutu is a research analyst at Morgan & Co. — or +263 774 795 854.