Batanai Matsika
On the 1st of November 2019, we initiated coverage of Old Mutual Zimbabwe Limited with a YE2019 Price Target of $13.78 (90.22
US cents per share). The prevailing exchange rate at the time was 15.2789.
The share price has since moved in line with inflation and responded
to the weakening of local currency (ZWL) and has reached ZWL73.44. Using
a parallel market exchange rate of USD1: ZWL 65, this represents a price of 112 US cents.
At the Old Mutual Implied Rate of 105.5689, OMZIL is trading at 69.15
US cents. We estimate a further deterioration in the ZWL given the weak macroeconomic fundamentals that have been exacerbated by the Covid-19 driven global recession. Consensus estimates of the YE2020 exchange rate target are at USD1: ZWL200.
This demonstrates a need to preserve ZWL balances against the expected inflationary pressures.
As outlined in our Thematic Research Report, OMZIL offers institutional investors an avenue to gain a strategic holding to a quality blue chip
investment through its ZWL 5.5bn (FY 2018) securities and property portfolio.
The stock provides significant protection from inflation and currency
depreciation. 75% of its total assets of ZWL7.3bn (FY2018) are invested in property and securities.
The financial service group is yet to publish its FY 2019 Results. While the big elephant in the room has been inflation (we estimate y-o-y
inflation at 1,200%) and a depreciating local currency (ZWL), the investment thesis in OMZIL remains intact as summarised hereunder;
OMZIL has established a strong franchise that dominates in Zimbabwe. It
is 75% held by Old Mutual Limited, a premium African financial services group that offers a broad spectrum of financial solutions to retail
and corporate customers across key markets.
Further, OMZIL has been leading the pack in terms of introducing innovative products in the market.
The insurer recently rolled out its Weather Index Insurance product for cover against weather anomalies. We highlight that climate change is increasingly becoming a significant business risk.
The recent Cyclone Idai and El Nino in Zimbabwe and Southern Africa have
also illustrated the impact of changing global climate conditions on businesses.
We believe that the Weather Index Insurance product will help complement premiums growth in its insurance division.
OMZIL has good quality and conservative management that has built a profitable business over the years. We believe that management
upholds high standards of corporate governance, ethics, sustainable lending practices and prudent risk management.
OMZIL is a major player in the financial services sector and has earnings quality above the industry average. In 2018, the group registered a net
profit margin of 21.5% against a sector average of 20.5%.
The group’s performance was on the back of improved customer retention figures that complemented premiums growth of 10% and active cost
containment measures that were hinged on investments in IT systems
OMZIL’s extensive market share in all its major sectors allows it to generate high returns per dollar invested through economies of scale.
OMZIL commands the largest market share of 16% in the insurance sector and the third largest in the banking sector (14%). The group also manages a comprehensive equities portfolio through is wealth management business.
Changes in indigenisation policies in Zimbabwe mean that OMZIL shares listed on FINSEC are now available to foreign investors.
The
company is a blue chip that will be attractive to foreigners when they eventually decide to invest in Zimbabwe again.
Traditionally, foreign investors have been overweight in blue chips such as Delta and Innscor. We think that demand for OMZIL shares from foreigners will allow the stock to move to abovemarket PERs (in line with its international peers) hence a dramatic re-rating in the medium term should be expected.
All in all, we recommend an entry price at or below 90.22 US cents (ZWL 58.64 using an exchange rate of 65). This will be a strategic
entry price given the inflation and exchange-rate hedging capabilities of OMZIL.
The major risk for investors currently is ZWL deterioration. OMZIL has
proved to be a natural hedge against inflation.
BUY OMZIL!
Batanai Matsika is the Head of Research – Morgan & Co and can be contacted on +263 78 358 4745 or email: batanai@morganzim.com
