Amidst the uncertainty, investors can take chances in Zimbabwe

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By Gilbert Muponda

ZIMBABWE’S political and economic crisis seems to have reached a decisive phase. Whilst politicians take time to size each other up as they prepare for the second round of the “mother of all elections”, this presents investors with excellent opportunities to take long term positions on under-priced assets.

The asset class and the magnitude of the position will require careful and informed analysis. Whilst investors should take positions, they need to be reminded by one of the first laws of investment that you only invest what you can afford to lose.

It’s important to respect this law since investing in Zimbabwe during this period is similar to a risk arbitrage transaction whereby investors take positions ahead of a business being restructured anticipating huge upward gains upon the restructuring exercise succeeding. Should the restructuring fail, the investor potentially could lose most of their investment.

During this period, investment opportunities spring up on a daily basis as the market adjusts and re-adjusts with investors struggling to accurately forecast the likely outcome of the current stalemate. Whilst the politics plays out, asset prices and asset classes become very difficult to price as the risk premium becomes virtually impossible to quantify.

The current election season, besides adding newborn babies’ names such as Runoff Moyo, Independent Ngwenya, Senatorial Gwati, Godfather Manheru, Candidate Pote, Rigging Hamadziripi, Electoral Commission Ndlovu, Foreign Observer Chimunda, Puppet Nkiwane, Neck And Neck Nyamadzawo, Sadhaki Sibanda, Heavy Weight Zviyo, Rural Stronghold Mpala, Polling Station Mangwiro, Released Results Matongo, Ballot Box and Ballot Paper Kunonga (twins), will create a new class of millionaires (real dollars). These alert investors are those who are ready and prepared to take risky positions whilst others take their time.

Due to rapid currency depreciation, Zimbabwe’s assets are heavily discounted and represent a bargain when compared to its regional peers. Whilst some discount is relevant due to high political risk, there are indications that most asset classes are now trading way below their replacement cost. This represents buying opportunities for investors (individual and institutional).

Various assets classes such as listed and unlisted equities, real estate and stock holdings represent outstanding opportunities as they are likely to lag behind their replacement costs. Whilst listed equities may be prone to price controls in the short term, it is clear we may be witnessing an end of and era and such assets will recover and in most cases, the upward potential is way higher than the investment holding cost.

It is interesting that a number of companies (manufacturers, bakeries, trucking firms, etc.) have found that (after some years) their real estate was in fact worth more than the rest of the business! This has also been true for many farmers (assuming the title is secure and there is confirmed long term “letter of present interest “from government).

This indicates investors should target those companies or assets that include verifiable real estate assets on their balance sheets. This is so because even in the case of a further economic meltdown, such assets will hold their own and will not only ensure that the investor gets the return of capital but also the return on their capital.

In addition, should the investor be looking at equities listed or unlisted, they need to pay particular attention to companies or assets with extremely good cash management skills. This is important considering that before the economy normalises, the assets have to be maintained in reasonably good shape.

Cash management is the difference between profits and bankruptcy during hyper-inflationary transition period such as the one Zimbabwe is about to enter. The single fact that influences every decision is: Time eats money. In addition to investing in companies with solid assets and real estate, investors should look for assets that exhibit the following qualities:

- Make absolutely certain business managers understand the time value of money.

- Never allow your cash to remain idle (i.e. spin money quick and fast.)
Good cash management can provide a major source of profit, while poor cash management can destroy a company in a matter of months as it fails to match working capital needs and fails to cover replacement costs.

- Constantly be prepared to convert dollars into a stable foreign currency, real assets or stocks.

- Be aware that the stock market may become an uncertain source of capital. Even though companies should now be taking advantage by listing during excess liquidity periods.

- Be prepared to maintain more than one set of books.

- Need to be aggressive with stock management. Inventory valuation should be based on NIFO (next in first out) rather than LIFO.

- Develop an appropriate inflationary adjustment for capital replacement or the value of your capital will disappear.

Whilst the whole Zimbabwe Stock exchange seems very cheap in terms of replacement cost and regional peer comparison, there are certain Companies that are more likely to withstand any further meltdown. These include Old Mutual, AFRE Corporation, ZPI, Pearl Holdings, Dawn Properties and Mash Holdings. These are companies with solid asset base and generate strong cash flows.

In addition, asset rich companies such as ZECO Holdings represent excellent value given that they own so much real estate which is fully paid for. There are opportunities to further unlock more wealth from ZECO Holdings by separately listing the Real Estate owning division. Further balance sheet restructuring for ZECO Holdings and other similar companies represent opportunities for those investors who have a medium to long term view of the market. These stocks have potential to wither a storm and offer remarkable upside should the good times start to roll.

DISCLAIMER
The views expressed are personal and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies. The information provided does not constitute investment advice and it should not be relied on as such. There is no representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. Investing in shares may not be suitable for all investors. Seek independent advice if necessary. Past performance is no guarantee of future results.

Gilbert Muponda is a Zimbabwe-born entrepreneur, exiled in Canada. He can be contacted at gilbert@gilbertmuponda.com. See his website: www.gilbertmuponda.com

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