Zimbabwean stocks are expensive for new money investment, Hasnain Malik - Managing Director, Frontier Markets Equity Strategy at Exotix, has said.

“Any discussion of fresh investment into Zimbabwe equities is redundant or, at least, a catch- 22 until repatriation flows smoothly again,” he said.

Repatriation requires a rebuilding of US dollar reserves and liquidity, which, in turn, requires re-engagement with international finance.

Malik said that in the interim, publicly listed equities continue to enjoy a premium because they act as a substitute for cash (which is in short supply) – the Old Mutual Implied Rate premium (the difference between the share price of the Harare listing of Old Mutual and the fully fungible London one) has increased to 106% (compared with 474% immediately before Mugabe’s fall in November 2017 and c50% in Q1 18).

“If the prospect of fresh capital injection at the macroeconomic level improves, then this “cash substitute” premium in equities likely fall. But the underlying value of listed assets likely increases at the same time (companies’ cash flow prospects improve if the broader economy is resuscitated),” he said.

In other words, a judgement on whether current valuation multiples are attractive requires disaggregating the “cash substitute” premium (and one’s view of whether that increases or reduces over time) and the valuation of the underlying business (and one’s view of whether that is fair or not).

Malik gave an example of beverage manufacturer, Delta, that is on forward PE (on Bloomberg consensus estimates), at face value, of 30x. 

“But stripping out the OMIR “cash substitute” premium (ie dividing by 2.06) reduces this to 15x. The equivalent figures for telecom operator, Econet, are 17x at face value and 8.3x on an underlying basis,” he said.

According to Malik, for those investors who are trapped in Zimbabwe equities, there is likely little option but to reinvest dividends or rotate within local equities.

“For those considering new investments, these face-value multiples are likely still too high, regardless of whether the prospects for recapitalisation of the economy are likely to improve. An alternative might be Australian-listed miner Zimplats, although it is very illiquid ($20k per day): there is no Bloomberg consensus, but trailing PE is 10x,” he added.