The unsettling stability of the FX market
The foreign currency auction market has held up so far. At its best, the Zimbabwe dollar has strengthened against the US$ on more than one occasion in the last two weeks. This points to falling month on month inflation rate and prices stabilization. On the surface that seems like good news for all stocks but we argue that this is a sign for bad times for some sectors, at least in the short term.
As the All Share Index (ALSI) gathers itself and pick up points after a bruising month of July, selectivity along sectors and names is necessary going forward. As of the 8th of September, the weighted average US$ rate was 82.7, not too distant from the black-market rate hovering between 95 and 105. We are of the view; it is too simplistic to assume that everyone suffered from the uneven foreign exchange (FX) market as it is to adopt the notion that everyone is benefitting from the stabilization.
This note focusses on our theory of how banks will fare in this new era. But at the outset it provides a big picture view of the impact on major sectors and names.
Exporters
First in line of beneficiaries of the forex auction market are miners who can now receive their Zimbabwe dollar equivalent at reasonable rates. Miners benefit doubly as the FX retention rate is raised to 70 percent from the previous 55 percent for gold diggers and 50 percent for other minerals. We project a jump in revenue and a boost for operating margins enhancing earnings and free-cashflows for the sector. Yes, the export incentives have been scrapped of, but the net effect will still be a plus for all exporters.
The positive change help to ease the financial circumstances of BNC and RioZim- the only two stocks constituting the Mining index. But their individual fundamental issues dissuade us from including them in our “recommended list”. Our sweet spot is Padenga a 100 percent crocodile skin exporter and gold producer to boot. Acquisition of 50.1 percent into gold miner Dallaglio provides for consolidation of accounts under Padenga Group.
Dallaglio owns Pickstone Peerless Mine near Chegutu and Eureka Mine near Guruve which is reported to be under development with commissioning targeted for this year. In Dallaglio’s 2018 financial year, Pickstone Peerless Mine recorded an after-tax profit of US$2,7 million relative to Padenga’s net profit of US$6.7 million for 2019. With benefits to be accrued from recapitalization of Pickstone Peerless Mine plus onboarding of Euraka Mine, Dellaglio may soon be contributing a third of total Padenga Group profits – a significant uplift to pre-acquisition valuation. We think Padenga share price still has a runway ahead of itself. Its year-to-date (YTD) of 512 percent still trails that of the ALSI, notwithstanding churning out profits in US dollars.–ebusinessweekly.co.zw
