How deep are Zimbabwe’s capital markets?

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Happiness Zengeni and Taurai Mangudhla
Zimbabwean companies lack access to predictable capital-market funding at a large scale and as such are increasingly looking towards external markets. 

Companies listed on the Zimbabwe Stock Exchange have raised nearly half a billion dollars for capital projects since dollarisation in 2009, an amount considered small versus the overall needs to recapitalise industry.

The funds were raised through initial public offerings, rights issues, convertible loans and private placements, according to data from the ZSE.

However, in most instances, capital raises on the ZSE have been poorly supported with the only successful programme being the Econet rights issue which had an over 50 percent subscription rate from shareholders.

While the ZSE was the best performing exchange in the first half to June, 2017, its yield has not been enough to attract foreign investors and to pull companies towards it, possibly implying that structural deficiencies still exist within the markets. Chief among the major concerns are capital controls and liquidity availability to remit dividends.

Generally, the reasons advanced are that as businesses seek to expand their footprint, Zimbabwe’s capital markets are not deep enough for firms to raise the required capital, moreso in this environment where the country is not able to provide sufficient foreign currency.

Zimbabwe has had a prolonged narrative of perceived country risk and this can only be overcome by more innovative promotional campaigns aimed at selling the capital markets as vibrant, sectorally diverse and dynamic. What dominates are narratives of poor regulatory decisions and lack of progressive leadership.

In recent weeks, two companies have come out to notify of their intentions to list on external markets, ostensibly to gain access to markets with bigger fundraising capacity.

ZSE listed seed producer Seed Co Limited (Seed Co) in June issued a cautionary,   advising its shareholders that the company’s board of directors had approved, subject to shareholder and regulatory approvals, a proposal to partially unbundle and list its external operations of the group on a regional stock exchange to raise capital for expansion and to fund growth opportunities.

Seed Co renewed the cautionary earlier this month, insisting the move was driven by the need to raise capital for expansion and fund growth opportunities. Well placed sources say Seed Co is set to list on the Botswana Stock Exchange.

Brainworks Limited (Brainworks) — a Mauritius registered, investment holding, consulting and advisory company, focused on Zimbabwe and select markets in sub-Saharan Africa — has also made its submission to the Johannesburg Stock Exchange (JSE) for its listing in August 2017.

Subject to Brainworks achieving the requisite spread of public shareholders required by the JSE, Brainworks has been granted a listing by the JSE in the Investment Companies sector of the Main Board of the JSE from the Listing Date. Brainworks intends to raise $25 million pursuant to the Offer.

Defending its decision to list on the JSE, Brainworks said the move provides scrip on an international exchange to be used for future acquisitions and also gives investors a liquid, tradeable instrument within a well regulated environment. Brainworks said the JSE is an efficient capital market that gives access to funding from the South African capital markets to facilitate and accelerate organic and acquisitive growth.

The move is also seen as an opportunity to create awareness with prospective institutional and retail investors and “raise equity from a market that understands the Zimbabwe opportunity landscape (while) providing a gateway into Zimbabwe for international investors through an international listing”.

This week, ZSE-listed fast food unit Simbisa Brands announced plans for a secondary listing on London’s AIM market. Simbisa Brands holds franchises for Chicken Inn, Nando’s, Pizza Inn and Steers in Zimbabwe.

Zimre Holdings intends to its consolidate all regional operations under a single company called “Emeritus International” which will list on the Botswana Stock Exchange (BSE).

Zimre will hold at least 51 percent in Emeritus International. The decision to list the company on BSE will enable it to raise funds without liquidity challenges faced in the local market. The structure for the company has received RBZ approval, according chief executive Stanley Kudenga.

Emeritus International’s structure will be used as a vehicle to mobilise capital for group expansion and strengthening the regional foothold. Its regional operations include the wholly-owned Malawi Reinsurance and Zambian Reinsurance while it also has 91 percent in First Reinsurance of Botswana and Uganda Reinsurance where it holds 2,43 percent shares

Smartvest managing director  Peter Kadzere said companies are listing outside Zimbabwe   mainly to raise capital with a view to expanding their regional operations.

“Reasons advanced by both Seed Co and Simbisa are the need to raise more finance to expand their operations outside Zimbabwe. Brainworks is a private equity firm. Listing on the JSE allows them to raise capital that can be applied in Zimbabwe where it can get higher returns. The model for private equity boutiques is to raise cheaper funding globally and channel it to areas where it can get higher returns,” Mr Kadzere said.

Mr Kadzere said secondary listings are not peculiar to the above scenarios. “On our exchange we have several companies with primary and secondary listings. Examples include Old Mutual, PPC, Hwange and Meikles. What you need to appreciate is the reason for listing, which is the need to raise capital.

Depending on the level of fungibility that will be granted by the ZSE, a dual listing might create arbitrage opportunities that local investors can capitalise on,”Mr Kadzere said. While one is tempted to conclude companies listed on the ZSE are looking elsewhere because they are struggling to raise capital, Mr Kadzere said it is more to do with  the need to access capital that can be used  outside the country.

“Looking at recent Seed Co financials, the results were excellent to the extent that the company paid a once-off special dividend of 1,46 US cents per share. These funds could have been applied towards expansion of company operations in the region. However, at the present moment, banks are struggling to make external payments as nostro accounts are not funded.

“Therefore, listing on an external bourse allows the company to access foreign capital that it can easily channel towards regional operations,”Mr Kadzere said.

Furthermore, Mr Kadzere said, it enable investors to easily repatriate their dividends to their home markets. This is one of the reasons why companies opt to establish a base in Mauritius when they have an objective of expanding into the region.

MMC Capital’s research department said secondary listings also mean corporates gain more liquidity through the availability of a broad base of investors in those markets, which will be reflected positively on the share prices and hence on the value of the company.

MMC said due to the prevailing economic challenges, sourcing new capital, locally, is becoming a challenge since marginal propensity to save is very low.  “In the event that the right amount if sourced, it is difficult to fund foreign projects as local banks’ nostro balances  remain under pressure. Alternative listing will thus come in handy in diversifying the local risks since money will be raised in other markets.

“Our view is that more companies, especially those with a foreign footprint, will seek more alternative listing considering that some of their financial obligations are foreign, requiring regular cash payments. Potential investors in both countries will take advantage of undervalued stocks prices in one market which helps the flow of capital to the other market,” said MMC.

Businessman Mr Tawanda Nyambirai’s Lifestyle Holdings in 2013 delisted from the ZSE and placed all its shares into a Mauritian special purpose vehicle, TN Harlequin International (TNHI).

The decision to move to Mauritius was in 2013 already paying dividends as the export market warmed up to the group’s local manufacturing unit, TN Harlequin.

Mr Nyambirai told Business Weekly businesses that are either registering or listing outside Zimbabwe are doing so to mobilise capital from foreign investors. However, he said, experience is that unless they significantly grow earnings outside Zimbabwe, the investors won’t be forthcoming.

“Seed Co has a good case because it already has operations outside Zimbabwe, but  unless the companies diversify their earnings to a point they are significant outside Zimbabwe then it remains difficult to raise the capital,” Mr Nyambirai said.

“The other reason also is that companies (that already have a regional footprint) are looking to give people in the markets in which they operate a chance to have equity in their business,” Mr Nyambirai added.

Whatever the motivation for companies to seek listing outside Zimbabwe, the story is only unfolding and results will be seen.

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