BY Tafara Mtutu
The Ministry of Finance and Economic Development’s privatisation drive has taken another step forward with an approval for the People’s Own Savings Bank’s (POSB) listing on ZSE in the pipeline.
POSB is one of the entities earmarked for privatisation among several state enterprises and parastatals (SEPs) that the government intends to turn around, revamp, or improve by way of privatisation.
In the 2021 National Budget statement by Minister Mthuli Ncube, the government noted that many of these SEPs are entities that can contribute meaningfully to the economy if properly privatised.
POSB is a financial services provider that is wholly owned by the Government of Zimbabwe which was established in terms of the People’s Own Savings Bank of Zimbabwe Act of 1999.
The bank serves 400,000 retail and corporate customers by offering them individual, corporate, mortgage, SME & agribusiness, and microfinance loans. According to the Reserve Bank of Zimbabwe’s Banking Sector reports, the size of POSB’s loan book represents roughly 1.2% of the local banking sector’s loan book.
In comparison, the biggest lending institutions command a loan book share of more than 55% among them.
These are CBZ (21%), FBC (19%), CABS (12%), and Stanbic (8%).
Unlike many other banks in the sector which mostly lend to the agriculture and distribution sectors, POSB’s loan book is largely exposed to individual loans.
POSB’s FY20 financial statements (in historical accounting figures) were marked by a revenue increase of 507% vis-a-vis an average Year-on-Year inflation rate of 622% throughout 2020. The bank’s net profit of ZWL$352.4m was 392% higher compared to the prior year and was also below the average Y-o-Y inflation.
POSB’s Net Profit Margin in FY20 was 40% and, if adjusted for corporate tax for the purpose of comparability (POSB is exempt from income tax), was lower at 30%.
Its listed peers — First Capital and NMB Zimbabwe Holdings — posted an average FY20 Net Profit Margin of 68% in comparison.
POSB’s FY20 tax-adjusted Return on Equity of 27% is also well below the peer average of 58.3% despite a higher Loans-to-Deposit ratio of 48% in comparison to the banking sector average of 38%.
Further, the bank has maintained a dividend pay-out despite a lower-than-peer average capitalisation of cUS$22 million in FY20.
In 2018, the bank declared a dividend of ZWL$1.9m which represented 11% of FY18 net profits and in subsequent years it declared dividends that were 6% and 5% of net profits in FY19 and FY20, respectively.
The bank is mandated to maintain at least US$30 million in capital by the central bank and its peers both held roughly US$26 million in capital as at 31 December 2020.
We note that the news of the possible listing brings the question of value and opportunities to local equity investors.
To that effect, we undertook a relative valuation of the business using its peers’ Forward Price-to-Earnings and Price-to-Book ratios.
This exercise was done using historical accounting records instead of inflation-adjusted figures.
Forward estimates of earnings that were used in the Price-to-Earnings valuation were based on (i) future inflation expectations in FY21, (ii), a regression of net operating income on inflation between 2015 and 2020, and (iii) the latest Net Margins by the respective banks.
Net asset values for the peers incorporated future earnings expectations minus any anticipated dividend pay-outs. This methodology yielded an average Forward Price-to-Earnings ratio of 1.6x among POSB’s peers and a forward-looking Price-to-Book ratio of 0.9x.
These ratios were multiplied against our future expectations of POSB’s earnings and net asset value of ZWL$447.2m and ZWL$1.6bn, respectively, to result in POSB’s relative values of ZWL$695m and ZWL$1.4bn.
An average of these two figures indicates a ball-park value of ZWL$1.0bn for POSB.
However, the parastatal’s relative figure will be ZWL$1.4bn if the institution remains tax-exempt after the possible voyage to the bourse.
If POSB gets the nod and lists at a market cap below ZWL$1.4bn, it could be an opportunity for speculative investors seeking capital gains.
The bank is not without investment risks.
The low direct exposure to the agriculture sector is likely to make POSB less attractive to fundamental investors in comparison to other banks.
According to the Finance Minister’s latest speech, the agriculture sector is anticipated to register a 34% growth in 2021 compared to prior year.
Its dividend policy could also be revised downwards to make way for a recapitalisation strategy.
At a value of ZWL$1.4bn, the stock will likely be classified as a small cap stock on the ZSE.The stock will also be part of the ZSE’s Small Cap and Financials Indices. With another anticipated listing of Tanganda on the ZSE later this year, Zimbabwe’s equity markets are showing signs of resilience following the delisting of Falcon Gold, ZPI, and Dawn as well as the suspension of Old Mutual Limited and PPC Limited in a space of two years.
Mtutu is a research analyst at Morgan & Co. — firstname.lastname@example.org or +263 774 795 854.