Shares trading at a huge discount

Business Reporter
AS stock prices continue to sag on the Zimbabwe Stock Exchange (ZSE), there is growing concern that the valuation of most companies is markedly below their intrinsic values, which means that most of the counters are trading at a huge discount. Market experts such as the British-born American economist Professor Benjamin Graham – professional investor popular for the Benjamin Graham rule — regarded any stock that is priced at least at a third below its intrinsic value as an undervalued stock.

Usually, the intrinsic value of a stock can be determined by dividing the price of a stock by the company’s earnings per share (EPS), which naturally produces the Price to Earnings ratio (P/E ratio). Value investors often like the P/E ratio to be as low as possible.

Currently, the total market capitalisation of the ZSE, which is the total value of the shares in issue for all the 60 tradable stocks, stands at $3,4 billion, which is $2 billion less than its value in 2013 when the ZSE’s market cap peaked at $5,96 billion in June 2013. Market watchers said last week the heavy discount in stock prices is a sign that investors expect prices to fall further.

“When a company is priced far below book value, often the market is expecting fundamentals to continue to deteriorate to an extent where the intrinsic value of the company shrinks beyond current book value,” said Mr Ray Chipendo, head of research at Emergent Capital Management.
“The market is suggesting that though the company is undervalued today, its value may be diminishing with time.”

There are many companies that seem to be undervalued. Hospitality group African Sun Ltd, which manages a broad portfolio of properties such as the 5-star Kingdom and the Elephant Hills Hotel in the Victoria Falls, Holiday Inn hotels in Harare, Mutare and Bulawayo, is valued at $21,5 million. But, according to the company’s recent financials, its assets currently stand at $42 million.

Similarly, Dawn Properties, which owns the hotel properties leased by African Sun, has assets worth $89 million, but the market puts its value at $42,1 million. Also, Zimbabwe Newspapers (Zimpapers), the country’s biggest integrated media house, reported in its interim financials ended June 30, 2015 that that its total assets were at $42 million.

However, its market capitalisation presently stands at $5,6 millon. It is the same pattern in most listed companies where the market values them at half the price of assets on their balance sheets. “Market-based valuation can certainly not be the only way to look at the value of the company,” said economist and Zimbabwe National Chamber of Commerce (ZNCC) chief executive officer Mr Takunda Mugaga.

“The upside risk is derived from the price earnings matrix, profitability trends, as well as looking at the economic fundamentals, which include potential of the industry, economic trends as well as the market structure of the industry.” Experts say there is a disconnect between the broader economy and general activity on the country’s exchange.

While the local economy grew 3,4 percent last year, the ZSE tumbled more than 20 percent in the same period. “The market tries to guess future economic growth and factors it into current stock prices.

“In our view, the beaten-down prices we see today indicate that the market is expecting the economy to continue performing badly.
“The fall in prices will continue until the market has reason to believe the economic slowdown has hit the bottom floor,” explained Me Chipendo.

The ZSE’s total tradable value represents just 34 percent of the country’s $10 billion national gross domestic product (GDP). Not surprisingly, foreign investors have had to buy into local firms at a premium. Last year, Atlas Mara paid US82 cents per share when it bought into ABC Holdings, which was significantly more than the US27cents that was quoted for the share price at the time

Added Mr Chipendo: “In extreme cases such as these, we would argue that a more representative price is what private investors are willing to pay to gain majority shareholding for control or to de-list a company. “It is little wonder then that all buyout offers have been at premiums in excess of 70 percent, from TA Holdings Ltd to Dawn properties.”.

The local bourse has continued tumbling this year. Industrials are down more than 17 percent for the year, while the mining index has dropped 63 percent since January. The country’s economic growth estimate has been revised downwards to 1,5 percent from the previous 3,5 percent forecast. Finance Minister Mr Patrick Chinamasa is however optimistic of economic growth in the medium-term.

He told Parliament on Tuesday that the “economy was on a rebound.”