Value investors hunt for major ZSE bargains

VALUE investors — those who hunt for stocks they believe the market has undervalued — could find themselves spoilt for choice on the Zimbabwe Stock Exchange (ZSE) going by the obtaining valuations on the market.

By Chris Muronzi

A look at a number of companies on the ZSE shows that they could suddenly find themselves fending off hostile takeovers owing to low price-to-book ratios, a natural allure for value investors.

The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock’s market value to its book value. A lower P/B ratio points to a stock being undervalued.

Just this week, Zimre Holdings Ltd (ZHL), through its investment vehicle, Stalap Investments increased its shareholding in CFI Holdings to 41,3% from 28%.

This comes after Hamish and Simon Rudland, some of Zimbabwe’s young crop of investors with interests in transport and logistics, agriculture and tourism acquired a 40% equity stake in ZHL, the country’s leading reinsurance concerns.

This is seen as part of a wider strategy by the Rudlands to control the company.

The move makes business sense.

When the Rudlands, through NMB Bank, underwrote the group’s US$15 million rights offer and got a significant equity stake in CFI, the company had a market capitalisation of around US$1 million.

CFI had assets amounting to US$95 million in the full year to September 2016 and total liabilities of US$58 million, implying a book value of US$37 million. Its market cap as at September 30 2016 was US$6,3 million. In FY15, CFI had a book value of US$51 million.

CFI’s market cap has since risen to US$13,5 million helped by a stock market rally in the last quarter of 2016.
It is not just CFI.

An analysis of several ZSE companies shows that real estate counters have the lowest price-to-book valuations with the four listed property firms ranked among 10 companies with the lowest P/B ratio.

Pearl Properties, with a market cap of US$40,86 million, has a P/B ratio of 0,33 and a price-to-earnings ratio (P/E) of 35,87.

With total assets of US$143 million and total liabilities of US$16 million, Pearl Properties’ book value is at US$127 million, while its market capitalisation stood at US$40,8 million.

The stock is trading at a discount of 69% to its book value.

It is not the only one in its sector with a low P/B ratio. ZPI, with a market cap of US$17,17 million, has a P/B ratio of 35,87 and P/E ratio of 12,50. Essentially, ZPI is trading at 64,13% of its book value.

On Tuesday, shares worth US$220 000 were snapped up at a 10% premium.

Mash Holdings with a market capitalisation of US$37,18 million has a P/B ratio of 0,40 and P/E ratio of 5,71, while Dawn with a market capitalisation of US$31 million has a P/B ratio of 0,38 and a P/E ratio of 32,50.

Going by current market prices, controlling 51% equity stakes in these four companies can be acquired for the sum of US$64 million.

Some investors have begun reaping benefits of value investing after cashing in on relatively cheaper stock with decent upside.

One of the country’s blue-chip counters, Meikles Africa Ltd, which owns the Cape Grace hotel and a five-star hotel in Harare, retail chain, department stores, and one of the country’s most productive estates, has become a takeover target after a Dubai-based billionaire, Ali Albwardy, made a takeover bid for Meikles Limited, through one of his investment vehicles involved in the hospitality, food and trade business.

A company is considered a takeover target for a variety of reasons, including large cash reserves, undervalued real estate, undervalued share price, attractive assets or strong growth and earnings potential.

Clothing retailer, Edgars Zim Ltd, with a market cap of US$11,7 million, also has a P/B ratio of 0,43 and P/E of 19,05. Its competitor, Truworths, has a market cap of US$3,46 million and P/B of 0,71 and a P/E pf 1,45.
Cash challenges and depleting nostro balances have seen the central bank failing to remit dividends to foreign investors and other payments for imports.

With discounted market capitalisations seen on the ZSE, analysts say such companies could find themselves fending off hostile takeovers by cash-rich investors who could easily accumulate cheap companies with good assets.

“Low price-to-book values could see such companies becoming vulnerable to hostile takeover bids as value investors would consider such a scenario to indicate a cheaper way to buy into the underlying assets of a company attributable to shareholders,” an analyst with a leading stockbroker said this week.

Companies with easy access to offshore capital have also taken advantage of the discounted prices on the local market.

Brainworks Capital, a private equity firm, enjoyed a shopping spree on the ZSE a few years back.

Others such as African Century, a company founded by former Morgan Stanley International chairman and CE Jonathan Chenevix-Trench, acquired a 28% equity stake when it underwrote a US$10 million rights issue in 2010.

Others such as Bob Diamond’s Atlas Mara completed the acquisition of ABC Holdings Ltd, a pan-African bank, for US$265 million in the first acquisition by the investment firm of the former Barclays Plc head.

BancABC offers financial services in Botswana, Mozambique, Tanzania, Zambia and Zimbabwe.

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