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Meikles debacle: A lesson for investors

It all started with the Zimbabwe Stock Exchange (ZSE) temporarily suspending the trading of Meikles Limited (Meikles) shares on February 16, citing “material and price-sensitive” information on the financial status of the company.

Nesbert Ruwo

The trading of the shares was re-instated by the ZSE on February 23 on the basis that Meikles was not given an opportunity to respond to issues raised in terms of the ZSE Listing Requirements.

Meikles is now said to be suing the ZSE for $50 million for damages arising from the suspension of its shares.

How the ZSE missed following its rules, particularly section 5.1, which requires the ZSE to obtain representations from the company whose securities are under threat of suspension, is a cause for concern.

A suspension usually occurs where some material event, which will drastically affect the share price, is about to occur. Suspensions are meant to protect investors and the public interest.

A suspension may either be company or ZSE-initiated when the company fails to comply with the listing requirements.

The suspension and the subsequent re-instatement was followed by a public spate which saw Meikles publishing statements to its shareholders as well as statements on the comments by its chairman while the Securities and Exchange Commission of Zimbabwe (SECZ) published a damning statement alleging a number of irregularities in how Meikles conducts itself.

SECZ stated that it is “concerned by the information asymmetry regarding Meikles Limited”.

The commission alleged that Meikles is withholding material information from the market that its disclosure would probably have an impact on the Meikles share price.

The bone of contention was the carrying value of the amount owed to Meikles by the Reserve Bank of Zimbabwe (RBZ) in Meikles’ 2014 annual report among other issues raised by the SECZ. The Meikles 2014 annual report shows an amount owing from RBZ of $90,8 million, representing 25,6% of reported total assets.

This balance was a jump from $40,5 million (14,7% of total assets) at the end of the prior year. This balance is significant in relation to the size of the company’s balance sheet.  For investors that is material.

The balance more than doubled following “interest rate negotiations” with the RBZ resulting in Meikles booking in interest income of $40,9 million (2013 – $1,9 million) in its 2014 results.  The headline earnings (earnings excluding once-off and non-continuing operations) show a loss of $4,1 million from a profit of $0,4 million in the prior year.

Meikles was suspended when its share price was 14 cents and it dropped to 13 cents a day after the suspension was lifted. The share price has remained at the 13 cents level since then.

The price has, however, been on a downward trend from the time it published its unaudited earnings report for the 2013/14 financial year ended March 31 2014 on July 2 2014. It is down 31,57% year-on-year, and 16,12% year-to-date.

While Meikles was given up to March 2 2015 by the ZSE to respond to the allegations, the investing public was left wondering how this streak of events panned out. Meikles, however, in its early-March statement assured investors that it will address “fully” all the issues raised by the SECZ.

Whatever the outcome of this process will be, it will have far-reaching implications on investor confidence over the investment regulatory environment in Zimbabwe as well as on Meikles as an investment. 

The issue of regulatory oversight and transparency is of paramount importance in the operations of financial markets. Investors depend on the integrity and robustness of the regulatory framework as well as the quality of information published by companies to make investment decisions.

Perceptions on the transparency and integrity of a market affect investor decision-making.

Each market participant must perform its part to improve the integrity and efficient operation of the financial markets. The case of Meikles, which is yet to be concluded, raises questions about the integrity of the ZSE regulatory framework.

If SECZ and ZSE are found to be in the wrong, it raises questions about the capability of these institutions to oversee the financial markets. If Meikles is found to be in the wrong, it will raise questions about the integrity of the information companies are publishing to investors and it will castigate the auditing profession and analyst community.

In either case, this is not good for the Zimbabwean capital market. This will send out wrong signals to the investor community, both local and international at a time Zimbabwe desperately needs investment.

In the USA, the US SEC advises investors to take caution when considering an investment in a stock following a trading suspension. ZSE advised investors to exercise caution when dealing with Meikles’ shares.

Until at least the issues at hand have been resolved, at the very minimum investors should assure themselves that they have current and reliable information about the company before making an investment decision with respect to its shares.

Nesbert Ruwo (CFA) is an investment professional based in South Africa. He can be contacted on nesr@opportunvest.co.za

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