As we reach the end of our economic outlook series, we conclude with an equity strategy for long term investors for 2023.
We remind the reader of the following overarching themes in the year; (i) strong global recession expectations, (ii) a tight hold on ZWL by monetary authorities, (ii) chronic power outages in Zimbabwe and the region, and (iii) the upcoming 2023 presidential elections.
These expectations form the building blocks of our recommended investment strategy, which we outline below.
The ethos of the investment strategy hinges on addressing the risks associated with the above-mentioned themes, hence it focuses on stocks with one or more of the following characteristics; (i) manufacturer of defensive consumer-facing products, (ii) companies listed on the VFEX, (iii) strong near-cash distribution channels, and (iv) good alternative energy sources.
We identify four stocks that exhibit one or more of these characteristics, namely Innscor Africa, Delta Corporation, Simbisa Brands, and Hippo Valley Estates. We delve into the fundamental case of each of these companies below.
Innscor Africa
Innscor effortlessly makes the list of top stocks for the year because it exhibits all the characteristics we mentioned above.
The business is a major FMCG player in Zimbabwe with an established footprint in the value chain of consumer staples in the country.
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Like many manufacturing companies, Innscor’s distribution channels extensively tap into the near-cash informal sector.
In addition, seven of the group’s companies have adopted solar power in a bid to allay energy-related risks. Innscor’s listing is also in the process of moving to the VFEX, a bourse we believe will see an increase in liquidity because of increased listings and USD nostro in circulation in the last six months.
We estimate a target price of US$1,36 per share and this indicates potential upside of 58% from its current USD-equivalent price of US$0,86.
Simbisa brands
The VFEX-listed stock remains a counter of interest because of its unique exposure and solid fundamentals.
The company is the only stock that offers exposure to the quick service restaurant (QSR) industry in Zimbabwe and sub-Saharan Africa.
The food service industry in Africa is largely dominated by quick service restaurants and investors who seek exposure in this market are limited to McDonald’s, Grand Parade Investments, Yum! Brands, Domino’s Pizza, and Simbisa Brands.
However, given the local investing community’s inability to invest beyond borders and the fact all these listings (excluding Simbisa) are in South Africa or the US, Simbisa remains the only option for them.
In addition, Simbisa is a fundamentally solid business with strong growth potential.
The business currently boasts 611 outlets in 9 different countries with 180 potential projects identified over the next two financial years by management.
We estimate a bullish fair price of US$0,62 on the back of strong USD generation capacity underpinned by its growing footprint in the local informal market, and this points to potential upside of 29%.
Delta Corporation
The resilience of the dollarised informal market sector has been a key driver to Delta’s sustained volumes growth amid contractionary measures in place.
Delta’s distribution channels extensively tap into near-cash markets, and we assert that this has driven its 70%+ FX sales contribution. We also add that electioneering activity will complement demand at least until the second quarter of Delta’s F24 year. However, we identify production risks associated with power outages that could offset the projected immediate benefits of capacity expansion locally.
Extended power outages in South Africa are also likely to dent the fruits of the group's expansion drive into the region but we maintain that these obstacles will be short term in nature. We peg Delta’s fair price at US$1,03, which indicates potential upside of 93% from the current price.
However, unlike Innscor and Simbisa, the stock’s price on the ZSE continues to fight price weakness because of a tight hold on ZWL.
Hippo Valley Estates
Despite a decline in Kenya-bound exports, Hippo Valley Estates’ overall sales have declined marginally because of an increased uptake of sugar locally by companies such as sugary beverages manufacturers.
We also add that the business’s sales are mostly invoiced in the US dollar and limits exposure to volatile policy changes around the ZWL.
Although not as visible as the other top picks, the company leverages from the above companies through strong downstream sales.
We value the business at US$0,76 which indicates strong potential upside of 77% from its current USD-equivalent price of US$0,43. We also cite an injection of ZWL liquidity in the economy as a trigger that will drive the market price closer to our target price.
We also add that these stocks have common positives that are worth mentioning. These companies operate in markets with limited price controls, and this exempts them from challenges that regulated players are facing.
For example, Econet’s potential upside has been limited by the staggered and sub-inflationary tariffs adjustments which are subject to regulatory approvals by the Postal and Telecommunications Regulatory Authority of Zimbabwe while export earnings by several companies are converted at the official rate vis-a-viz a parallel market-driven cost base. These top picks are also regarded as blue chips by many, and they are consistent dividend-paying stocks.
Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854.
