BATANAI MATSIKA
Investing and trading in stocks is all about market timing.
Here is a wise piece of investment advice you might not usually find in any newsletter or weekly column on capital markets.
Are you ready?
Here it is.
You should buy low and sell high.
It seems simple but it is a shame that only a few can master this. It simply means that you buy into stocks when they are going to go up and sell when they are going to go down. Based on our analysis of the Zimbabwe Stock Exchange (ZSE) and the Financial Securities Exchange (FINSEC), investors should start taking profits on certain counters and taking positions in the undervalued ones.
The Finance and Insurance sector in Zimbabwe is an interesting one.
The industry is expected to grow by 7.2% in 2021 (Ministry of Finance and Economic Development Estimate).
Our research reveals that there is scope for M&A activity in the sector in 2021 and this could present interesting opportunities for investors.
We have also noted that there has been a major re-organisation of the banking sector that the National Social Security Authority (NSSA) has started.
The pension fund disposed its shareholding in ZB Financial Holdings (ZBFH) and increased its stake in CBZ Holdings (CBZH). NSSA has also indicated that it would be disposing a significant chunk of its shareholding in First Mutual Holdings Limited (FMHL) and redirecting the proceeds to foreign-denominated assets and other impact investments such as housing.
There is more transactional activity expected in 2021.
There also appears to be scope for M&A activity in the insurance sector. IPEC’s Funeral Assurance Report for the nine months ended 30 September 2020 reveals that only 3 out of 8 funeral assurers reported capital positions that were compliant with the regulatory minimum capital requirement of ZWL62.5 million as prescribed in Statutory Instrument 59 of 2020. In addition, the funeral assurance sector GPW was dominated by 2 funeral assurers who had a combined market share of 80.9%.
The remaining 6 funeral assurers controlled 19.1% of GPW. We opine there is scope for consolidations in the space. But here is the tip.
The table shows valuation multiples for CBZH, ZBFH and FMHL. All three counters are associated with NSSA’s portfolio re-organisation strategy.
We have noticed that there was a re-rating that occurred when new owners came into CBZH. As a result, valuation multiples for CBZH (Fwd PER of 79.9x) imply that the counter has clearly rallied ahead of fundamentals.
While we note the improved risk profile since the exemption of the OFAC fine and the advantages associated with government funding programmes, the counter now holds minimal upside at this stage.
This points to a good time to Sell and Take Profits.
In the same vein, a re-rating should also be expected with ZBFH and FMHL. In fact, investors should be switching out of CBZH and buying into ZBFH and FMHL. ZBFH remains a well-established player in the sector.
The group has strategically preserved value through extensive real asset (investment properties) and shareholding in Mashonaland Holdings.
We also like the strategies directed towards regional diversification.
In terms of FMHL, we remain optimistic about the group’s value creation efforts in the region (Botswana).
That said, our favourite in the insurance space is Old Mutual Zimbabwe Limited (OMZIL).
The insurer remains strategically positioned given its dominant position in the market and strong balance sheet that enables it to undertake acquisitions and other value-creating transactions.
To conclude, our advice is straight forward; Switch out of CBZ Holdings and BUY ZBFH, FMHL and OMZIL.
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
