Old Mutual shares: The new forex to move funds

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Kudzanai Sharara
A block of Old Mutual Plc (OML) shares worth over $9 million changed hands on the local bourse on Monday this week. This is the biggest deal in the counter in a very long time, but the attraction has been intensified and strong for the better part of the year.

In fact activity on the counter increased after the RBZ increased fungibility of the counter to allow 49 percent of the counter to be removed from the Zimbabwean register to the Johannesburg Stock Exchange and the London Stock Exchange where the counter is also listed.

In June 2016, the Reserve Bank Zimbabwe (RBZ) gave OML and PPC the green light to increase fungibility of their shares from 40 percent to 49 percent.

Fungibility implies that two things are identical in specification, where individual units of the commodity or goods can be mutually substituted. Since June 21, 2016, a total 3 046 294 shares were removed from the Zimbabwean register with 2 243 734 being sent to the JSE and 802 560 to the LSE. As at September 26, there were 7 381 126 shares available for removal with 2 516 801 having been removed.

Market players said most of the transactions happened in the later part of this year.
“Most of the removals from the ZSE are being conducted by foreign investors and high net worth individuals who are using the counter to repatriate funds that cannot be channelled out using formal channels,” said a local Stockbroker who requested anonymity.

“In the case of individuals, the shares are being used to fund foreign obligations such as fees for children studying outside the country.”

The result has been a rally of the OML share price on the ZSE where it is currently trading at a year-to-date gain of 309 percent as of Wednesday, higher than the overall market’s gain of 269,56 percent.

Explaining the premium
The counter is also trading at a huge premium to both the price on the JSE and the LSE. As at November 14, Old Mutual was trading at $14,3o per share on the ZSE, a 476 percent premium to the share price on both the LSE and the JSE.

The attraction on the counter can be explained in so many ways. For example investors would consider using OML as a hedge against a depreciating currency.
Local bank balances are being discounted between 60 to 70 percent on the illegal market despite assurance by the RBZ that the money in the bank is equal to hard cash.
This has prompted investors to seek refuge in shares, Old Mutual Plc included.

But does this justify the huge premium?
Are there any other attractions being considered?
The company makes the majority of its earnings outside our borders which makes them real than the earnings being made by local companies.

OML has operations in South Africa, UK, US among others which makes it immune to the economic vagaries that might befall the country.
Shareholders are therefore guaranteed a dividend or at least have assets to hold on to if the local economic environment remains dire.

But this can’t be enough to justify the huge premium, as it is way more than the discounts on bank balances.

The PE ratios among other price based valuations also do not justify the price on the ZSE. The dividend yield becomes insignificant against such a high price.
But the major attraction though is that the counter is fungible, allowing individuals to repatriate funds, long locked in Zimbabwean banks and fast losing value.

But this is also at a huge loss given the prevailing premium. Buying OML on the ZSE at $14,30 and selling at $2,48 means taking an 82 percent loss.

This is almost equal to buying US dollars from the illegal market where they are being sold at a 70 percent. But at least buying shares is not illegal.

Conduit for inward flows
The counter is, however, not only attracting outward removals as an equally bigger number of OML shares have also been brought into the country.
As at November 14, 2017 the country had received 4 326 430 shares with 2 677 286 coming from JSE and 1 649 144 from the LSE. The figure is from mid-2016 when the RBZ increased fungibility to 40 percent to 49 percent.

Analysts believe that given the huge premium the counter is currently trading at, investors and individuals with free funds are choosing to bring in their investments not in hard currency but in form of OML shares.

The attraction here is that once the shares are brought into the country and sold on the ZSE they immediately gain a premium of almost 500 percent.
As much as there is talk of loss of value for the returns which will be deposited in local banks, the discount on bank balances is still very low compared to the premium gained.

Bank balances are currently being discounted at 60 to 70 percent against hard currencies. The premium on the local bourse is also cushioning those who want to bring in funds for investments in building houses against increased prices where the cost of products has gone up quite significantly. In other words, the premium is helping maintain value for investments.

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