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Corporate earnings to take severe knock

BY TATIRA ZWINOIRA

LOCAL financial services firm IH Securities has predicted that corporate earnings for listed companies will take a severe knock this year due to the collapse of the local currency.

The Zimbabwe Stock Exchange’s (ZSE) market capitalisation slumped by 70.3% last year compared to 31% in 2018 based on the Old Mutual Implied Rate of US$1: $26.88.

“We anticipate to continuously see a further significant contraction in corporate earnings in real terms, attributable to a depreciating Zimbabwe dollar and limited working capital funds as borrowers increasingly lack capacity to provide loans,” said IH Securities in its latest equities outlook.

“Furthermore, we are concerned that persisting drought conditions, burgeoning money supply, relatively lower forecast economic output and a depreciating currency will affect consumption in 2020 resulting in an economic contraction.”

IH Securities added: “Thus, we believe that in this current trading 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.

“As such, we have a natural proclivity toward ‘hedged counters’, which predominantly derive their earnings outside the country’s borders.”

The contraction of corporate earnings has been linked to the effects of drought, market-unfriendly government policies and acute power shortages, which is expected to lower national production.

Continued devaluation of the Zimbabwe dollar is set to erode wages and reduce the spending power of consumers, which will hit the listed firms’ ability to sell their products or services due to reduced demand.

“Zimbabwe’s industry is poised for further contraction due to acute power outages lasting at least 16 hours across the country as the Zambezi River Authority cut generation at Kariba Dam by 1,050MW to avoid depleting the dam on receded water levels to less than 20% capacity after a poor rainy season,” IH Securities added.

“Tobacco earnings for 2019 were down 44%, while minerals were down on average 30% as a consequence of debilitating blackouts — a condition expected to persist until the nation resorts to alternative power sources, such as wind or solar.”

According to IH Securities, forex earners including Seedco International and Padenga would provide a natural hedge in the market, whilst Simbisa’s regional diversification would lessen the impact of Zimbabwe’s imploding economy,
Producers of staples including Innscor also remain in good standing while retailers such as OK Zimbabwe are undervalued by the market at current levels. This is based on these firms’ dominant shares in their respective spaces.

“It is imperative to consider a company’s level of independence on the domestic market, foreign currency obligations, dependency on imports, exposure to the bottom-of-the-pyramid and the company’s level of control in pricing when valuing Zimbabwean stocks,” IH Securities said.

“As such, we have a natural proclivity toward ‘hedged counters’, which predominantly derive their earnings outside the country’s borders.”

IH Securities picked companies with the ability to defend their market share as a critical recovery factor when the economy eventually finds its equilibrium.

Last year saw a significant contraction in corporate earnings in real terms, attributable to a change in functional currency and limited working capital funds as borrowers lacked capacity to provide loans.

In June 2019, government reintroduced the Zimbabwe dollar much to the chagrin of the market as the fundamentals did not support the reinstatement of the local currency that was discarded in 2009 due to hyperinflation.

“The volatility of exchange rates spiralled the equities market into a market rally sustained by excessive demand in heavyweights as local investors sought for capital preservation while foreign investors continuously exited the market, driving prices of fungible stocks, particularly Old Mutual,” IH Securities said.

“Soaring inflation rates, at 521% as December 2019 vs 42% in December 2018, and a vastly depreciating Zimbabwe dollar, down over 500% year-on-year thrust local institutions into also considering alternative investments, such as property and private equity, in a bid for capital preservation.”

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