Corporate Finance Research Trading STOCKBROKERS ZAMBIA LIMITED from recovery to growth 28 TH FEBRUARY 2018 Evelyne Nambeye enambeye@sbz.com.zm +260 211 237448
The LuSE All-Share Index ( LASI ) ended 2017 with a 26.84% increase in Kwacha terms and a 25.95% increase in USD terms reversing the 26.83% Kwacha drop and 19.01% USD decline recorded in 2016. This is largely attributed to 11 of the 22 listed firms on the bourse recording capital gains and the improved macroeconomic conditions the country experienced in 2017. Overview 2017 was a year of economic revival for Zambia following the economic trials that affected the country during the second half of 2015 and throughout 2016 (i.e. poor harvest, power shortage, declining copper prices, inflationary pressures, and a volatile currency). The increase in copper prices by 30.94% in 2017 compared to 17.6% in 2016; improved agricultural output and hydro-electricity generation following a heavier and longer 2016-17 rainy season; deceleration of inflation; a stable currency and the Bank of Zambia s ( BoZ ) expansionary monetary policy stance have all played a significant role in cultivating economic activity and improving the country s economic outlook in the short to medium-term. This improvement is reflected in the announcement by the rating agencies Moody s and Standard & Poor s revising the outlook on Zambia from negative to stable on January 26 th, 2018 and August 26 th, 2017 respectively. Monetary Policy was Loosened With money market inflation remaining within the BoZ medium-term inflation target of 6-8% and well below the 2017 target of 9.0%, BoZ eased its contractionary monetary policy stance by taking the following actions: i. In February 2017, the Monetary Policy Committee ( MPC ) reduced the Monetary Policy Rate ( MPR ) to 14.0% from 15.5%; restored the Overnight Lending Facility ( OLF ) Rate to 600 basis points from 1,000 basis points above the MPR; and reduced the Statutory Reserve Ratio ( Reserve Ratio ) to 15.5% from 18.0%; ii. In May 2017, the MPC lowered the MPR to 12.5% from 14.0% and reduced the Reserve Ratio to 12.5% from 15.5%; iii. iv. In August 2017, the MPR was further reduced by 150 basis points to 11.0% from 12.5% and the Reserve Ratio was also further reduced by 300 basis points to 9.5% from 12.5%; and In November 2017, the MPR was again lowered by 75 basis points to 10.25% from 11.0% and the Reserve Ratio was also lowered by 150 basis points to 8.0% from 9.5%. The above measures taken by the MPC were aimed at reducing the cost of BoZ lending to commercial banks and stimulating the increase in commercial bank liquidity thus resulting in a decrease in interbank and treasury bill ( T-bill ) rates. Despite this, bank lending rates remain generally high, with the average nominal lending rates only marginally declining from 29.2% in December 2016 to 24.6% in December 2017. The high lending rates continue to restrict private sector credit growth, especially for small and medium enterprises ( SME ), and in turn stifle economic growth. Top 5 Gainers (2017) Opening Closing % change % change Company Price Price (ZMW) (USD) LASI 4,200.30 5,327.58 26.84% 25.95% ZANACO 0.29 0.97 234.48% 232.14% AELZ 6.85 18.49 169.93% 168.04% CEC 0.87 1.44 65.52% 64.36% LAFARGE 3.89 6.25 60.67% 59.54% SCZ 1.73 2.77 60.12% 58.99% Top 5 Losers (2017) Opening Closing % change % change Company Price Price (ZMW) (USD) NATBREW 13.00 12.50-3.85% -4.52% MFIN 3.24 3.08-4.94% -5.60% ZSUG 3.00 2.70-10.00% -10.63% PRIMA-RE 2.90 2.50-13.79% -14.40% BATZ 2.45 2.00-18.37% -18.94% BATZ 5.66 2.45-56.71% -57.02% Source: BoZ/LuSE Page 1 of 6
Money Market Perceived as Stable The performance of the Zambian Kwacha against the United States Dollar during the first seven months of 2017 was nothing short of outstanding. The Kwacha began the year at ZMW/USD 9.92 and ended the first seven months of the year at ZMW/USD 8.91 representing an appreciation of approximately 10.45%. However, the Kwacha came under pressure between August 2017 and November 2017, depreciating by 13.06% thus reversing the gains recorded between January and July 2017. The depreciation was due to a 28.8% decrease in copper export volumes as a result of a 5.8% drop in copper production due to Kansanshi Copper Mine, Zambia s largest copper mining company, closing one of its smelters for maintenance. The weakening market sentiment following delays in concluding a programme with the IMF and continued challenges associated to the Government s fiscal and debt position also attributed to the depreciation of the Kwacha. The Kwacha ended the year at ZMW/USD 9.99, recording a marginal depreciation of 0.71% for the year. Steady GDP Growth on Strong Fiscal Consolidation Despite the improved macroeconomic conditions (i.e. bumper harvest, improved electricity generation, inflation remaining in the single digits and the easing of monetary policy), overall economic growth has been constrained. This is attributed to the poor performance of the services, mining and construction sectors and decreased levels of public investment compared to the 2013-2015 period and the high cost of bank borrowing despite the reduction in the MPR and T-bill rates (World Bank Zambia Economic Brief: Issue 10). The World Bank has thus revised 2017 GDP growth downwards from 4.1% to 3.8%, which is a modest improvement from the 2016 GDP growth of 3.6%. GDP growth is projected to bolster to 4.3% in 2018 and 4.7% in 2019. The medium-term GDP growth is underpinned by: Improved performance in the services sector; Continued increases in copper prices; An increase in copper production from new and refurbished mines; Inflation remaining well within the medium-term target of 6-8%; and The continued easing of monetary policy by BoZ supported by a strong fiscal consolidation. On the global front, 2017 global growth was recorded at 3%, its strongest rate in 6 years. It is projected to marginally increase to 3.1% in 2018 as emerging market and developing economies continue their road to recovery which will more than offset the slight moderation in advanced economies (The World Bank Global Outlook: Broad-Based Upturn: Will it Last? January 2018). Source: BoZ Source: World Bank Equity Market Review for 2017 2017 saw the LASI gain by 26.84% in local currency terms and 25.95% in USD terms. The manufacturing sector gained 18.95% pulling back from its 2016 loss of 39.03% as AELZ, BATA, LAFARGE and ZAMBREW gained 169.93%, 2.05%, 60.67% and 10.32% respectively. AELZ s impressive gain is attributed to an outstanding dividend declaration of ZMW 2.40 per share. The resulting dividend yield ( DY ) of 35.29% acted as a catalyst for price formation of the stock. The banking sector had an astronomical year gaining 79.57%, reversing its 2016 loss of 33.35%, as SCZ and ZANACO gained 60.12% and 234.48% respectively. BoZ easing its contractionary Page 2 of 6
monetary stance attributed to the banking sector performance. The agricultural processing sector recorded a gain of 1.85%, compared to its 2016 loss of 28.74%, as ZAMBEEF gained 20.00% whereas ZSUG shed 10.00% of its value. The investments sector gained 0.91% due to CCHZ recording a gain of 33.33%. ATEL, PUMA and CEC gained 7.69%, 17.65%, and 65.52% respectively where as BATZ, PRIMA RE, and MFIN declined by 18.37%, 13.79% and 4.94% respectively. On the quoted-tier, CEC Africa ( CCAF ) recorded a 28.57% price decline. CCAF began trading on 3 rd November 2017 at ZMW 0.59 and ended the year at ZMW 0.40. CCAF was quoted on 29 June 2017 following its demerger from Copperbelt Energy Corporation Plc ( CEC ) in December 2016. The road to achieve the required LuSE minimum spread continued with ZAMEFA, PUMA, ZSUG and AELZ all achieving compliance during the year. ATEL, SCZ, ZAMBREW, PAMODZI, ZCCM-IH, and BATZ are yet to comply with the minimum spread. LuSE Switches to New Automated Trading System The LuSE launched its new automated Trading, Clearing and Settlement System on 18 December 2017. The advanced and innovative system will enhance and promote efficiency in trading, clearing and settlement on the LuSE. Total equity turnover for the year was up 333.45% from ZMW 276.3m to ZMW 1.2bn (or c. USD 26.8m to USD 125.4m) in 2017. This was the largest turnover ever recorded on the LuSE, slightly surpassing the ZMW 1.1bn recorded in 2014. Volumes traded also increased by 710.48% from 105.2m shares to 852.2m shares. Market capitalisation on the LuSE closed the year at ZMW 62.4m (USD 6.2bn), compared to the 2016 close of ZMW 57.7Bbn (USD 5.8bn). Average daily volume and turnover traded was 3.5m and ZMW 4.9m, respectively, versus the 0.42m and ZMW 1.1m recorded in 2016. The foreign participation by turnover value was 34.28% of the total turnover, down from the 53.62% recorded in 2016. The turnover ratio was recorded at 4.24%, substantially larger than the 0.92% recorded in 2016 and the market PER closed at 10.07x compared to the 13.39x recorded in 2016. ZANACO was the most active stock in terms of turnover and volume, contributing 54.01% and 80.44% of the total market turnover and volume. This was due to Rabo Development B.V. ( Rabo ) transferring its 45.59% (658.2m shares) shareholding in ZANACO to Arise B.V. ( Arise ) on 30 June 2017 in a shareholder restructuring via the Lusaka Securities Exchange ( LuSE ). NATBREW came in second contributing 10.53% and 5.20% of the total market turnover and volume. The NATBREW trading activity was attributed to Heinrich s Syndicate Limited selling 70.00% of its shareholding to Delta Corporation Limited on 26 December 2017. Source: S&P/LuSE 10 Most Active Stocks by Volume Company Vol % of Total ZANACO 685 575 531 80.44% NATBREW 44 310 197 5.20% SCZ 32 511 489 3.81% ZAMBEEF 27 622 980 3.24% ZAMBREW 12 727 078 1.49% PUMA 9 734 336 1.14% ZSUG 7 701 553 0.90% LAFARGE 7 351 552 0.86% BATZ 7 077 308 0.83% CEC 3 596 922 0.42% 10 Most Active Stocks by Turnover (ZMW'000) Company Turnover % of Total ZANACO 647 224 599 54.01% NATBREW 126 206 968 10.53% ZAMBREW 81 473 813 6.80% ZAMBEEF 75 650 818 6.31% SCZ 65 059 180 5.43% ATEL 64 226 677 5.36% LAFARGE 24 914 682 2.08% ZSUG 20 595 039 1.72% REIZ 19 249 505 1.61% ZAMEFA 15 919 254 1.33% Page 3 of 6
No New Listings There were no new listings on the main board or the Alternative Exchange Market ( Alt-M ). The Alt-M was launched in 2015 to facilitate long term financing for private sector investment and to encourage transitionary participation by emerging corporates that have not yet met the listings requirements for the main board. Market Outlook for 2018 Zambia is set to continue its path to economic recovery in 2018. Given the improving macroeconomic conditions, domestic GDP growth is projected by the World Bank at 4.3% in 2018 versus the Sub-Saharan Africa ( SSA ) GDP growth estimate of 3.2% and an increase from the estimated 3.8% for 2017. GDP growth is projected to further increase to 4.7% in 2019 versus the SSA GDP growth rate of 3.5%. The projections assume continued easing of monetary policy supported by a strong fiscal consolidation; increased copper prices and production; improved performances in the services sector and BoZ containing inflation within its 6-8% medium-term target. Debt Capacity Concerns There is mounting pressure on the Government to take appropriate actions to address the fiscaldebt problem. Total public sector and publicly guaranteed debt has increased from 35.6% of GDP recorded in 2014 to 60.5% of GDP recorded at the end of 2016 (World Bank Zambia Economic Brief: Issue 10). As at August-end 2017, total public debt (external and domestic) was at 47% of GDP (or c. ZMW 114.9bn equivalent to US$12.45bn) (Zambia 2018 Budget Address). The World Bank and IMF debt sustainability analysis has put the country at high risk of debt distress as Zambia is accumulating too much debt at an increasing rate. To address the need of debt management, the Ministry of Finance has initiated a Medium- Term Debt Management Strategy ( MTDS ) which outlines measures that will aim to reduce the rate of debt accumulation and achieve a desired composition of the debt portfolio which captures Government s risk and cost preferences (Zambia Medium-Term Debt Strategy (2017 2019)). Such measures include altering the current 45%:55% domestic external debt mix to 60%:40%; reducing foreign currency denominated debt; prioritising concessional and semi-concessional financing; ensuring public debt is maintained at sustainable levels over the medium to long-term; and communication with market participants and stakeholders regarding the MTDS and its objectives. A Role for Capital Markets? Furthermore, Government has recognised the need to develop and utilize the capital markets as an alternative to banking sector finance. Capital markets are a cheaper source of raising long-term financing for the private sector and State-Owned Enterprises ( SOEs ). Government has yet to outline the strategies it will employ to address the underdeveloped and underutilized capital markets. There is a need for Government to implement strategies that will, on one hand attract private sector companies and SOEs listings for development of the capital market, and on the other hand, attract and retain listings for the commercial benefits associated with listing. LuSE Market Free-Float Compliance 2018 is set to be another interesting year on the LuSE as it pursues to ensure the remaining six non-compliant firms (ZCCM-IH, Airtel, Stanchart, ZAMBREW, BATZ, and Pamodzi) comply with the LuSE minimum spread requirement. It is highly unlikely that the local market alone will be able to absorb the large quantity of shares given the small number of active institutional and retail investors. However, if the pricing is right, we can expect strong participation from foreign value investors looking to cash in on the continued upswing of the markets in the medium-term. Top Stock Picks for 2018 The continued easing of monetary policy by BoZ will continue to boost the performance of the banking sector but there is a risk the sector will become overvalued as investors rush to participate in the continued upswing of the sector. Lafarge will again have to navigate a difficult year ahead as there are possibilities of additional new players entering the cement market. Of our stocks under coverage, our top-3 picks are: AIRTEL This stock is an attractive choice for investors who enjoy a healthy dividend yield. Page 4 of 6
The company recorded a 2017 capital gain of 7.69% and there is still room for the stock to record capital gains as it is currently trading at a 30.35% discount to its current market price. Our comparative valuation currently values the stock at ZMW 45.62 vs a current price of ZMW 35.00, with the stock trading at a PER, PBV and DY of 15.88x, 7.52x and 11.43% respectively vs the respective PER, PBV and DY peer averages of 19.16x, 7.03x and 3.29%. PUMA Puma had a strong performance on the LuSE in 2017 recording a capital gain of 17.65%. The stock has strong fundamentals and strong potential for growth with oil prices forecasted to increase to $70 a barrel in 2018. We value PUMA at ZMW 1.87 vs. a current price of ZMW 1.00, with the stock trading at a PER, PBV and DY of 7.36x, 0.85x and 5.40% respectively vs the PER, PBV and DY peer averages of 13.58x, 1.58x and 2.13% respectively. ZAMBREW Zambrew is set to have an exciting year ahead on the LuSE. The oncoming acquisition of the non-alcoholic ready-to-drink business segment of the Company by The Coca- Cola Company will ultimately be beneficial to Zambrew as it is fundamentally a beer company. This will allow Zambrew to focus on and continue to grow its core business, the beer business, and thus continue to dominate the beer market in Zambia resulting in healthy shareholder returns. Our comparative valuation currently values the stock at ZMW 8.88 vs. the current price of ZMW 6.84 with the stock trading at a P/BV of 3.09x vs a peer average of 13.61x. /Airtel Annual Report 2014-2016 /Puma Annual Report 2016 /Zambrew Annual Report 2017 Page 5 of 6
REPORT BY: STOCKBROKERS ZAMBIA LIMITED ANALYST: Evelyne Nambeye EMAIL: enambeye@sbz.com.zm For more information, please refer to our website www.sbz.com.zm INVESTMENT CAUTION Share price prices may rise and fall investors should always seek professional advice before investing in shares. CONTACT US: Email: info@sbz.com.zm Telephone: +260 211-227303/ 232455/ 232456/ 236614 Fax: +260-211 224055 Stockbrokers Zambia Limited shall not be held liable for any losses resulting from this information. It is provided for information purposes only. Page 6 of 6