BATANAI MATSIKA
According to Small Enterprise Impact Investing, Exploring the “Missing Middle” beyond Microfinance by Symbiotics (Roland Dominicé and Julia Minici), more than 95% of registered businesses in the world are small.
Together, they constitute the largest employer in any given private-sector economy, whether of high, middle or low-income levels.
Generally, lower income countries tend to have a much higher concentration of micro-enterprises than SMEs, contrary to higher income countries which have many more SMEs than micro-enterprises – a gap referred to as the “missing middle” in the low-income SME markets.
The current growth they face will gradually bridge this gap.
But ultimately, the pace at which they will grow will depend on the sources of financing they can access and the quality of their growth will depend on regulation and behavioural standards that guide their expansion.
Despite the recognised importance of the SME sector, evidence indicates that SMEs continue to be undersupplied with the financial products and services that are critical to their growth.
The more obvious structural impediments that explain banks’ subdued interest in financing the SME sub-sector include: (i) problems of information asymmetry, (ii) high NPLs, (iii) a lack of collateral, (iv) high administrative costs and (v) high risk perception.
However, mounting evidence suggests that some banks are finding effective solutions to constraints such as determining credit risk and lowering operating costs, and are profitably serving the SME sector.
The potential profitability of serving SMEs has been enhanced by the development of new business models to engage small enterprises.
In Zimbabwe, NMBZ Holdings has been gradually shifting its focus and strategy towards SME banking.
The group recently published its FY2020 results posting a 26.1% decline in inflation-adjusted revenues that was driven by lower FX gains compared to prior period.
Opex was up by 18.1% because of staff and Covid-related costs. Net monetary losses fell by 97.7% as the business increased exposure to inflation-hedging FX assets (Nostro balances doubled to ZWL$1.4bn and ZWL balances with the Central Bank decreased by 66.7% to ZWL$416m). A tax credit resulted in PAT more than doubling to ZWL$849m and a higher PAT Margin of 45.2%.
In the outlook, the group is well positioned given a loan book that is largely invested in the agriculture sector as well its focus on SMEs through technologies such as POS machines and its Tap Card.
We estimate a F2021F EPS of US0.87c which indicates a Fwd PER of 11.4x. NMBZH also trades at a 20% discount to its net asset value at a PBV of 0.8x. NMBZH’s business model is solid and receives support from its foreign shareholder (Arise).
We maintain our BUY recommendation on NMBZ Holdings.
Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
