The Zimbabwe stock exchange has had a very bad patch lately, very bad indeed. Since the beginning of March, the industrial index has retreated by 4%, whilst the mining index has slipped much more, having lost a whooping 8%. The losses are huge, more so considering the very stable inflation outlook and the good stream of December 2011 results that are coming into the market. Fidelity Life, Dairibord, Pearl Properties and Innscor, among other companies, have posted impressive results that should have ordinarily had lifted the market. But negative sentiments largely emanating from bickering policy makers on key policy aspects continue to cast a big shadow on the future ability of corporates to continuously generate good earnings.
Analysts and investors would generally converge in wide ranging opinions that a handful of the companies on the stock exchange are trading below their net asset values and when evaluated against the tight liquidity conditions in the market and heightened negative sentiments, these opinions could be true. Discounted opportunities can be found here and there, but the general opinion that the market is trading at huge discounts could be, but just faulty.
Pearl Properties, currently trading at a market capitalisation of $41 million is an interesting counter on the stock market! Its December 2011 balance sheet depicts a strong property portfolio of $110 million up from $86 million in December 2010, thanks to some aggressive mark-to-market gains of $20 million. Its net asset value is very strong at about $107 million. The share price, according to these figures, is therefore trading at a huge discount considering that the market values it at $41 million vis-à-vis the net asset value of $107 million. Who would not want to buy $1 by just paying $0.38 on Pearl shares? But a closer look at the income components, especially the fair value adjustment gains, reveals a weak link on the strength of Pearl’s revenue generating model. Yes, the company has done well under the circumstances to achieve an occupancy rate of 78%, but the net income from the core business translates to a P/E ratio of only 10x. The huge asset portfolio of $110 million can therefore only be valued to the extent to which it generates positive net cash flows for stock holders.
Thus, the ‘discounted’ opportunities in Pearl Properties are only on paper as its true ability to generate tangible earnings remains constrained by the state of the economy and quality of the property portfolio. The market valuation of Pearl Properties can therefore be assumed to be fair and reasonable, and the same applies to many other listed companies on the market that, at face value, may appear to be trading at huge discounts.
Whilst investors remain The money market remains the best investment choice in Zimbabwe at the moment, with cumulative yields in excess of 63% since dollarisation in 2009. The persisting liquidity challenges, which to some extent have been compounded by the deteriorating asset quality within the banking sector as noted by the RBZ, continue to sustain the high investment interest rates of around 16% per annum that are obtainable in the market for those with huge parcels of investible funds.
Recent results from listed banking institutions reveal the tight net interest margins that are prevailing in the sector around at 50%, a revelation of the very stiff competition for liquidity among the banks especially at a time the market had been without efficient inter-bank transactions due to the absence of quality paper to use as collateral. These prevailing high money market yields put Zimbabwe’s money market among the best yielding markets in the world in dollar terms. However the ability of the market to continuously attract more offshore funds chasing these high returns remains constrained by policy uncertainty, especially regarding the tenor of the multiple currency system.
Whilst money market investors continue to bask in the glory of good returns, the borrowers have been finding the cost of funding balance sheet very high and unsustainable. Zimbabwe needs continuous fresh capital inflows to fund the recover process of the economy, and indeed the existing high interest rates on the money market should act as good enough an incentive in attracting high risk capital inflows from financial centres around the world where interest rates remain very subdued around 1% per annum. On the contrary, the much desired economic recovery cannot be achieved with the existing high rates of borrowing, especially for industry that is willing to embark on long-term capital projects.
A balance would therefore need to be struck to ensure that the investment interest rates remain attractive to the global investors, whilst at the same time ensuring that the pass-on rates to the borrowers do not over-burden an already fragile economy. A policy framework that is predictable, transparent and consistent would usually provide the anchor upon which the important market variables will converge to create a vibrant efficient market mechanism that promotes growth.
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