Zimbabwe | ZSE

We expect revenue for Innscor to grow 16% y/y to US$811mn from a combination of affordable pricing policies in place to support volumes and sustained focus on diversification and expanding product portfolios. Our view is that Group EBITDA for FY23 will register at US$115.85mn, assuming an EBITDA margin of 14.3%. Historical EBITDA margin for the Group in a dollarized economy has been c. 11% but Innscor Africa has since adopted a leaner, cost efficient structure by regrouping operations according to their core business and spinning off specialised segments into standalone entities. We forecast net margin in the period to soften to a steady state of 7% as other once off income lines fall away.

The country formally moved to adopt a currency weighted consumer price index as the official measure of inflation to reflect the dual currency structure. According to monetary authorities, 75% of domestic expenditure is now forex denominated and as such blended inflation will aptly reference trajectory of the economy. Month-on- month inflation in the first quarter declined from 0.7% in January down to 0.1% in March, trending below the forecasted blended average of 1.5% average in 2023. Annual inflation has also taken a disinflationary path easing from 101.5% at the start of the year down to 87.6% at the end of the quarter. Whilst blended figures present a rosy outlook, the local currency has been under pressure, depreciating 34% within the month and the black-market premium widening to 64% as the official rate trails behind. Notably, civil servants were granted a 100% increase in the ZWL portion of wages within the period possibly hinting to increased money supply.

The business continues pursuing its growth strategy hinged on improved deliveries, technology development, continued growth in footprint and brand development. In Kenya, sitting at a store count of 224, Simbisa consolidated its position as the largest QSR operator in the market surpassing a key milestone of 200 stores. The Group has a significant pipeline of new stores and expects to open 83 stores in FY23, mainly in Zimbabwe (41) and Kenya (41) at a cost of about US$27mn. Simbisa is generating sufficiently strong free cashflows to drive this growth. As such, we expect an increase in customer counts, from a low base, on the back of improved trading hours and increased store count, translating to increased revenue of US$289.5mn for FY23. In FY22, Simbisa restaurants served over 52.3mn customers, up 28.6% from the prior year. Of concern are high tax rates which are expected to continue weighing down margins thus negatively impacting profitability. A debt restructure was enacted during FY22 to manage the impact of exchange rate volatility and prescribed lending rate increases in Zimbabwe. With the advent of an increasingly strong US$, we expect local currency risks to persist in the region posing a downside risk.

The Reserve Bank of Zimbabwe delivered the 2023 Monetary Policy Statement amidst high expectations from the business community for concessions to be made on key issues. 2022 saw periods of resurging monetary instability as the exchange rate continued to deteriorate and global headwinds filtered into the domestic economy. As a result, the central bank doubled down on its contractionary measures to offset pressures with the main policy rate being raised to 200%. The tight monetary policy stance allowed the Bank to anchor inflation and exchange rate expectations as the economy responded ending the year in a disinflation trajectory. The Central Bank also reported that household spend in the CPI basket is now 76.56% skewed towards foreign currency transactions whilst expenditure in local currency constitutes the rest of spend. As such, blended inflation was adopted in the month of February as the new metric for measures price changes in the economy. Consequently, month on month inflation came in at -1.6% for the month of February 2023. Using the same new metric, annual inflation was reported to have moderated from 102% in January 2023 to 92% in the month under review owing to suspected price decreases of some commodities.

The ZSE market cap currently stands at ZWL$2.29tn (circa US$2.26bn at the alternative rate), a discount of 39% to the historical average of US$3.70bn, suggesting buying opportunities on the bourse. While fundamentals speak to a bullish stock market in 2023, in 2022 we observed a dislocation between fundamentals and the ZSE stock market performance. Tight monetary policy changes coupled with regulation of the bourse resulted in the exchange registering -59% real returns in 2022 (smoothened for Simbisa and National Foods). The uncertainty around money supply developments in 2023 propels us to lean more towards defensive stocks that have strong dividend policies in case capital gains remain subdued. Based on counters under IH universe, median dividend yield currently stands at 2.6%. Presenting higher dividend yields is Axia (7.5%), Delta (5.4%), and National Foods (4.0%). In the case of economic turbulence, consumer staples exhibit the most resilience to tough operating environments. Consumer facing stocks are currently trading an average P/E (+1) of 5.62x versus regional peers at 16.50x and EV/EBITDA (+1) of 4.12x versus regional peers at 10.23x suggesting buy opportunities. Mining companies also present buying opportunities trading at average P/E (+1) of 4.25x versus historical average of 13.13x and EV/EBITDA (+1) of 4.72x against historical average of 4.72x. On the VFEX, we have been observing capital appreciation of counters migrating from the ZSE due to exchange rate disparities. We are of the view this prevailing situation will be sustained at least in the short-term presenting an opportunity to register gains for companies moving from the ZSE onto the VFEX. Amidst economic uncertainty in the wake of an election, the Karo bond which is offering a coupon rate of 9.5% seems to be a good investment, also offering another asset class for diversification.

The trading environment in the first half of the financial period was characterised by exchange rate volatility resulting in the resurgence of hyperinflation. Challenges faced by OK Zimbabwe include difficulties in product pricing due to run-away inflation and unfavourable trading terms from suppliers. Some manufacturers in the period also prioritised supply into channels offering hard currency straining supply for formal retailers. Contractionary measures implemented by the Reserve Bank affected aggregate demand for goods and services by consumers and as a result, volumes fell from a marginal gain of 1% in the first quarter of the company’s financial year to an aggregate decrease of 8.23% to 1H23. Re-pricing of interest rates also resulted in a significant increase in interest burden for the company which currently had increased leverage due to ongoing capital expenditure campaigns. Whilst no new stores were opened within the period, the group invested in face lifts on existing stores to improve competitiveness within the market. Margins for OK Zimbabwe within the period registered lower due to a spike in operating costs. EBITDA margin for 1H23 decreased from 8% at the start of the period to 6.5% whilst Net Margins eased from 3.9% to 2.3%. OCF/EBITDA closed the period at 24.3%. OK Zimbabwe re-iterated the adverse effect of the IMTT tax on its business with effective tax rate at the end of the period standing at 38%. Nevertheless, the company remained in a profitable position to 1H23 and subsequently declared a dividend of USc0.13 payable on or about the 20th of January. At current levels, this translates to a dividend yield of 2.81%.