Zimbabwe Stock Exchange top picks for H2
MMC Capital Research has recommended six counters as top picks on the Zimbabwe Stock Exchange (ZSE) during the second half of the year.
This is despite the ZSE not being the best investment market since the beginning of the year, simply because of the volatility of stock prices which have fallen to lowest levels since the beginning of the year due to prevailing serious liquidity challenges.
The counters are Delta Corporation, Econet Wireless, Pagenga Holdings, SeedCo, National Foods Limited and Simbisa Brands Limited, which listed on the ZSE last year in November.
Punters have taken advantage to buy cheaper stocks, but the market is taking too long to pick-up as foreign investors withdraw their funds from what they refer to as risk markets.
Commenting on Delta, MMC Capital said the company’s business has remained very cash positive, generating a total of US$137 million from operations which is higher than the group’s net profit of US$80 million for the year to March 2016, signalling high quality of reported earnings.
The business has also continued to benefit from its strategy to eliminate the middleman through the use of its own distribution fleet, a move that is helping strengthen market share.
This shortens the cash cycle as well as enhancing service delivery. The group recently said it expects to inject additional investments in two manufacturing plants for the Chibuku Super product, to be commissioned in Masvingo and Kwekwe by September 2016.
“We project a nine percent decline in revenue to US$489,8 million for the full year to 2017 on the back of intense competition and transactional difficulties due to cash shortages, in a shrinking economic environment.”
“This will translate into an earnings per share of 5,95 (US) cents per share. Our Price to Earnings valuation metric, using a peer average PE of 17,07x, and an EPS (+1) of 5,95 cents points to a fair value price of 101 cents, an upside potential of 49 percent relative to the current price of 68 cents. We thus maintain our buy recommendation on the counter,” said MMC Capital about Delta.
Delta Corporation released a fair set of numbers for the full year ended March 31, 2016. Revenues came in at US$532,2 million, falling by seven percent from US$576,6 million recorded in prior year. The decline in revenue is attributed to the deteriorating macro-economic environment and the slowdown in demand in the face of declining disposable incomes.
Evaluating on Econet, the country’s largest mobile telecommunication company by earnings and subscriber, MMC Capital said it project the company to record a 13 percent decline in revenue to around US$646 million for the full year to August 31 2016 on the back of the reduction in regulated tarrifs.
This will translate into earnings per share of US$0,028 per share. MMC Capitals price to earnings valuation metric using a peer average PE of 12,425x, (Safaricom of Kenya (PE ttm of 18,29x), MTN of South Africa (PE ttm of 11,17x), Sonatel of Senegal (PE of 8,7x), TNM of Malawi (13,4x) and Vodacom of South Africa (16,69x)) and an EPS(+1) of 2,8 cents points to a fair value price of 35c, an upside potential of 67 percent relative to the current price of 21 cents.
“We thus maintain our buy tag on the counter. Downside risks to our projections, however, include the proposed infrastructure sharing arrangements. If implemented, the competitive environment in the telecoms space will intensify to the detriment of players,” said MMC Capital.
Econet’s revenue for the half year to August 31 2015, at US$323 million, came in 18 percent lower relative to the prior year. The negative trend was chiefly attributable to the slowdown in economic activity and significant regulatory changes which saw the Postal and Telecommunications Regulator of Zimbabwe (POTRAZ), implementing a 35 percent reduction in regulated tariffs, in addition to the five excise duty on airtime sales.
Cutthroat competition in the telecoms sector remains tense as penetration levels surpass 106 percent. Econet’s market share currently stands at 72 percent and relative to last year, the group gained seven percent from rivals.
Padenga Holdings recorded an operating profit before depreciation, amortisation, impairment and fair valuation adjustments of US$9,98 million for the twelve months to December 31 2015 from US$8,95 million from turnover of US$27,5 million during the same period from US$28 million.
“Our view is that the full year 2016 revenue will come in at around US$27,2 million. Given the poor operating fundamentals engulfing Zimbabwe, exposure into different markets becomes key and our view is that Padenga is well placed in that space. Our valuation model, which is a based on a forward P/E of 11,16x (on earnings of 1,3 cents per share) yields a fair value of 14,5 cents against a current market price of 8,66 cents. We therefore tag a buy rating on the stock,” said MMC Capital.
The majority of Zimbabwean crocodile skin exporters are favouring Asia because of the lower quality. The crocodile skins market is run by curtails and Padenga is rightly placed because of its strong relationships. The group is targeting annual production of around 50 000 skins and maintaining productions qualities. Considering that economic headwinds continue to mount on the local space, Padenga remains well placed to benefit from foreign market exposure.
SeedCo’s turnover for the half year ended September 30 2015 advanced 17 percent to US$18,8 million relative to US$16 million in the prior period.
Revenue growth was driven by the recovery in the demand for winter cereals. The operating environment remains tough, exacerbated by the erratic rains as a result of El’nino and Lanina as well as power shortages especially in Zambia following the lower water levels in Kariba dam. The technical-equity partnership with Vilmorine&Cie will be key in driving the seed business and the ever increasing food security issues in Africa present a good opportunity for Seedco.
“We project a three percent decline in revenue growth to US$91,.8 million for the financial year 2016 on the back of the El’nino effects and the La Nina effects especially in Kenya. This will translate into an earnings per share of US$0,0539 per share. Our Price to Earnings valuation metric using a peer average PE of 16,01x, and an EPS (+1) of 5,39 cents points to a fair value price of 93,97c, an upside potential of 66 percent relative to the current price of 56,50 cents. We thus maintain our buy tag on the counter,” said MMC Capital.
Another pick – National Foods Holdings Limited operates throughout Zimbabwe via a system of factories, depots and agencies. The company’s merchandise is marketed mainly under the brand names “Gloria”, “Red Seal” and “NF” stockfeed. The company also actively seeks export markets for its products.
National Foods revenue for the half year ending December 31 2015, came in two percent higher at US$171 million relative to the prior year. This positive trend was necessitated by the group’s strategy to lower average selling prices, whilst growing market share in the increasingly competitive environment.
“We project a two percent increase in revenue to around US$320,3 million for the 2016 full year period, necessitated by the company’s strategy to increase volumes and lower prices. This will translate into earnings per share of 19c.
“Our Price to Earnings valuation metric using a peer average PE of 18.4x and an EPS (+1) of 19 cents points to a fair value price of 349,71 cents, an upside potential of 71 percent relative to the current price of 205 cents. We thus maintain our BUY tag on the counter. Downside risks to our projections, however, include the declining disposable income as well as cash shortages,” the advisory firm said.
Simbisa Brands Limited, a Pan-African quick service restaurant operator that has been trading on the ZSE for eigtht months now owns, operates and franchises intellectual property rights of a basket of brands.
The group continues to witness an increase in customer count, although average spending remains under pressure due to the downward pressure on consumer purchasing power.
A total of 12 counters were recently opened in Gweru, Masvingo, Kwekwe, Bindura and Harare. For the half year period ending December 31 2015, Simbisa posted total revenue amounting to US$38,74 million. Opportunities to expand remain visible in this market. The group recently opened two new drive-thrus in Harare and Bulawayo, a development which is expected to propel customer satisfaction and overall volume growth. Simbisa remains a high cash generating business, showing its capacity to pay dividends
“We project a three percent increase in revenue to around US$158 million for the full year to December 31 2016 on the back of the aggressiveness in increasing the group’s foot print. This will translate into an earnings per share of US$0,02 per share,” said MMC Capital.
MMC Capital said its price to earnings valuation metric using a peer average PE of 11,25x and an EPS (+1) of 2,00 cents points to a fair value price of 22,5 cents, an upside potential of 73 percent relative to the current price of 13 cents.
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