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Still stumping for the thesis that Zimbabwe’s stock market is undervalued, John Legat, CEO of Imara Asset Management, “noted that in the third quarter of 2010 foreign buying jumped to 63 percent of all activity on the stock market compared to 29 percent the previous period, a sign of attitudes changing among those running frontier Africa investment funds.” 

Legat made headlines earlier this month when he announced his support for a flat tax regime in lieu of the current proposed revisions (supported by KPMG tax director, Steve Matoushaya) which would incorporate a residence-based system meant to tax all Zimbabweans for income earned outside the country, as well as that earned locally.  “The net result of low tax rates, if successful, will be immigration and a rising population which will immediately add to consumer demand, investment in new businesses and a boost for the construction industry as housing investment rises.  That in itself will lead to a growing tax base,” argued Legat.  “In Russia, the tax system was too complicated and tax rates were high.  In 2001 President Vladimir Putin introduced a flat tax of 13 percent, that rate being applicable to all personal income.  He reduced corporation tax from 35 percent to 24 percent.  In just three years, his tax reforms had resulted in a significant increase in government revenues and a reduction in the informal economy.”

In sum, Legat concluded, a flat tax would not only encourage a return migration, but it would incentivize the current informal sector.  The net result, he opines, is less bureaucracy and higher after-tax incomes–which in turn would further fuel P/E ratios and larger receipts.

“For a country like Zimbabwe, which is starting with a clean [post hyperinflation] slate, rising global taxation provides a great opportunity to attract skills back to the country. In very simple terms, if Zimbabweans living in South Africa are paying 40 percent in income tax at the top band, 15 percent provides an attractive incentive to relocate back to Zimbabwe.  Furthermore the informal sector will slowly be encouraged to join the formal sector, especially where good policing can discourage underhand/illegal dealings . . . a lower tax rate [will] also result in higher after-tax income and hence higher disposable incomes, encouraging greater consumption that would translate into higher value added tax receipts.” 

The following currently appears September’s Business Diary Botswana.  Given the magazine’s opening of a second office in Harare, I thought a focus on Zimbabwe, and also a specfic player (Delta Corp.) in its beverages (manufacturing and distribution) and agro industrial sectors might be apropos:

Reiterating its earlier assessment that Zimbabwe’s [formal] economy is worth somewhere between $8-$10bn (nominal GDP), Imara Asset Management, a unit of Gaborone, Botswana-based Imara Holdings Ltd., opined in August that the country’s stock market value looked “cheap.”  The Zimbabwe Stock Exchange re-opened in February 2009 after closing in November 2008 at the height of the country’s hyperinflation-fueled devestation.  However, the exchange only opened to 79 listed companies with a market capitalization of roughly $3bn, down from roughly $11bn in 1998.  Imara CEO John Legat’s proclamation flies in the face of valuations by both the International Monetary Fund (IMF) and Tendai Biti, Zimbabwe’s Finance Minister, each of which pegged the country’s economy at roughly $5bn in size within the past year.  “We find it hard to understand why both the IMF and government are being as cautious as they are,” Legat told Bloomberg.  “Their views give a sobering view of the country, rather than an upbeat and exciting outlook for a country barely in its second year of reform.” 

Zimbabwe’s economy, which the government estimates contracted by nearly 50 percent from 2000-2008, grew by 5.7 percent in 2009, the first annual expansion in a decade, after President Robert Mugabe’s ZANU-PF formed a unity government with long-time rival Morgan Tsvangirai, now prime minister, and his MDC party.  The coalition subsequently abandoned the local currency in favor of the U.S. dollar and South African rand in order to help assuage an absurdly high inflation rate once estimated at 89.7 sextillion percent in late 2008 by the Cato Institute, but now expected by Biti to hover between 4-5 percent annualized by this year’s end.  Citing a “fragile economic recovery” and its effects on the country’s four main pillars of output—agriculture, mining, manufacturing and tourism—Biti lowered GDP projections for the year to 5.4 (from 7.7) percent.  The tempered revision came despite the somewhat contentious announcement last month by the Kimberley Process Certification Scheme, the diamond trade’s international watchdog, to allow limited exports of gems from the controversial Marange fields where human rights groups allege that illegal panners have been systemically slaughtered by state troops.  Per the Financial Times in July, for example, “government officials estimated that the diamond stockpile in question could be worth as much as $1.7bn per annum, a figure which would effectively double [the size] of the country’s 2010 exports.  However, private sector experts are more skeptical, putting a value of about $250m annually on the gems–equivalent to a 15 percent increase in exports.” 

Regardless of who’s [more] right, from a sheer fiscal standpoint (and thus moral and theoretically legal concerns aside) the diamond development can be viewed as positive for a country that has outstanding arrears of roughly $1.3bn to the IMF, African Development Bank and World Bank, and is struggling to attract foreign capital in the meantime as political partnerships wobble precariously.  Foreign investors remain [rightfully] edgy, for instance, about the government’s continued division relating to a proposed Indigenization and Economic Empowerment Act that would force foreign-owned businesses to transfer 51 percent stakes to black Zimbabweans (though speculation is that number may ultimately be whittled down to 15 percent in the event it’s not wholly scuttled).  “Last year our market was being driven by foreigners—upwards of 40 percent were foreigners and net buyers.  But from the end of January with the gazetting of the indigenization regulations, there has been a lot of uncertainty and foreigners have put on hold their transactions,” Biti noted this past spring.  Meanwhile, future loans from the IMF remain on indefinite hold; while the organization reinstated Zimbabwe’s voting rights after a seven-year suspension back in February, it made access to loans conditioned upon settlement of arrears.  “Improving the timeliness and quality of data reporting and making further progress in economic policies would help to move toward a staff monitored program, which is the stepping stone to an IMF financial arrangement and debt relief,” Vitaliy Kramarenko, the institution’s mission chief to the country, stated in June.  The ease with which said relief will be granted may lie at the crux of the aforementioned valuation gap that Legat views with such hearty disdain.  In essence, given the IMF’s clout among international investors and lenders alike, its estimation of Zimbabwe’s future production potential may largely be self-fulfilling if its own conditions for Zimbabwe are unmet and capital remains dear.  An IMF staff paper published in early June concluded that Zimbabwe’s debt was “so heavy it cannot be resolved even if the government adopted the right economic policies and increased mineral extraction.”  The not so subtle subtext was no doubt aimed straight at President Mugabe.

Against this muddled battlefield of diamond mining and wonkish policy barbs, Legat isn’t the only money manager to seek alpha while the risk averse wait out a less opaque macro horizon.   Invesco Perpetual fund manager Neil Woodford raised some eyebrows in the international investment community, for instance, when he recently staked some $25m of his clients’ money to Masawara, an $80m, Jersey-incorporated and London-listed (AIM) fund focused almost exclusively on Zimbabwe that seeks long-term capital growth through the acquisition of interests in agriculture, mining, telecommunications and real estate companies.  “Does Woodford know something we don’t,” the FT’s headline ran in August, though the piece failed to really answer its own question.  London-based Jamie Allsopp of Insparo Asset Management, a frontier markets focused firm, also recently touted the country’s fundamentals, and in particular its brewery and telecom stocks.  Legat honed in on these very sectors in making his pitch that the top-down view of Zimbabwe ought to be revised.  Imara’s estimate of the Zimbabwean economy’s size is based on a comparison of spending power in neighboring Zambia (a $14b annual economy), he told Bloomberg, and while Zambia’s two biggest breweries reported sales of $230m last year, revenue at Delta Corp., Zimbabwe’s biggest beer maker with approximately 95 percent of the beer market and 85 percent of soft drinks, totaled $324m.  Moreover, he noted, this year Econet Wireless Holdings Ltd., a Zimbabwean mobile-phone operator, expected revenue of $500m, while Zambians are expected to spend $280m with Zain Zambia, the country’s biggest mobile-phone company.  “According to the IMF and the government, Zimbabwe’s gross national product per capita is $450, which compares with Zambia at $1,200 per head,” Legat said.  “Spending patterns in both countries suggest the opposite.” 

Delta made headlines of late when it reported in August that its net income climbed to $39.7m in the 12 months through March, from $5.4m in the same period a year earlier, during which time beer volumes increased 50 percent.  From a money manager’s standpoint, looking forward the company is not only a relatively low-beta proxy on increasing income and consumption per head in Zimbabwe, but also a direct play on per capita beer sales in a historically savvy market.  Last year, Delta announced that it plans to invest $150m to increase production capacity in order to produce 10 million hectolitres (including soft drinks) from its current level of 2.2 million hectolitres by 2014 in response to rising consumption trends.   According to one Harare-based industry consultant, Zimbabwe’s numbers are increasing such that it is likely to soon join Africa’s top ten drinking nations.  And per BMI, a consultancy, the firm’s largest single shareholder (36%), brewing giant SABMiller is set to increase its equity stake to combat falling sales in developed Europe and to further develop its African presence as Delta’s capacity augmentation is realized.  “While SABMiller in particular has succeeded in growing sales volumes at a promising rate in a number of emerging regional markets on an upward curve such as Mozambique, Tanzania and Zambia, which has led to expansionary capacity investment, Zimbabwe is a recovering market. Before its decade-long slump, Zimbabwe housed one of the region’s most robust beer markets.  Consumer tastes and preferences were more developed and their ability to fork out on non-essential beverages was far greater than the majority of their regional counterparts.  Therefore, it is unsurprising that a large part of Delta’s investment kitty will be used to restore underutilized equipment to push up capacity rather than installing new technology.”  While beer production in Zimbabwe is no doubt improving after years of under-utilization and limited maintenance, the litmus test for lasting social, economic and political stability in Zimbabwe as a whole is a bit frothier.  One sip, and step at a time, it seems.

John Legat, the Harare-based CEO of Imara Asset Management, noted this spring in regards to the “dollarization” of Zimbabwe that it had been “extraordinary how quickly consumption has started to increase, and with it volumes and capacity utilization.” Zimbabwe has used the U.S. dollar as one of several multiple foreign currencies (notably South Africa’s rand) since January, in order to temper the hyperinflation which left the Zimbabwe dollar nearly worthless last fall. Inflation since the new currency regime has averaged around 2% through June; the last inflation figure announced before the country’s adoption of foreign currencies was last October, when prices were soaring at record 231 million percent.

A late June conference in the capitol attracted 40 overseas fund managers eager to capitalize on the increased investment that dollarization has realized. “Until recently, international owners had significant constraints on repatriating their Zimbabwe profits and did not consolidate these assets on their balance sheets,” noted Imara CEO Mark Tunmer. “This all changes in a dollarized economy. Following the global banking crisis, many companies are keen to show that their balance sheets are not over-leveraged. The ability to reflect ‘forgotten’ Zimbabwean assets could be most helpful in this environment.” Investors keen on Zimbabwe may also be pleasantly surprised by many firms’ current production capacity and potential for growth, according to Imare’s Sean Gammon. “A lot of plant in our corporate sector is relatively modern and well maintained. Many of our larger companies invested in new plant in the 1990s. It provides a robust base for operations as the country makes a new start, while any new investment would add significantly to productive capacity,” he said.

Legat, for one, points to the SAB Miller-owned Delta, Zimbabwe’s largest brewer, as an example of a firm that can expect a boost from increased consumption and more efficient (up to 4x) capacity utilization which will help the company eventually meet rising demand. “Volumes in the full year to March 2010 are expected to be about the same level as in 2005, before the big recent slide in consumption,” he theorized.

That said, some critics allege that without a continuous stream of foreign aid, Zimbabwe’s dollarization experiment is likely doomed to fail, since the federal budget can no longer be financed through domestic means, and foreign currency “vouchers” being used to pay civil servants in particular are not widely accepted by retailers or banks. Some local politicians, in fact, are already calling for “de-dollarization” (though their motives/ideological allegiances are questionable). Yet such talk is likely just that. Zimbabwe will not return to using its own currency in the near future, and any move back to the Zimbabwe dollar will be linked to export strength, Zimbabwe’s finance minister Tendai Biti emphatically said on this week.


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