Simbisa Brands’ latest financial results were overshadowed by news of its intention to move its listing to the USD-denominated Victoria Falls Stock Exchange (VFEX).
Simbisa is the largest quick service restaurant business in Zimbabwe and Kenya with a growing footprint in other sub-Saharan countries such as Zambia, Ghana, Mauritius and Namibia.
The business has established itself with brands such as Pizza Inn, Chicken Inn, Nandos, and Steers. The volatility of the ZSE, characterised by a USD gain between January and April 2022 of 48% that was followed by a real loss of 57% from May to September, has fuelled listed companies’ preference for the less volatile VFEX that will also allow them to raise funds in a stable currency.
The current volatility on the ZSE stems from policy inconsistency whose far-reaching effects have stifled the development of local capital markets as evidenced by the indefinite delay of a REIT listing. If the move is signed off by all stakeholders, Simbisa will become the third listing to move from ZSE to VFEX after BNC, Padenga, and SeedCo International. Several questions have been raised concerning the move, and we unpack them below.
What are the implications?
Simbisa’s shareholder profile, like any other listed company, comprises long-term and speculative investors, and these two groups will likely hold opposing views regarding the move. Long-term investors typically invest for more than five years and some in perpetuity for strategic reasons. Speculative investors often have a short-term horizon instead and focus more on temporaneous profit opportunities highlighted by technical signals.
Long-term investors who invested in the business when it unbundled from Innscor in 2015 made the investment in USD, and the prospects of being able to cash out in the future in the same currency would be most welcome. Speculative investors, on the other hand, thrive on the volatility of stock prices and the illiquidity of the VFEX – which we will unpack shortly – waters down the prospects of making a quick buck from short-term tactical investment strategies.
We also note another group of investors who invested in Padenga and SeedCo International before their migration for the purposes of acquiring a USD asset through ZWL. We opine that the growing number and quantity of dividends being paid in USD by ZSE-listed companies and the introduction of gold coins could make them indifferent to investing in Simbisa for the same reason.
Between March and September 2022, 10 companies on the ZSE declared USD dividends with a combined total in excess of US$15 million.
Will this improve liquidity?
To answer this question, we look at the successes of Padenga and SeedCo International at drawing liquidity on the VFEX. Before Padenga migrated to VFEX, the counter traded a USD equivalent of US$23 632 in daily turnover, on average, between January 2018 and July 2021. The counter’s average daily turnover has since declined to US$11 820 since its move to VFEX. We note a similar trend with SeedCo International, whose average daily turnover declined from an equivalent of US$4 615 on the ZSE to US$1 127 since it migrated to the VFEX.
We cite low confidence in the formal banking channels as a major hindrance to VFEX turnover and trading activity. The stench of real losses incurred after the change in currency in 2009 and 2019 lingers and continues to deter especially retail investors from moving their hard-earned foreign currency from under the mattress and into formal banking channels. This has subsequently seen very low interest in the VFEX from this type of investor.
Does this set a precedent?
What sets Simbisa apart from other VFEX listings is that the company is the first business with most of its revenues generated in Zimbabwe but it makes a substantial amount of sales from regional operations. An approval of the migration of a business such as Simbisa will likely set a precedent for several businesses that are driven by local operations. Companies such as Tanganda Tea, Ariston, Hippo Valley and Delta could easily make a case for a move to VFEX should they want to do so in the aftermath of Simbisa’s migration.
Should investors stay put?
The short answer is yes. Simbisa 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 567 outlets in nine different countries with over 75 additional outlets scheduled to be opened in FY23. Simbisa is one of the few listed businesses that extensively tap into the pervasive informal sector which has been doing well if proxied by artisanal gold miners’ activity. The resumption of economic activity following the relaxation of Covid-19 restrictions in SSA has also driven the rebound in customer spend and traffic. We remain optimistic about VFEX in the long-term and we pin this on strides made by the exchange to accommodate retail investor activity through VFEX Direct. - Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854.