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The hits and misses of 2022 (II)


Continued from last week...

OUR analysis of the surprise announcements presented by the president on the evening of May 7, 2022 proved to be spot on.

Policy changes in the announcement included (i) allowing payment of duty, royalties, and taxes in Zimbabwean dollar, (ii) further tightening of money supply by reducing quarterly money supply growth to 0%, and (iii) an increase in the Capital Gains Withholding Tax (CGWT) for investments held for less than 270 days from 1,5% to 4,0%.

We opined that the payment of statutory obligations in the local currency and tightening of local currency supply would have a combined effect of slowing the depreciation of the Zimdollar on the parallel market because of the laws of supply and demand.

This held true considering that the depreciation of parallel market rates between May and December of 47% was slower than the depreciation between January and May of 58%. The higher CGWT hampered speculative trading as envisaged as average daily turnover on the ZSE slowed after the announcement.

We looked at the stock market’s response to the May 7 announcements and key to our conclusions was that the dip in the market was not as temporary as many investors hoped. At the time, Innscor’s share price shed 24% in the 10 days after the announcements, while stock prices for Delta and Econet were down 22% and 33%, respectively over the same period.

Overall, the ZSE’s market capitalisation fell by 20%, or ZW$655,6 billion. Several proponents of the “buy the dip” strategy encouraged other investors to take positions while our research pointed to the price weakness in the market being more structural than cyclical.  As it turns out, the market is yet to recover from the supposedly temporary dip.

In June, we looked at the implications of the payment modalities by the Grain Marketing Board to maize farmers, which constituted ZW$75 000 per tonne, 30% of which was payable in foreign currency.

We noted that, at such static prices, delivers to the GMB would remain low and side-marketing would increase. We highlighted two scenarios and their implications.

The first scenario assumed that the GMB would maintain their prices to farmers, as opposed to the second scenario that assumed prices would be revised upwards.

We anticipated the second scenario to play out with the government revising purchase prices closer to the regional grain price levels and either improving the US dollar component or subsidising input costs.

We observe that this has largely been the case given that the GMB raised its producer prices for white maize to ZW$100 000 + US$90 per metric tonne (mt) in August, a price that converts to US$206 per mt versus a SAFEX price of US$292.

In September we were upbeat over the consensus from SARCOF-26. According to the forum, Zimbabwe is expected to receive above-average rainfall throughout the 2022/23 agriculture season.

Among the many expectations we had was the recovery of the country’s electricity generation capacity. We pinned our positive power supply forecasts on the availability of water at Lake Kariba.

However, we note that we were too bullish on the quick recovery of the water levels at Lake Kariba given that the flows into Lake Kariba will likely drive the water levels at the dam only as early as next year in the first quarter. This has also seen power outages intensify in December in both residential and industrial areas.

We took another glance at the stock market after the rollout of gold coins, and our sentiments and revised expectations of the ZSE’s performance continue to hold true. 

Gold coins came as a new effective hedge against the depreciation of the local currency amid the ZSE’s extended bear run since May 2022. Many investors even cashed out of the stock market and bought gold coins.

This further compounded the bourse’s liquidity challenges and we expected the stock market to remain dull in the short to medium-term, which has been the case so far.

In October we looked deeper into the dynamics affecting listed companies’ dividend pay-out ratio, which hinged on the lack of the Zimdollar in circulation and an increase in internally generated FX. We made the following inferences as a result of our analysis;

Manufacturing businesses that are not near-cash will likely forego a dividend in the current period given the high demand for local currency and low US dollar-generating capacity (Seed Co Limited)

Established and fundamentally solid businesses on an expansion drive will either forego a dividend or adopt a conservative US dollar and/or Zimdollar dividend pay-out ratio (Delta, Meikles, BAT, Axia and Simbisa Brands)

Value stocks will continue paying a dividend, which could be in US dollars more than Zimdollars given the current shortage of local currency (Innscor, National Foods, African Distillers and Hippo Valley)

Financial services companies are likely to increase US dollar dividends given an increasing contribution of US dollar income to lending and insurance operations (First Capital, FBC Holdings, ZHL).

Of these remarks, only (iv) was somewhat off the market considering that only ZHL declared a US dollar dividend in the latest half year period.

One of our most recent pieces made the bold statement that exchange rates in the country will not converge based on (i) limited access to foreign currency on the interbank market, (ii) cheaper costs associated with hard cash, (iii) less stringent transaction limits attached to currency in the informal system, and (iv) policy inconsistency. At the time of the report’s publication, the gap between the two rates stood at 23%. Currently, the gap has widened to 34% and this confirms our remarks.

Mtutu is a research analyst at Morgan&Co. — tafara@morganzim.com or +263 774 795 854.

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