FINANCIAL services firm, IH Securities projects that Econet Wireless Zimbabwe (EWZ) will post more foreign exchange losses in the coming year owing to local currency volatility, after its market capitalisation fell by US$1,76 billion since the start of the year.
At the beginning of the year, Econet’s market capitalisation on the main Zimbabwe Stock Exchange bourse was US$2,05 billion but had fallen to US$290,92 million last Friday. This was caused by the Zimbabwe dollar depreciating to $672,70, against the greenback, from $108,66 at the beginning of the year.
Econet, Zimbabwe’s largest telco, has reported heavy foreign exchange losses throughout the year.
In its latest half-year report for the period ended August 31, 2022, Econet reported foreign exchange losses of $43,7 billion, representing 39% of revenue for the 2021 comparative period.
“As a result of the exchange rate movements over the last six months, the business recorded foreign exchange losses of $43,7 billion representing 39% of revenue against a prior year comparative of 2% virtually eroding any possibility of achieving an accounting profit,” Econet chairperson James Myers said, in the report.
IH Securities said Econet was now burdened by forex losses.
“For years, the group’s financial performance has been weighed down by foreign exchange losses stemming from foreign currency denominated obligations and debentures. This situation had to some extent improved in (Recipient's Fiscal Year 2022) FY22 owing to a relatively stable local currency during that period,” IH Securities said in its latest analysis.
“Moving forward, FY23 foreign exchange losses are expected to come in elevated again as evidenced by losses for 1H23 which are already high at 36% of revenue. Although exchange rate depreciation has slowed in 2H23 compared to 1H23, the country hasn’t yet achieved currency stability.”
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Econet reported a loss of $5,78 billion for the six months ending on August 31, 2022 blaming ineffective tariffs that had not been kept in touch with inflation-induced costs.
Revenue was at $112,4 billion, a decline of 1% from the 2021 comparative period.
Econet has been strongly advocating for a tariff adjustment owing to high inflation.
The telco had $1,06 to every dollar of debt, as of August 31, 2022, dangerously approaching an illiquid position.
IH Securities said the Zimbabwe dollar’s depreciation would continue to significantly impact EWZ’s ability to invest in new equipment as it imports equipment and software for operating purposes.
“With Capex hovering around 5% versus Sadc peers at circa 15%, the network will remain suboptimal in the near term. The misalignment in the review of tariffs relative to inflation and ‘real’ costs will continue to impact revenue and profitability creating downside risk to the business,” IH Securities said.
“Broadband and data services demand across the country continues to increase which is positive and the clear pathway for growth. Econet remains best placed to lead the advancement of technology within the industry, and to unlocking interminable opportunities, reaping the benefits that come with being a diversified pioneer.”
IH Securities said it had switched to a US dollar-based valuation of the company so its estimates would continue to be meaningful in the current inflationary environment.
IH Securities forecasts a 24% real revenue reduction next year with earnings before interest, taxes, depreciation, and amortization margins holding at 45%.
Econet is expected to maintain COVID-19 cost-cutting efforts.
IH Securities said Econet's debentures, due to be fully redeemed in April 2023, would mitigate forex losses as it would reduce the firm’s debt burden.
In May 2017, the telco issued 1 166 906 618 unsecured redeemable debentures with a 5% annual compounding coupon rate and a six-year duration.
The subscription price was 4,665 US cents per debenture with redeemed debentures paying interest.
“At the discretion of the board, the company may redeem the debentures before expiry at a price determined by adding to the subscription price the cumulative interest calculated at a coupon rate of 5% per annum compounded annually up to the date of redemption,” Myers said.
“Pursuant to an offer made by the company in July 2021 for the early redemption of debentures at the interbank rate, 22,46% debentures were offered for early redemption by the holders.
“The company remains with an obligation for 904 778 710 debentures. The debentures are redeemable at the end of April 2023 at a price of 6,252 US cents per debenture.”
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