LOCAL financial services firm, IH Securities says income statements of stock-listed firms will be distorted by rising inflation and by recent exchange rate adjustments.
BY TATIRA ZWINOIRA
Due to the reintroduction of the Zimbabwe dollar, the Zimbabwe Stock Exchange (ZSE), while surging on the back of investors seeking to retain value, has recorded its lowest market capitalisation since dollarisation because of the falling local currency.
In its Zimbabwe Consumer Sector Report released on Friday, IH Securities said of particular impact on the ZSE from inflation and exchange rate fluctuations would be consumer related stocks.
“We believe that in this environment, income statements will be distorted by the impact of inflation and exchange rate adjustments, which will naturally also affect balance sheet preservation and consequently valuation metrics. Therefore, we have a strong preference for companies with the ability to defend consumer share which will be a critical recovery factor when the economy eventually finds equilibrium,” reads part of the report.
“The recent flight to assets such as equities as investors de-risk RTGS dollars has driven market valuations resulting in high face value multiples, on face value our Consumer universe trades on PER of 33.45x and EV/EBITDA of 16,62x, which seems demanding.”
According to the report, recent monetary and fiscal policies have had a contractionary effect on consumption, which is expected to last for the rest of the year and into the greater part of 2020.
As such, consumer related counters are expected to see a significant decline in their valuations made worse by the devaluing Zimbabwe dollar that continues to reduce the market value of these counters.
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For example, at the official forex rate of US$1:ZW$9,16, the market capitalisation of the ZSE at ZW$25,03 billion, as of last Friday, is in fact worth US$2,73 billion.
“There will be a knock-on effect on corporate earnings and pressure on margins as raw materials and opex rebase faster than revenue lines. Therefore, we lean towards ‘relatively defensive’ stocks such as Econet (ECO: ZH) and Cassava (CSZL: ZH), an attractive stand-alone asset positioned to maintain its growth trajectory. Counters such as Simbisa (SIM: ZH) and Seedco International (SCIL: ZH) provide some form of hedge through regional diversification,” reads part of the report.
“Producers of staples including Innscor (INN: ZH) and National Foods (NTFD: ZH) also remain in good standing in our view given low grain yields in the 2018/19 cropping season on account of the drought, while retailers such as OK Zimbabwe (OK: ZH) are undervalued by the market at current levels.”
Despite consumer-related companies pricing their goods to retain value, low disposable incomes and eroding salaries from the devaluing local currency are leaving consumers unable to afford these higher prices.
As a result, economics dictates that producers may be forced to cut down production and thus revenue to avoid serious losses resulting in a decline in market value.
IH Securities said food retail is the most significant component of the consumer sector, with more than 30% of total annual consumption expenditure being spent on food and groceries, with staples (particularly maize meal, bread and sugar) being the most popular food items.
