Zimbabwe Booklet May 2013

Zimbabwe Stock Exchange Overview | June 2013Extraordinary Times, Exceptional Opportunities.

Asset Management | Corporate Finance | Securities | Trust Services

IMARAINVESTINGIN AFRICA

CONTENTS SECTOR PAGE

EXECUTIVE SUMMARY 3

ZIMBABWE IN FIGURES: MACROECONOMIC INDICATORS

4

ZIMBABWE – MACRO-ECONOMIC OVERVIEW

5

THE ZIMBABWE STOCK EXCHANGE OVERVIEW

10

Companies In Detail

AFRE CORPORATION LIMITED

Insurance 14

AICO AFRICA LIMITED Agriculture 17

BARCLAYS BANK ZIMBABWE LIMITED Financial 20

BAT ZIMBABWE LIMITED Tobacco 23

CBZ HOLDINGS LIMITED

Financial 26

DAIRIBORD HOLDINGS LIMITED Food 29

DELTA CORPORATION LIMITED Beverages 32

ECONET WIRELESS ZIMBABWE LIMITED Telecoms 35

HIPPO VALLEY ESTATES

Agriculture 38

INNSCOR AFRICA LIMITED Conglomerate 41

NMBZ HOLDINGS LIMITED

Financial 45

NEW DAWN MINING

Mining 48

OK ZIMBABWE LIMITED Retail 51

PADENGA HOLDINGS LIMITED Agriculture 54

PEARL PROPERTIES LIMITED Property 57

SEED CO Agriculture 60

TSL Conglomerate 63

ZIMPLATS LIMITED Mining 66

Analysts

Addmore Chakurira +263 4 700 000

Email [email protected]

Tonderai Maneswa +263 4 700 000


2

mailto:[email protected]


Executive Summary

Watershed year? Zimbabwe successfully held its constitutional referendum in March 2013 which resulted in the adoption of a new constitution. The country is due to hold “harmonised elections” i.e. Presidential and General elections at the same time, later this year. The political environment has remained relatively peaceful since the adoption of the Government of National Unity in 2009, which has resulted in improved investor sentiment. Although the term of the current Parliament is due to end on 29 June 2013, the date of the elections is still to be announced. In our view, it is unrealistic that the elections will be held before the end of June 2013 since there are several issues still to be dealt with. These include the alignment of the laws to the new constitution, a credible voters’ role, and chiefly raising the financial resources estimated at over USD 30.0m. The referendum was held in a peaceful environment and should this be carried into the election the country’s recovery could well be enhanced. Since the adoption of the multi-currency system the Government has maintained a cash budgeting framework which has helped the economic recovery. As noted by the Minister of Finance in his Q1 Economic Update, there are significant unbudgeted for pressures on the 2013 budget stemming from high employment costs, critical external loan repayment obligations, the referendum, elections and grain importation. The cash strapped Government is facing the daunting task of keeping in check its spending while ensuring the money is well spent to reconstruct the economy. Although the economic growth has slowed due to local uncertainties, heightened political rhetoric ahead of elections as well as the tight liquidity conditions, Zimbabwe still continues to witness economic recovery. We are convinced that the country enjoys a number of advantages which will make continued high growth likely. These include a high degree of literacy, a dynamic private sector, generous endowment of natural resources and a young population, with 42% under 15 years of age. Early stages on a recovery The market has gained 59% YTD on strong rallies by big caps especially Barclays (+20%), BATZ (+126%), Dairibord (+39%), Delta (+45%), Econet (+55%), Innscor (+32%), OK Zim (+93%) and Natfoods (+98%). It is no surprise that most of the companies that have rallied injected significant investments into their businesses since dollarisation and are rightly being rewarded. Despite the recent rally on the ZSE, we believe that the ZSE still carries good long-term growth potential given the increasing profitability and return of dividends. The economy is expected to record good growth underpinned by recovery in agriculture and mining. There are attractive opportunities to buy rapidly growing, monopolistic, well managed companies and strong cash generating companies such as BATZ, Dairibord, Delta, Econet, Innscor, Hippo and OK Zimbabwe. Generally, the prospects of continued good earnings growth will provide further upside potential from current levels. Nonetheless, volatility is likely to stay high in the outlook period given the uncertainties mainly around indigenisation and elections, hence, we recommend investors take a long-term view on their holdings. Most of the big cap counters are post their heavy capex projects and we believe will be able to pay attractive dividends in the future. Counters such as BATZ, Delta, Econet and OK Zim easily come to mind in this regard. Given the demand for infrastructure reconstruction we believe construction companies are well poised to take on opportunities (as the economy recovers) and counters likely to gain include Lafarge and Masimba Holdings. Given the tight liquidity conditions and limited credit lines we believe that bank asset quality pressures will remain elevated. We rate banks at best as Spec Buys and our picks in this space include ABCH, Barclays, CBZH, FBCH and NMBZH. In our opinion FMCG businesses are also likely to continue to post good financials as incremental increases in disposable incomes translates into retail spend figures and companies to look for include BATZ, Dairibord, Delta, Econet, Innscor, Natfoods and OK Zim. With the recovery in some sub-sectors of agriculture counters such as TSL and SeedCo may benefit. Some selected second tier stocks that might offer upside include Afdis, Mash Holdings, Padenga, Pearl Properties and Zimplow.

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Zimbabwe in Figures: Macroeconomic Indicators

2009 2010e 2011 2012e 2013f 2014fPopulation (m) 13 13 13 13 13 13

Nominal GDP growth (%) 5.4 9.6 9.4 4.4 5.0 6.3

Nominal GDP (USDm) 6,133 7,433 9,433 11,914 13,400 14,200

GDP Per Capita (USD) 450 531 574 593 610 661

Inflation (y-o- ch.)CPI Annual Average 3.1 3.5 3.7 4.5

CPI End of Period (7.7) 3.1 3.5 2.9 5.0

Money and Credit (USDm)Broad Money (M3) 1,381 2,328 3,400 4,400 5,100 6,500

Domestic Debt 723 1,695 2,755 3,538 4,250 5,650

Central GovernmentRevenue (USDm) 973 2,339 2,921 3,640 3,845

Expenditure (USDm) 850 2,107 2,895 3,640 3,845

External Trade (y-o- ch. (USDm))Merchandise exports (1) 1,692 1,179 594 74

Merchandise imports 23 (1,930) (2,400) (653) (322)

Balance of Payments (US$m)Merchandise exports 1,625 3,317 4,496 5,090 5,164

Merchandise imports (3,232) (5,162) (7,562) (8,215) (8,537)

Trade Deficit (1,607) (1,845) (3,066) (3,125) (3,372)

DebtTotal Externat Debt (USDm) 7,145 7,662 8,140 12,200 13,500

Total external debt (% of GDP-e-oy) 104.0 99.8 102.1 103.6

Source IMF, RBZ, Ministry of Finance, IES

-10%

0%

10%

20%

30%

40%

50%

60%

70% GDP growth rate by sector

2010 2011 2012 est 2013 Proj Source: Ministry of Finance

Zimbabwe Exports Contribution 2010

Source: Ministry of Finance, RBZ

Mining 65%

Tobacco 17%

Agriculture 8%

Manufacturing 8%

Other 1%

2012 Contribution to revenue

VAT 31%

Companies 12%

Individualls 19%

Non-tax Revenue 6%Excise Duties 12%Other Taxes 4%

Customs Duty 12%

Source: Ministry of Finance

Contribution to GDP 2009


Manufacturing 15%

Finance & Insurance 4%

Mining 5%Other 32%Agriculture 16%

Tourism 11%

Education 3%

Transport & Communications 15%

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Zimbabwe Macro-Economic Overview

Slowing growth in recent years In the early years of dollarization, the Zimbabwean economy experienced a strong recovery between 2009 and 201, with growth averaging 7.7%, anchored by improved policies, a favourable external environment and off-budget donor grants. The growth was mainly driven by a strong recovery in agriculture, mining and financial services. Last year, 2012, proved to be a rather challenging year as the “noise” from the inclusive government destabilised the relatively stable business environment. GDP growth, which was initially forecast at 9.4% (by the Ministry of Finance (MoF), was revised downwards three times to eventually settle at 4.4%, due to a lethargic performance from most sectors. Despite the decent recovery witnessed over the last few years, poverty remains an issue as the growth benefits did not filter through to many people outside the public sector due to lack of resources to support social programs and infrastructure development. The average annual gross income per person is USD 3,475, according to the ZimStats - Poverty Income Consumption and Expenditure Survey 2011/12. Although per capita GDP in Zimbabwe is still low, the country enjoys a number of advantages which make continued high growth likely: A high degree of literacy Generous endowment of natural resources Dynamic private sector Commodity price rally A young population, with 42% under 15 years of

age The MoF estimates that the mining sector (projected to grow by 17.1% in 2013) will anchor the economy going forward. GDP is expected to register 5% growth in 2013. The mining sector is expected to benefit from firm international commodity prices, strategies to lower electricity supply interruptions and additional private capital injections. However, the indigenisation issue remains unresolved and international commodity prices are stagnating in the face of the slowdown in the European Union and the USA. Baseline growth of 4.7% anticipated to 2017 In its September 2012 Article IV Consultation, the IMF cited two scenarios for the local economy. Under a Baseline scenario previously referred to as the unchanged policies scenario, the group forecast a slight improvement in GDP growth compared to the previous assumptions. GDP is estimated to grow at an average rate of 4.7% as investment remains subdued as a result of:

Weak business environment

Erratic electricity supply and an unfavourable agricultural season.

Absence of ambitious growth-oriented reforms Uncertainty surrounding the pending elections

According to the IMF, additional downside risks for the outlook include: Political disturbances Export price declines Higher-than-anticipated increases in imported

food and fuel prices Unfavourable weather Reversals of capital inflows Banking system instability.

Under the alternative, active scenario, the IMF assumes that the government will implement strong policy measures to address existing impediments to sustainable growth. Under this scenario, the country’s external debt ratios would decline much faster than under the baseline scenario and all indicators would be within prudent thresholds by 2023. If government strengthens fiscal disciple, improves the quality of expenditures, ensures that the implementation of the indigenisation legislation takes into account investor’s concerns, presses ahead with key structural reforms, and takes forceful steps to address financial sector vulnerabilities, the country could potentially boost growth performance by about 2-3 percentage points relative to the baseline scenario over the medium term. Real GDP is projected to grow at an average of 7% over the medium term driven by increased investment in mining and strong growth in construction, electricity and manufacturing as the business environment improves. Inflation would remain contained at an average of about 4.5% in the medium to long term. The current account deficit would decrease to around 14% of GDP by 2017, largely financed by foreign direct investment. In his Q1 2013 economic update the Minister of Finance, Mr. Tendai Biti, noted that the macro-economic environment remained stable as reflected by low inflation levels. However, the economy, exhibits a number of fundamental weaknesses which may impact on the 2013 projected growth rate of 5.0%. These weaknesses emanate from the liquidity and financing challenges, limited revenue growth, as well as a widening trade and current account gap due to depressed exports and over-dependence on imports. All this has resulted in the capacity utilisation of most productive sectors remaining well below potential, dampening prospects for fast economic recovery.

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Inflation on the decline When the economy dollarised in 2009, inflation ended the year at -7.7%, but subsequently rose to an average of 3% for 2010, 4.1% for 2011 and 3.7% 2012. With food prices accounting for +>30% of the consumer price index, weather conditions tend to materially influence the inflation outcome. Inflation remained under control at below 3.0% during the months of January and February 2013, recording 2.5% and 2.98%, respectively. This was mainly attributed to tight liquidity and depressed demand as well as a depreciated ZAR, which gave relief to importers.

-8.0%

-5.0%

-2.0%

1.0%

4.0%

90

92

94

96

98

100

102

Jan-09 Dec-09 Nov-10 Oct-11 Sep-12

Consumer Price Index

CPI (LHS) M-o-M (RHS)y-oy

Source: ZimStats

According to an Article IV report on Zimbabwe by the IMF, the CPI inflation rate in Zimbabwe is highly correlated with both the CPI and PPI inflation rates in South Africa with a lag of five months, mostly due to the high share of imports from South Africa. Regression results indicate that a 1-percenatge point increase in the CPI inflation rate in South Africa leads to 0.6 percentage point increase in the CPI inflation rate in Zimbabwe five months later.

0 10 20 30 40

Food and non alcoholicHousing, water, electricity, gas and …

Furniture, household equip. And …Transport

Recreation and cultureClothing and footwear

Alcoholic beverages and tobaccoMiscelleneous goods and services

EducationHealth

CommucicationRestaurants and hotels

Changes in Inflation weights

2013 weights 2001 weightsSource: ZImStats

The Zimbabwe National Statistical Office (ZimStat) conducted the Poverty Income Consumption and Expenditure Survey in 2011/12. This has resulted in the reshuffling of weights amongst the CPI constituents, effective January 2013. The biggest addition was observed on Education (+2.82), followed by Communication (+2.42), Food and non alcoholic

beverages (+1.63), while Housing, water, electricity and gas gained 1.51 percentage points. Furnishing, household equipment and routing maintenance suffered the biggest downward adjustment of (-5.2 percentage points) Generous endowment of natural resources Although over 40 different minerals are produced, approximately 85% of mineral production is currently derived from chrome, coal, diamonds, gold and platinum. Mining is an important export earner, making up more than 65% of total export earnings. The mining sector’s contribution to GDP has grown from an average of 10.2% in the 1990s to an average of 16.9% from 2009-2011, overtaking agriculture. Mining output

2000 2005 2006 2007 2008 2009 2010 2011 2012e 2013fAsbestos (t) 145,203 122,041 96,956 84,520 11,489 3,116 2,020 0 0 0

Coal (t) 3,807,827 3,370,826 2,107,115 2,080,221 1,509,000 1,667,000 2,000,000 2,922,000 1,500,000 2,000,000Chrome (t) 668,043 667,199 700,000 616,558 442,584 201,000 500,000 599,000 420,000 282,000

Gold (kg) 22,070 14,023 11,353 7,018 3,579 4,966 8,000 12,949 15,000 17,000

Nickel (mt) 7,122 9,220 8,825 8,582 6,354 4,858 6,120 7,992 8,500 10,000

Platinum (kg) 505 4,833 4,998 5,086 5,496 6,849 9,000 10,827 11,000 12,500

Palladium (kg) 366 3,879 4,022 3,999 4,274 5,354 6,000 8,422 8,800 10,000

Source: Zimbabwe Chamber of Mines Output for the mining sector is estimated to have increased by 10.1% in 2012. The main drivers in 2012 were increased production in diamond (+38%), gold (+16%) and nickel (+6%). The increase in gold production has been supported by significant activity from the small scale miners, who now contribute an estimated 15% to the total production. This has also resulted in significant upliftment of disposable incomes for ordinary people. The mining sector is expected to grow by 17.1x% in 2013 underpinned by significant increases in diamond (+41%), gold (+13%), nickel (+18%) and platinum (+14%) output and a moderate performance from other minerals. Mining output in January and February 2013 increased anchored by growth in platinum, coal, nickel and chrome. Gold production for the two months amounted to approximately 2,155kgs, while platinum production was 2,227kgs. Generally, production is still in line with the 2013 budget macro-economic framework. Although mining output is set to increase, investment continues to be constrained by high capital costs and an unwillingness by large investors to commit capital given the uncertainties fuelled by the indigenisation legislation. Significant realisation of the potential of the country’s mining industry will require up to USD 5.0bn in investment towards the recapitalisation of mining houses over the next three to five years.

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Strong recovery in cash crops With a majority of the population (+68%) staying in rural areas a higher agricultural output translates into higher consumer spending and improved living standards. According to the Poverty Income Consumption and Expenditure survey 2011/12, agriculture income contribute 17.5% to average annual gross income. Furthermore, the highest proportion (71.8%) of employed people are employed in agriculture. Zimbabwe’s agricultural production has witnessed strong recovery since 2009 from its cumulative decline of 86% between 2002 and 2008. The recovery was underpinned by improved production in tobacco, maize, sugar, cotton and tea. A considerable amount of investment also supported the recover as the sector is the sector most supported sector by the state having received +USD 2.7bn since dollarisation. Agricultural output ('000 tonnes)

2000 2005 2006 2007 2008 2009 2010 2011 2012f 2013fMaize 1,545 750 1,485 953 575 1,140 1,300 1,452 968 1,400

Tobacco 198 74 55 80 45 58 123 133 145 170

Beef 71 90 90 95 90 93 101 94 94 94Cotton 304 198 198 260 235 226 260 250 350 283

Soya beans 99 50 70 102 48 115 135 84 71 115

Horticulture 63 60 64 66 60 45 50 45 51 54

Dairy( m litres) 153 95 90 50 46 40 45 63 65 70

Source: Min. of Finance Zimbabwe, FAO The country’s agricultural production remains susceptible to the vagaries of the weather as no significant investment has been made in irrigation systems post the chaotic land reform exercise. The 2012-13 cropping season was adversely affected by the late start to the rainy season as well as the dry spell in some parts of the country. Although the performance of all crops is still to be determined, a cereal deficit is anticipated for 2013 due to the dry spell and lack of fertilizers that resulted in a poor harvest. The grain milling industry estimates that it requires approximately 150,000t of maize before the next harvest. The country has to date imported 432,400t of maize to meet the cereal gap of 436,121t. Nonetheless, tobacco has performed strongly with cumulative receipts of USD 483.6m (+26% y-o-y) to 22 May 2013 on 130.5m kgs (+28% y-o-y). The average price was about USD 3.71 per kg, compared to USD 3.76 last year. The tobacco national crop is expected to be bigger than that achieved in 2012 with estimates indicating a crop size of between 160mkg and 170m kg. Lost competitiveness in manufacturing Manufacturing accounts for just over 15% of total production, with the output of food related products

the biggest component. Industrial production is estimated to have grown by a modest 2.3% last year (from 13.9% in 2011) and manufacturing’s share of GDP has fallen from a high of almost 25% in the early 1990s. The sector continues to be impacted by the de-industrialisation of the lost decade, power outages, high utility costs, working capital constraints and outdated equipment. The shortage of liquidity is squeezing much needed investment expenditure, as many companies cannot expand using debt. Growth in some sub-sectors was negative in 2012, especially for clothing and footwear as well as metals and metal products. Capacity utilisation for the manufacturing sector averaged between 40% from 52.7% in 2011 and a figure of 40% - 50% is expected in 2013. Despite this, food related manufacturing companies have done well, recording capacity utilisation of approximately 60%. According to the MoF the manufacturing sector is expected to grow by 3% in 2013. Subsectors, which are expected to perform relatively, better include beverages +7.4%, foodstuff +4%, furniture +3.7% and paper, printing and publishing +2.6%. A survey conducted by the Consumer Council of Zimbabwe indicates that 65% of the products in retail shops are imports. Foodstuffs capacity utilisation which was expected to reach 57% in 2012 stubbornly remained at the 44% recorded in 2011. Opening up of traditional source markets to spur recovery Zimbabwe's tourism industry has continued to recover anchored by increased arrivals from the traditional source markets (America and Europe) and earned approximately 13% of the nation’s GDP in 2012. The sector recorded a 4.3% growth in 2011 followed by a 3.9% in 2012 and is expected to grow by 4% in 2013, underpinned by hotels and restaurants sector. According to the Zimbabwe Tourism Authority, tourism earnings jumped 4% in 2011 to USD 662.0m while the number of visitors rose 8% to 2.4m underpinned by arrivals from Asia (+80%), Middle East (+52%), America (+30%) and Europe (+23%). In our view, the tourism sector has the potential to be one of the fastest growing sectors in Zimbabwe’s economy, benefiting from the continued recovery in both global and domestic economic activity, and also on the back of targeted marketing strategies. We believe that the longer-term potential of the industry remains unquestionably encouraging as Zimbabwe has top resorts and the infrastructure is still relatively intact and grossly underutilised.

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0

100

200

300

400

500

600

700

0

500

1,000

1,500

2,000

2,500

3,000

2000 2002 2004 2006 2008 2010

Tourism Trends Arrivals LHS '000s

Receipts RHS USDm

Source: RBZ, ZTA

USDm

Construction still reeling from years of economic slowdown The construction industry is a good economic barometer: it is the first to feel the impact of a recession and is a good indicator of the stage of economic recovery. Minimal construction activity has occurred despite the infrastructural decay, due to liquidity constraints and the high cost of local building materials. Estimates indicate that Zimbabwe will require approximately USD 15.0bn in the next five years, for infrastructure development. Local pension funds are heavily invested in commercial property. That said, we believe significant growth will come from the residential market as the mortgage market redevelops. Banks’ asset quality remain a major concern Banking institutions in Zimbabwe have seen strong deposit and credit growth ahead of GDP growth over the last three years albeit off a very low base. According to the MoF, the domestic savings rate remains very low at 2% of GDP negatively impacting on investments. Total bank deposits were USD 4.4bn as at end 2012, up 30.7% y-o-y largely driven by increases across all classes of deposits as follows: demand deposits 12.2%, savings 42.9%, short term deposits 33.1% and long term 67.2%. Nonetheless, the deposits remained volatile with short term deposits accounting for more than 60% of total. The aggressive lending regime which was followed by banks post dollarisation has resulted in huge non-performing loans on the balance sheet of mostly indigenous banks. The Bankers association of Zimbabwe estimates that 12.3% of loans mainly concentrated in 8 banks are not performing. Loan origination from weak banks remains high, funded by unstable short-term deposits. Non-performing loans (NPLs) increased from 6% on average at the end of December 2011 to 12.3% at the end of November 2012. The NPLs are extremely high when compared to the prudential 3% promulgated in the Basel III requirements. NPLs could rise further with the ongoing deceleration in economic activity. The intransigencies

unearthed at Interfin confirm persistent concerns over the lending practices, risk management and the quality of corporate governance in some of the smaller banks. We continue to reiterate that most of the lending decisions have been based on the size of the collateral being offered and relationships rather than cash flow. In the absence of credible information compounded by the absence of the national credit bureau, abuse by clients will remain high and rampant. Furthermore, the value of the collateral, which is real estate in most cases, tends to be overstated and inevitably harder to realise if the need arises. This has allowed the official NPLs numbers to be low. In our view, many banks are sitting on a significant unknown quantity of NPLs and these continue to grow. Precarious BOP position Exports declined by 10% y-o-y for the three months to March 2013 to USD 689.0m while imports grew 14% y-o-y to USD 1.7bn. The trade deficit worsened to USD 1.1bn (160% of total exports) in the first quarter of 2013 from USD 757m (99% of total exports) for the corresponding period. Mineral shipments accounted for the bulk of exports at 68.8%, followed by tobacco 14.8%, manufacturing 10.5%, agriculture 3.1% and hunting 0.4%. Platinum dominated mineral exports at USD 210m, gold was at USD 124m and diamonds were USD 113.7m. The import bill indicates that finished products account for 50% (2011:42%) of total imports with capital goods accounting for only 25% (2011:14%).

0

2,000

4,000

6,000

8,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012e 2013f

Foreign Trade

Exports ImportsUSDm

source: RBZ The country is relying mostly on non-concessional debt flows to finance current account transactions, which exacerbates the country’s already precarious external debt position. Foreign Direct Investment (FDI) and portfolio investment have remained subdued on the back of the intensification of the Indigenization initiatives that gathered substantial momentum in 2012.

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Limited fiscal space Since dollarisation, the GNU has maintained a cash budgeting system which has helped the economic recovery. Nonetheless, current expenditure remains too high, particularly on wages and salaries which account for 70% of the total budget. In contrast, capital expenditure outlays are only 5% of the budget. According to the MoF Q1 2013 update, there are significant unbudgeted for pressures on the 2013 budget stemming from high employment costs, critical

external loan repayment obligations, the referendum, elections and grain importation. The government plans to import approximately 150,000t of maize from Zambia at a cost of USD 60.0m to USD 70.0m to ensure food security. Huge debt overhang With external public debt estimated at USD 12.2bn (104% of GDP) as at December 2012, the country remains saddled with debt which negatively impacts on development and economic growth. Approximately 60% of the debt is in arrears.

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At eighth place, ranked by market capitalisation (circa USD 5.2bn as at 17 May 2013), Zimbabwe is not one of the largest markets in sub-Saharan Africa. However, with 74 listed companies, the ZSE has more depth and diversity than some of the region’s markets. The stocks on the exchange include financial, insurance, retail, construction, transport, pharmaceuticals, property, telecommunications, manufacturing and agricultural-related stocks. There are currently two indices on the Stock Exchange; the Mining Index with four companies and the Industrial Index comprising of 70 companies. The indices are calculated using a 2009 base date and are weighted by market capitalisation. The Industrial Index is dominated by price movements in a few big cap stocks such as Delta which represents 20% of the index, Econet (19%), Innscor (8%), SeedCo (6%) and Hippo (5%). Trading on the ZSE Presently trading is by call over, using an open-cry floor system on a matched bargain basis. This trading system is paper based and settlement is on a T+7 basis against physical delivery of scrip (seven day settlement for both shares and payment). Custodial options: Barclays Nominees Stanbic Nominees Standard Chartered Bank Zimbabwe Limited Three Anchor Investments T/A Old Mutual

Custodial Services ZB Bank Limited

Share dealing is done through stockbrokers once a day, from Monday to Friday. The call over session commences at 10.00 hours. Financial instruments that can be traded on the ZSE are common stock, preference shares, corporate debentures, warrants, government stocks and fixed-interest securities. However, the bulk of trades and listings on the exchange are for common stock. Preparations for the launch of Central Scrip Depository (CSD) are well advantaged, which will eventually allow for electronic trading. The CSD system is anticipated to be launched later in the year, around September 2013. Dealing costs The set legislated transaction costs amount to 4.21% for a buy and sell.

ZSE Transcation costsBuying % Selling %

Brokerage fees 1.00 1.00

Stamp duty (buying) 0.25

Capital Gains Tax (selling) 1.00

Securities Commission Levy 0.18 0.18

Investor Protection Levy 0.05 0.05

VAT at 15% on Brokerage 0.15 0.15

Total costs 1.73 2.48Total costs for both buying and selling 4.21%Basic Charge USD 2.00 USD 2.00

Source: ZSE Foreign Participation and Regulation Foreign participation in stock market trading was introduced in mid-1993, following the partial lifting of exchange control regulations. Foreign investors may hold up to 10% of any listed company without recourse to Exchange Control. Collectively foreign ownership in a listed company may not exceed 40% of the issued capital of that company. These rulings exclude holdings which were acquired before June 1993. Any violation of the above limits would not see registration. It would be reported by the transfer secretary to both the ZSE and RBZ resulting in a directive from the RBZ to the investor to sell any excess holding. Fungibility is permitted for some dually listed companies, namely ABCH, NMBZH, Old Mutual and PPC. Patience is a virtue when trading frontier markets In the last 12 months the ZSE turned over USD 0.4bn in value or 10% of total market capitalisation. Given the size of the market, patience is generally required to build a position and equally when fund managers want to sell. The market is characterised by high levels of local institutional investors who are relatively inactive compounding the liquidity problem. Key ZSE Statistics

1995 1996 1997 2008* 2009 2010 2011 2012Market Cap USDbn 2.1 3.9 5.7 4.2 3.9 4.2 4.0 4.3

Average daily turnover USD '000 549 942 1,264 1,225 1,859 1,555 1,906 1,801

Annual turnover USDm 150 245 329 311 437 392 477 448

Number of listed companies 64 64 65 81 81 81 81 81

Market cap as % of GDP 21 58 66 86 75 67 45 36

*based on OMIR Source: IES, ZSE

The Zimbabwe Stock Exchange Overview

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Foreign activity has dominated trading on the ZSE accounting for +46% in 2012, up from around 36% in 2009. Foreigners have remained net buyers on the market since dollarisation in 2009.

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Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13M

illio

ns

of U

SD

Monthly net foreign dealing USDm Jan 11 - Apr13

Source: IES, ZSE ZSE Outlook Given the slowdown in economic growth, we expect this to be reflected in corporate earnings. Over the past years most companies managed to post earnings growth in excess of 40% y-o-y and we forecast this to moderate to around 20% this year. Nonetheless, we believe that there are prospects of heightened economic growth post a peaceful election, albeit off a low base. Critical to sustained growth includes policy consistency, rule of law and availability of funding. The economy remains hugely undercapitalised with most companies still saddled with heavy and expensive borrowings. In our view, election talk, political rhetoric and indigenisation concerns will continue to negatively impact on investor sentiment, thus volatility will likely stay high until the local uncertainties clear, hence, we recommend investors take a long-term view on their holdings.. Although the ZSE has gained 36% YTD on strong rallies by the big caps, we believe there are still

opportunities for long term investors given the increasing profitability and return of dividends. Most of the big cap counters are post their heavy capex projects and we believe will be able to pay attractive dividends in the future. Counters such as BATZ, Delta, Econet and OK Zim easily come to mind in this regard. Given the demand for infrastructure reconstruction we believe construction companies are well poised to take on opportunities (as the economy recovers) and counters likely to gain include Lafarge and Masimba Holdings. Given the tight liquidity conditions and limited credit lines we believe that bank asset quality pressures will remain elevated. We rate banks at best as Spec Buys and our picks in this space include ABCH, Barclays, CBZH, FBCH and NMBZH. In our opinion FMCG businesses are likely to continue to post good financials as incremental increases in disposable incomes translate into retail spend figures and companies to look for include BATZ, Dairibord, Delta, Econet, Innscor, Natfoods and OK Zim. Given the recovery in some sub-sectors of agriculture, counters such as TSL and SeedCo may benefit.

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Jan-11 Jun-11 Nov-11 Apr-12 Sep-12 Feb-13

Mill

ion

s of

USD


Source: IES, ZSE

11

ZSE Listed Companies

Companies Analyst Year Shares Price Mkt cap Eps (USc) P/E (x) PBV (x) EV/EBITDA (x) OPM* (%)end in issue (USc) (USDm) hist +1 +2 hist +1 +2 hist +1 +2 hist +1 +2 hist +1 +2 ST LT

Agricultural na 3,371.9 450.9Ariston TJM Sept 1,378.4 1.3 17.9 (0.1) 0.1 0.2 na 19.4 5.9 1.1 1.1 1.0 (260.7) 14.4 6.6 (0.6) 7.6 14.5 Hold HoldBorder Timbers TJM June 42.9 30.0 12.9 11.7 4.3 1.7 2.6 7.1 17.5 0.1 0.1 0.1 (6.3) (7.2) (8.7) (14.5) (19.5) (13.5) Hold HoldAICO TJM Mar 534.1 8.0 42.7 1.1 0.7 2.0 7.2 11.8 4.0 0.5 0.5 0.4 2.3 3.1 2.2 16.0 12.0 16.0 Hold HoldHippo Valley Estates TJM Mar 193.0 110.0 212.3 12.1 11.6 12.2 10.1 10.6 10.0 1.1 1.0 0.9 8.1 6.6 6.1 21.9 24.0 23.5 Buy BuyInterfresh TJM Dec 487.6 0.2 1.0 (0.5) (0.8) (0.8) na na na 0.1 0.1 0.3 (3.1) (2.6) (2.3) (24.9) (22.4) (20.0) Sell SellPadenga Holdings TJM June 541.6 4.9 26.3 0.6 0.7 1.0 7.9 6.8 5.3 0.8 0.7 0.7 5.3 5.6 4.5 29.9 25.0 25.0 Buy BuySeed Company TJM Mar 194.2 71.0 137.8 9.0 9.9 1.8 7.9 7.2 39.8 1.9 1.7 1.6 6.5 6.4 10.8 22.3 20.2 9.5 Buy Buy

Building and Allied na 3,114.8 161.7Lafarge TJM Dec 80.0 86.0 68.8 5.8 8.7 11.3 14.9 9.9 7.6 2.9 2.9 2.9 6.0 5.6 5.0 16.2 19.5 21.5 Buy BuyMasimba TJM Jun 214.8 7.0 15.0 0.5 0.6 0.6 13.3 11.6 11.0 0.8 0.8 0.7 6.3 7.3 5.6 3.4 1.1 1.6 Buy BuyPGI TJM Mar 478.3 0.9 4.3 (1.2) (0.3) (0.1) na na na 2.1 1.7 1.4 (3.6) (5.0) 56.2 (14.6) (5.7) 0.4 Sell SellTurnall TJM Dec 493.0 5.0 24.7 0.2 0.9 1.2 23.3 5.4 4.3 0.8 0.7 0.7 5.6 3.3 2.6 9.6 11.3 11.4 Hold BuyPPC TJM Sept 15.2 262.5 39.9 7.1 7.8 9.0 36.9 33.5 29.1 30.4 24.3 31.3 16.9 13.5 13.5 24.9 24.0 21.6 Hold BuyRadar TJM Jun 55.4 12.0 6.7 (0.5) 0.9 3.3 na 13.8 3.7 0.1 0.1 0.1 4.0 3.1 3.1 12.4 14.2 12.0 Hold HoldWilldale TJM Sept 1,778.0 0.1 2.3 (0.0) (0.0) (0.0) na na na 0.3 0.3 0.3 15.3 3.5 (3.2) (7.0) (3.2) (0.6) Sell Sell

Beverages, Hotels and Leisure na 4,541.3 2,263.5Afdis ATC Jun 95.2 20.0 19.0 1.2 1.6 2.0 17.0 12.4 9.9 3.8 2.9 2.2 14.9 8.2 6.6 5.8 8.1 8.1 Buy BuyDelta ATC Mar 1,202.5 142.0 1,707.5 8.4 9.9 11.7 16.5 14.0 11.9 4.9 4.1 3.5 2.7 2.2 2.0 25.6 26.5 27.3 Buy BuyInnscor ATC Jun 541.6 93.0 503.7 7.1 7.5 9.5 13.0 12.4 9.8 3.8 3.1 2.5 7.6 6.4 5.1 10.9 11.9 12.9 Accumulate BuyRTG ATC Dec 1,870.5 1.0 18.7 (0.2) (0.1) (0.0) na na na 1.7 1.3 0.0 100.3 40.8 23.5 (4.1) (2.0) 0.3 Sell SellAfrisun ATC Sept 831.5 1.8 14.6 0.1 0.1 0.2 14.7 12.6 7.5 0.8 0.8 0.7 5.5 4.5 4.2 6.0 6.4 6.6 Sell Hold

Engineering na 2,588.3 41.9CAFCA TJM Dec 8.2 50.0 4.1 17.9 24.0 31.0 2.8 2.1 1.6 0.5 0.4 0.3 1.7 1.0 0.5 10.9 12.7 14.5 Hold BuyGulliver TJM Sept 554.9 0.0 0.0 (0.5) (0.8) (1.1) 0.0 0.0 0.0 0.0 0.0 0.0 (0.9) (1.0) (0.8) (90.4) (88.3) (85.7) Sell SellPowerspeed TJM Sept 401.2 1.6 6.4 0.2 0.2 0.3 9.6 8.0 6.3 0.8 0.7 0.6 8.0 7.1 6.1 3.0 3.0 3.0 Spec Buy Spec BuySteelnet TJM Dec 538.0 Suspended Susp SuspZECO TJM Jan 463.3 0.1 0.3 (0.5) (0.5) (0.4) na na na 0.0 0.0 0.0 (0.1) (0.0) (0.1) (138.4) (110.6) (86.9) Avoid AvoidZimplow TJM Dec 622.7 5.0 31.1 1.0 1.7 2.5 5.1 3.0 2.0 0.9 0.8 0.6 3.5 2.1 1.3 17.3 23.4 28.9 Hold Buy

Financial na 4,112 307.5ABC ATC Dec 71.7 65.0 46.6 16.9 24.4 34.6 3.8 2.7 1.9 0.6 0.3 0.3 84.7 82.2 80.2 Accumulate HoldBarclays Bank ATC Dec 2,153.1 3.0 64.6 0.1 0.2 0.4 30.0 12.6 6.9 1.6 1.4 1.2 90.5 82.3 74.2 Hold AccumulateCBZ ATC Dec 684.1 13.9 94.8 6.6 7.7 9.6 2.1 1.8 1.4 0.6 0.4 0.3 57.8 53.6 50.4 Spec Buy Spec BuyInterfin ATC Dec 51.2 Suspended suspendedZBF Holdings ATC Dec 175.2 9.0 15.8 3.8 3.8 3.8 2.4 2.1 1.9 0.2 0.2 0.2 87.1 87.8 86.6 Spec HoldFBC Holdings ATC Dec 591.9 8.0 47.3 2.4 3.3 3.8 3.6 3.0 2.5 0.5 0.4 0.3 72.4 70.6 69.1 Spec Spec BuyNMB Bank ATC Dec 384.4 10.0 38.4 0.3 6.4 7.6 5.6 4.5 3.8 1.4 1.0 0.8 58.3 55.2 53.0 Spec Buy BuyTrust Holdings ATC Dec 359.7 0.4 1.4 (0.3) (1.3) (1.2) na na na 0.1 0.1 0.1 Sell Sell

Insurance 1,400.9 179.6Fidelity TJM Dec 108.9 11.5 12.5 1.8 3.2 4.6 6.3 3.6 2.5 0.5 0.4 0.3 Hold HoldAFRE TJM Dec 217.1 12.5 27.1 (4.2) (3.2) (1.6) na na na 0.5 0.6 0.7 Buy BuyNicoz Diamond TJM Dec 565.9 1.3 7.4 0.3 0.3 0.5 4.5 3.8 2.6 0.6 0.5 0.4 Hold AccumulateOld Mutual TJM Dec 67.6 240.0 162.2 (9.4) (8.0) (4.0) na na na 0.7 0.9 0.9 Buy BuyZimre TJM Dec 767.4 1.3 10.0 0.3 0.4 0.5 0.0 0.0 0.0 0.0 0.0 0.0 Spec Accumulate

OPM* - for finanial companies its cost to income ratio

Recommendation

12

ZSE Listed Companies cont’d

Companies Analyst Year Shares Price Mkt cap Eps (USc) P/E (x) PBV (x) EV/EBITDA (x) OPM (%)end in issue (USc) (USDm) hist +1 +2 hist +1 +2 hist +1 +2 hist +1 +2 hist +1 +2 ST LT

Food na 1,271.3 331.0Cairns TJM Aug 167.7 0.0 Suspended SuspendedColcom TJM Jun 159.0 26.0 41.4 3.0 3.1 3.8 8.6 8.4 6.8 1.6 1.5 1.3 5.3 4.2 3.5 13.7 15.0 16.0 Hold BuyDairibord TJM Dec 357.7 29.0 103.7 2.0 2.1 2.8 14.7 13.8 10.4 2.1 1.9 1.6 7.6 7.1 5.6 13.1 12.5 14.5 Hold BuyNational Foods TJM Jun 68.4 260.0 177.8 11.6 12.4 12.6 22.5 21.0 20.6 3.6 3.0 2.7 12.7 11.1 10.5 5.5 5.5 5.0 Buy BuyStarafrica TJM Mar 518.5 1.6 8.0 (1.7) (1.6) (1.4) na na na 1.5 0.8 0.5 (11.2) (12.8) (17.2) (11.7) (8.5) (6.2) Sell Sell

Industrial Holding na 2,888.1 153.5Apex ATC Oct 503.7 0.0 0.1 (0.0) (0.1) (0.2) na na na 0.0 0.0 0.0 0.1 0.1 0.0 0.1 (2.3) (6.5) Sell SellAstra ATC Aug 140.0 4.5 6.3 1.1 1.3 1.7 4.1 3.5 2.7 0.4 0.4 0.3 2.1 1.8 1.4 7.9 8.2 8.5 Spec SpecCFI ATC Sep 105.5 6.0 6.3 (3.1) (0.5) (1.2) na na na 0.1 0.1 0.2 (17.0) 106.8 11.3 (1.3) 0.2 1.6 Hold HoldGeneral Beltings ATC Dec 536.6 0.0 0.1 (0.5) (0.6) (0.9) na na na 0.0 0.0 0.0 (1.1) (4.6) (8.9) (22.9) (20.0) (17.4) Sell SellMeikles ATC Mar 240.8 25.5 61.4 (2.5) (0.2) 0.6 na na 40.4 0.5 0.5 0.5 32.4 9.9 6.5 (0.4) 1.3 2.0 Spec SpecPhoenix ATC Oct 87.5 0.3 0.3 0.5 0.7 1.1 0.6 0.4 0.3 0.0 0.0 0.0 2.5 2.1 1.8 2.5 2.8 3.2 Reduce HoldT A ATC Dec 164.8 9.0 14.8 0.8 1.8 2.3 11.2 5.1 3.9 0.3 0.3 0.3 0.9 0.7 0.5 10.7 11.1 11.8 Sell HoldLifestyle Holdings ATC Dec 762.0 0.0 0.0 0.5 0.6 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Suspended SellT S L ATC Oct 347.3 18.5 64.2 1.6 1.9 2.2 11.6 9.6 8.5 1.1 1.0 1.0 9.4 7.5 6.5 17.3 19.0 20.4 Buy Buy

Mining na 1,556.8 103.6Bindura Nickel ATC Dec 1,210.2 3.0 36.3 (10.1) (8.7) (4.0) na na na (2.4) (2.7) (1.8) (3.4) (3.1) (7.1) (823.0) (44.1) (10.8) Sell SellFalgold ATC Sept 111.2 12.0 13.3 3.7 4.4 6.0 8.7 7.8 7.5 0.0 0.0 0.0 0.0 0.0 0.0 2.9 3.2 3.2 Hold HoldHwange ATC Dec 182.1 15.0 27.3 1.7 1.9 2.0 na na 41.7 0.0 0.0 0.0 0.0 0.0 0.0 (23.6) (4.0) 3.5 Hold BuyRioZim ATC Dec 53.3 50.0 26.7 (8.2) (1.3) 1.2 na na na 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Hold Hold

Paper and Packaging na 1,363.0 20.2Amalgamated Regional Trading ATC Sep 467.3 0.6 2.8 0.1 0.3 0.5 6.5 2.4 1.3 0.3 0.2 0.2 3.7 2.7 1.9 6.7 7.9 8.2 Spec HoldHunyani Holdings ATC Oct 319.7 4.0 12.8 0.3 0.3 0.4 14.6 11.8 10.5 0.6 0.6 0.5 4.7 4.4 4.1 3.9 4.0 4.1 Hold BuyZimbabwe Newspapers ATC Dec 576.0 0.8 4.6 0.0 0.1 0.2 74.1 5.8 3.8 0.6 0.5 0.5 (6.0) (3.7) (2.8) 3.2 4.3 4.6 Sell Sell

Pharmaceuticals and Chemicals na 2,814.9 1.4Chemco ATC Oct 15 Suspended SuspendedMedtech ATC Dec 2,800 0.1 1.4 0.0 (0.0) (0.0) 136.9 na na 0.8 0.9 1.0 50.0 31.3 16.7 (1.2) (1.1) (0.9) Spec Hold

Retail stores na 4,386.2 380.0Celsys TJM June 1,599.6 Suspended SuspendedEdgars Stores TJM Jan 283.4 12.2 34.6 1.2 1.5 2.2 7.6 6.0 4.2 3.3 2.1 1.4 5.5 5.1 3.7 14.6 13.6 14.7 Add BuyOK Zimbabwe TJM Mar 1,130.8 29.0 327.9 1.0 1.4 1.5 28.9 20.1 19.3 6.3 5.1 4.3 15.2 11.5 11.0 4.7 4.8 4.7 Hold BuyPelhams TJM Mar 995.6 0.1 0.5 (0.3) (0.2) (0.0) na na na 0.3 0.2 0.1 na na na (1.9) (1.3) 17.0 Sell SellTruworths TJM Jun 376.7 4.5 17.0 0.2 0.3 0.5 13.9 9.3 5.1 2.2 2.2 2.6 10.7 7.2 5.7 4.9 5.5 8.9 Hold Buy

Tobacco na 17.4 144.3BAT Zimbabwe ATC Dec 17.4 830.0 144.3 70.5 97.0 117.3 11.8 8.6 7.1 10.3 9.5 8.6 8.1 6.3 5.3 32.5 33.2 33.4 Buy Buy

Technology na 1,640.0 1,148.0Econet ATC June 1,640.0 70.0 1,148.0 96.6 109.4 126.7 4.7 4.1 3.6 2.0 1.5 1.2 3.3 3.1 2.6 37.6 38.2 38.2 Buy Buy

Transport na 171.6 6.5Pioneer ATC Dec 55.0 2.5 1.4 (1.6) 0.1 0.3 na 17.6 7.3 0.6 0.5 0.5 (4.9) (11.3) 36.7 (3.5) (1.5) 0.4 Sell SellNTS ATC Dec 253.9 2.0 5.1 0.3 0.5 0.7 5.9 4.3 3.0 1.0 0.8 0.6 4.5 3.3 2.2 5.6 6.6 8.0 Hold Buy

Property na 7,271.1 131.6Dawn Properties TJM Mar 2,457.2 0.9 20.9 (0.0) 0.0 0.0 na 581.5 60.1 0.3 0.3 0.3 16.2 18.9 15.2 52.4 40.5 43.5 Hold HoldMashonaland Holdings TJM Sep 1,859.1 2.5 46.5 1.3 1.0 0.3 2.0 2.5 7.7 0.6 0.5 0.5 12.5 9.0 6.7 61.0 64.0 66.9 Buy BuyPearl Properties TJM Dec 1,238.2 3.3 40.2 0.7 0.6 0.5 3.7 3.0 3.0 0.3 0.3 0.2 7.8 6.1 6.0 45.5 50.0 45.0 Buy BuyZimre Properties Investments TJM Dec 1,716.7 1.4 24.0 0.4 0.5 0.5 3.9 3.1 2.8 0.4 0.4 0.3 10.7 4.9 2.2 48.8 57.0 63.9 Buy Buy

Recommendation

13

Equity Research Zimbabwe May 2013 Insurance

Bloomberg Code AFRE:ZWRecommendation BUYCurrent Price (USc) 12.5

Target Price (USc) 28.2

Upside (%) 125.5

Liquidity

Market Cap (USDm) 27.1

Shares (m) 217.1

Free Float (%) 29.0

Ave. daily vol ('000) - 12 months 46

Price Performance

Price, 12 months ago (USc) 6.0

Change (%) 108.3


Change (%) 145.1

Financials (USD '000) 31 Dec F2012 2013F 2014F

Net Premiums 75,001 83,460 91,902

Surplus before tax 19,296 20,454 22,258

Net Investment Income 17,304 20,216 22,273

Attributable Earnings 13,451 16,794 18,216

EPS (USc) 4.51 5.65 6.12

DPS (USc) - 1.63 1.80

NAV/Share (USc) 29.11 34.15 38.05

Ratios

RoaA (%) 8.2 9.0 8.8

RoaE (%) 23.6 24.9 24.0

Cost Margin (%) 47.7 47.3 47.6

Valuation Ratios Current 2010F 2011F

Earnings Yield (%) 37.6 47.1 51.0

Dividend Yield (%) - 13.6 15.0

PE (x) 1.9 1.6 1.4

PBV (x) 0.4 0.4 0.3

Afre is the second biggest insurer after Old Mutual commanding a respectable market share of circa 15% for both life and nonlife business. The insurance business is dominated by two big players and the rest of the market is fragmented. Post dollarisation the insurer was negatively impacted by shareholder issues which saw the exiting of Renaissance from the group as the major shareholder and the coming of NSSA, culminating in management change. This significantly changed the fortunes of the group and the last financials indicate improving gross premium written, improvement in the liquidity position of the group and float is re-emerging for the business. • Gross premium written up 10% Afre Corporation reported a set of robust financial results underpinned by a 10% growth in gross premium written to USD 88.6m. First Mutual Life Assurance Company wrote premiums of USD 22.4m slightly lower than the prior year figure of USD 23.5m. • High collection rates driving growth The claims ratio for the business declined from 42% to 27% and the reinsurance ratio was maintained at 1%. Compared to other insurers with collection rate of 60% the group as a whole has a very high collection rate of 89% an increase of 3% on last year figures. • Delivering value through growth in premiums Ratings are undemanding with PER+1 of 1.6x and a PBV of 0.4x, we therefore recommend investors to BUY at current levels.

Strengths WeaknessStrong management Legacy issues

Diversified income stream A reduced float to invest

Well capitalised operations across the board

An indigenous operation

Strong relations with major shareholder

Opportunities ThreatsRegional expansion Slow growth in GDP

Recovery of the health sector Insurance penertrateion to GDP is low

Recovery of the public sector Political instability

Indigenisation issues at Old Mutual Increase in Fraudulent claims

-

500

1,000

1,500

2,000

-

4

8

12

16

May-12 Oct-12 Mar-13

AFRE - volume vs price

Volume ('000) RHS Price (USc) LHS

Source: IES

14

Nature of business AFRE (Africa First ReNaissance Corporation Ltd) is a diverse financial services holding company with interests in short-term insurance as well as real estate. The operating subsidiaries are namely: First Mutual, Pearl Properties, Tristar Insurance, African Actuarial Consultants, FMRE Property & Casualty (ZIM), FMRE Life & Health and FMRE Property & Casualty (Botswana). The company also owns a 57% stake in ZSE listed real estate company, Pearl Properties. FY 2012 Financial & Operational Review Strong performance Afre Corporation reported a set of robust financial results underpinned by a 10% growth in gross premium written to USD 88.6m. First Mutual Life Assurance Company wrote premiums of USD 22.4m slightly lower than the prior year figure of USD 23.5m. Employee benefits premium was 9% to USD 12.6M due to challenges relating to low salaries in the market and the withdraw of some schemes during the year. Individual Life premium declined from USD 10.7m to USD 10.1m due to the termination of the Ecolife product. The claims ratio for the division declined from 42% to 27% and the reinsurance ratio was maintained at 1%. Compared to other insurers in Zimbabwe with collection rates of 60%, FML Assurance has a very high collection rate of 89% an increase of 3 percentage points on last year’s figures. FMRE Life and Health increased gross premium written by 89% to USD 1.8m with the Health business contributing 73%, life contributed 22% and individual life contributed 5% of the gross premium written. On the Health Insurance business, FML Health Care Company increased gross premium written by 16% to USD 36.3m mainly as result of a 20% increase in membership from 66,259 to 79,242. The claims ratio for this division declined from 74% to 68% and collection increased from 85% to 87%. Tristar insurance increased gross premium written by 8% to USD 9m, with motor insurance contributing 43% followed by fire at 20% and accident at 20%. Pearl Properties achieved a rental yield of 8.7% (2011:9.8%) due to slower growth in rentals relative to the appreciation in investment property values. The average rental per square metre achieved was USD 7.87 (2011: USD 7.33). The vacancy rate was at 19.8% compared to 22.5% in 2011 as more spaces is getting occupied. Working capital declines Operating cash flow declined slightly from USD 12.3m to USD 11.2m due to investment in working capital of USD 2.9m compared to a divesture of USD 3.6m last year. Net cash utilised on investing activities declined from USD 5m to USD 2.3m. During the year Afre

borrowed fund to the tune of USD 6.6m thus resulting in a net cash increase for the group of USD 15m compared to USD 7m in FY 11. Overall the closing cash position for the group was USD 24.2m compared to USD 8.6m in the prior year. Solid balance sheet The balance sheet strengthened by 16% due to increases in investments properties and accounts receivables. The reclassification of retained profit for the non-controlling stake in Pearl Properties reduced the previous period’s retained income, and thus the NAV of the company was an adjusted USD 2.3m for 2011. Comparatively NAV grew from USD 2.3m to USD 16.2m due to an USD8m injection from the rights issue and a USD 7.7m retained income for the current financial statement. Outlook The separation of policy holders’ funds from shareholders’ funds is a distinction that Afre has with other local insures who continue to lamp the two even in the face of imminent changes on the matter from accounting standard setters. The promise to increase disclosure by management at Afre is indicative of the quality of management at the company and the reclassification of the previous results will improve the quality of information that analyst and the investment community will use to value the business. The collection figures at Afre are flattering to say the least especially in an environment which is experiencing a credit crunch. Although the insurer lost the Ecolife business, management indicated that it is working hard to reposition the company in this space. Management is targeting a gross premium written of USD 100m by the end of financial year 2013 and from the kind of growth that has been witnessed ever since the “changing of the guard”, these numbers are within reach and we believe Afre will get market share from smaller players, although but Old Mutual will remain the dominant player. Although we don’t expect the insurance sector to outperform in the current environment Afre present a compelling investment case that is driven by astute management with a clear vision. The group did not declare a dividend as it looks to strengthen the balance sheet to enable it to underwrite more risk and grow its regional operations. Management indicated that 30% of income by 2017 should be regional, and staff costs are targeted at 15% of revenue by FY 13. Valuation and Recommendation Ratings are undemanding with at a PER of 1.6x and a PBV of 0.4x, we therefore recommend investors to BUY at current levels.

15

USD Thousands 2007 2008 2009 2010 2011 2012 2013 E 2014 ENet premiums 19,023 47,194 67,045 75,001 83,460 91,902

Y-o-Y % NA 148.1% 42.1% 11.9% 11.3% 10.1%

Net Claims 10,443 28,668 38,244 37,563 43,150 47,616

Y-o-Y % NA 174.5% 33.4% -1.8% 14.9% 10.3%

EBIT/Operating Profit 14,070 11,734 4,645 19,296 20,454 22,258

Y-o-Y % NA -16.6% -60.4% 315.4% 6.0% 8.8%

Investable Surplus (Float) 36,849 38,542 50,055 53,145 63,953 72,981

Y-o-Y % NA 4.6% 29.9% 6.2% 20.3% 14.1%

Attributable Net Income/Profit After Tax 29,349 8,753 1,085 13,451 16,794 18,216

Y-o-Y % NA -70.2% -87.6% 1140.1% 24.9% 8.5%

Per Share data

Attributable Diluted EPS 0.14 0.04 -0.03 4.51 5.65 6.12

Y-o-Y % NA -71.4% -179.0% -14610.8% 25.2% 8.5%

Dividend Per share (DPS) 0.03 0.00 0.00 0.00 1.63 1.80

Y-o-Y % NA -100.0% NA NA NA 10.1%

NAV/Basic Share 32.4 23.0 23.0 29.1 34.2 38.1

Y-o-Y % NA -29.0% 0.1% 26.4% 17.3% 11.4%

Margin Performance2009 2010 2011 2012 2013 E 2014 E

Claims Loss Ratio 54.9% 60.7% 57.0% 50.1% 51.7% 51.8%

Cost to Income ratio/Expense Ratio 56.0% 60.4% 68.3% 47.7% 47.3% 47.6%

Combined Ratio 110.9% 121.2% 125.3% 97.8% 99.0% 99.4%

Underwriting profit margin -10.9% -21.2% -25.3% 2.2% 1.0% 0.6%

Retention Ratio 77.2% 78.8% 83.4% 84.7% 86.0% 86.0%

EBIT margin% 74.0% 24.9% 6.9% 25.7% 24.5% 24.2%

Net Income Margin % 154.3% 18.5% 1.6% 17.9% 20.1% 19.8%

RatiosROaA 21.5% 6.6% 0.8% 8.2% 9.0% 8.8%

ROaE 41.8% 14.6% 2.1% 23.6% 24.9% 24.0%

Earning yield on current price 1.1% 0.3% -0.3% 37.6% 47.1% 51.0%

Liquidity ratio (shareholders fund/net prem) 355.5% 27.8% 3.5% 21.6% 29.3% 36.5%

Investment yield* 48.4% 57.0% 41.0% 32.6% 30.9% 29.8%

Solvency ratio (shareholdrs funds/policy liab.) 144.0% 24.3% 3.4% 20.6% 27.5% 33.8%

Dividend yield current price 0.3% 0.0% 0.0% 0.0% 13.6% 15.0%

*Excluding unrealized gains and losses

Financial Summary – AFRE

16

Equity Research Zimbabwe May 2013 Agriculture/FMCG

Bloomberg Code AICO:ZWRecommendation HOLDCurrent Price (US c) 8.0

Target Price (US c) 25.0

Upside (%) 212.5

LiquidityMarket Cap (USD m) 42.7

Shares (m) 534.1

Free Float (%) 28.6

Ave. daily vol ('000) 151.1

Price PerformancePrice, 12 months ago 13.0

Change (%) (38.5

Price, 6 months ago 12.0

Change (%) (33.3

Financials (USD '000) 31 Dec Current 2013F 2014F

Turnover 293,292 285,798 300,088

EBITDA 46,873 34,296 48,014

Net Finance Income (23,611) (15,699) (10,395


EPS (USc) 1.1 0.7 2.0

DPS (USc) 0.4 0.0 0.0

NAV/Share (USc) 15.7 16.9 20.5

Ratios

RoaA (%) 13.7 9.0 14.5

RoaE (%) 7.5 4.2 10.7

EBITDA Margin (%) 16.0 12.0 16.0


Earnings Yield (%) 13.9 8.5 25.1

Dividend Yield (%) 5.5 NA NA

PE (x) 7.2 11.8 4.0

PBV (x) 0.5 0.5 0.4

EV/EBITDA (x) 2.3 3.1 2.2

The delayed finalisation of the recapitalisation of AICO has destroyed value for shareholders as the share price has lost 68% from its October 2010 levels. Press reports speculate that the delay is due to the major shareholders failing to agree on the modus operandi of the scheme of arrangement to recapitalise the company. The level of borrowing on the balance sheet is unsustainably high and continues to increase.

• Reduced lint recoveries impacting throughput Group financials were impacted by a 49% decline in lint prices and low input scheme recoveries due to side marketing by cotton farmers. • Disposal of non-core assets After a strategic decision to dispose of Quton to Seed just before dollarisation, AICO has weaned off subsidiaries that were of no strategic fit to its vision. This resulted in the disposal; of Exhort enterprise and in the first of FY 2013 the company concluded the sale of Scottco, the last of companies it deemed as lacking a strategic fit. This resulted in three distinct subsidiaries namely Olivine, The Cotton Company of Zimbabwe and Seed Co. • Attractive valuation Using a sum of the parts valuation and the discounted cash flow method we derived a value of US 25c, implying 213% upside potential to the current price of US 8c. AICO remains undervalued on sum of parts valuation given that its 50% holding in Seed Co alone is worth USD 65m. For the company to have a market cap of USD 42m imply that Cottco and Olivine combined have a negative equity. Hold, pending finalisation of the possible transactions.

STRENGTHS WEAKNESSESDiversified business Input scheme recoveries

Dominant market share

Strategic Partneships

Strong management team

OPPORTUNITIES THREATSContinued regional expansion Competition from new entrants

New products for FMCG business i.e. the Chinese

Improving disposable incomes Volatile international lint prices

SI 142 ensures favorable recoveries Drought

-500 1,000 1,500 2,000 2,500 3,000 3,500

-

5

10

15

20


AICO - volume vs price


Source: IES

17

Nature of business AICO Africa Limited is an integrated agro-industrial conglomerate. The group wholly owns Cottco, which with nine ginneries, constitutes the ginning operations of the Group. AICO also holds a 51% stake in SeedCo Limited, which in turn holds a 100% interest in Quton Seed Company, a cotton planting seed production house. The group also has a 49% stake in Olivine Holdings. H1 2013 Financial & Operational Review Lukewarm performance AICO posted a lukewarm set of financials negatively impacted by the 49% decline in lint prices, high finance charges, low input scheme recoveries, delayed start of the season for the seed business as well as the delayed buying of cotton which resulted in late lint shipments. Scottco was disposed of during the period with the group remaining with three operating units namely Cottco, SeedCo and Olivine. Group sales volumes declined 30% mainly due to the low winter cereal sales for the seed business where volumes declined by 59%. Cotton intake improved 45% to 150,000 tonnes, although the input scheme recoveries declined to below 70% from 95% achieved in the two preceding seasons. FMCG sales volumes grew 2.5% y-o-y to 6,157 tonnes. The Cotton business contributed 71% to group revenue from 64%, seed business 16% from 27% and FMCG 13% from 9%. Margins shrunk due to the high seed cotton buying prices, price discounting in the seed business and inefficiencies in the FMCG business. Gross profit margin eased to 27% from the 30% achieved in the corresponding period. The low input scheme recoveries resulted in impairments of USD 8.6m. The cotton business contributed an after tax loss of USD 16.9m from a profit of USD 5.9m in H1 12, the seed business loss of USD 10.9m versus –USD 0.2m, while FMCG unit lost USD 1.2m versus –USD 1.8m. Cash flows remained strained on the poor performance. Gearing further deteriorated to 337% from 165% at year-end and interest cover remained poor at negative 1.6x. Total debt was USD 198.1m, up 44% from year-end to finance working capital requirements.

AICO H1 2013 Results Summary

Source: Company, IES

Outlook Proposed restructuring Management indicated that it is working on plans to recapitalise and this is likely to result in the unbundling of the group with Cottco and Olivine to list separately. The capital raising is expected to expunge debt and necessitate the restructuring of AICO’s loans. In addition, we expect the funding to grow and sustain current operations. As a result, both the Cottco and the FMCG business are expected to post significant profitability soon there-after. For FY 2013 Cottco is expected to record lower profits than those achieved in FY 2012 although it is expected to remain profitable. SeedCo is expected to post similar levels of profitability with potential to surprise on the upside depending on the rain season. The FMCG business desperately needs funding. Valuation and Recommendation Using a sum of the parts valuation approach and the discounted cash flow method we derived a value of US 25c, implying a 213% upside potential to the current price of US 8c. ACO remains undervalued on sum of parts valuation given that its 50% holding Seed Co is worth USD 65m alone. For the company to have a market cap of USD 42m would imply that Cottco and Olivine combined have a negative equity which according to the last financial results is not correct. Hold.

18

USD Thousands 2009 2010 2011 2012 2013 E 2014 ERevenues 120,677 162,879 225,939 293,292 285,798 300,088

Y-o-Y % NA 35.0% 38.7% 29.8% -2.6% 5.0%

Gross Profit 69,077 53,527 89,138 89,850 88,597 105,031

Y-o-Y % NA -22.5% 66.5% 0.80% -1.4% 18.5%

EBITDA 34,736 20,070 40,895 46,873 34,296 48,014

Y-o-Y % NA -42.2% 103.8% 14.6% -26.8% 40.0%

EBIT/Operating Profit, exlc exceptionals 26,886 12,783 33,245 38,537 25,587 39,120

Y-o-Y % NA -52.5% 160.1% 15.9% -33.6% 52.9%

Attributable Net Income/Profit After Tax 7,774 -4,270 8,946 6,156 3,683 10,700

Y-o-Y % NA -154.9% -309.5% -31.2% -40.2% 190.5%

Per Share data

Attributable Diluted EPS 1.42 -0.78 1.62 1.11 0.68 2.01

Y-o-Y % NA -154.7% -308.2% -31.1% -39.1% 196.0%


Y-o-Y % NA NA NA -100.0% NA NA

NAV/Basic Share 16.2 15.5 15.2 15.7 16.9 20.5

Y-o-Y % NA -3.9% -2.3% 3.4% 7.9% 21.4%


Gross Margin 57.2% 32.9% 39.5% 30.6% 31.0% 35.0%

EBITDA margin % 28.8% 12.3% 18.1% 16.0% 12.0% 16.0%

EBIT margin% 22.3% 7.8% 14.7% 13.1% 9.0% 13.0%

Net Income Margin % 6.4% -2.6% 4.0% 2.1% 1.3% 3.6%

RatiosROaA 25.3% 5.8% 14.0% 13.7% 9.0% 14.5%

ROaE 18.2% -5.1% 11.0% 7.5% 4.2% 10.7%

Earning yield on current price 17.7% -9.7% 20.2% 13.9% 8.5% 25.1%


Financial Summary – AICO

19

Barclays Zimbabwe is one of the leading commercial banks in Zimbabwe. Barclays’ financial results have been depressed as the bank has remained very cautious in terms of its strategy. In our view, Barclays has a distinct advantage over its indigenous peers, and will be one of the key players in Zimbabwe’s economic recovery. With over 76 ATMs, 39 branches and service centres nationwide, Barclays’ branch network is extensive. Barclays commands approximately 6% and 3% market share, in terms of deposits and total lending, respectively.

• Fee income covers opex The bank’s opex is 88% covered by fee income, hence Barclays is well poised for significant earnings growth once the advances book starts to grow. The total advances book at only USD 92.0m and impairments at less than 1% highlight the conservative nature of the bank in the absence of a credit bureau, which has resulted in information asymmetry. Volume growth in transactions has been the main driver of commission and fee income. The strength of the bank’s brand name should continue to enable volume growth in commission related transactions. • Blue chip lending book and prudential risk

management With a balance sheet in the region of USD 281.5m, the bank is selectively growing its advances book while enhancing its product offering to increase transactional volume and hence fee income. • Expensive relative to other SSA banks Barclays trades at significant premiums to the Zimbabwean sector average PBV of 0.9x and forward PER of 5.4x. Nonetheless, valuations based on earnings are fraught with high risk due to the significant uncertainties prevailing in the local financial sector. Traditionally, Barclays trades at a premium as it offers a perceived safe haven and due to its conservative approach to business. We believe that Barclays is an attractive play on the long-term Zimbabwean economy. Accumulate.

Bloomberg Code BARC:ZHRecommendation ACCUMULATECurrent Price (USc) 3.0


Upside (%) 83.3

Liquidity

Market Cap (USD m) 64.6

Shares (m) 2,153.1

Free Float (%) 158.3

Ave. daily vol ('000) - 1 yr. 752.1

Price Performance


Change (%) (16.7)


Change (%) 20.0

Financials (USD) 31 Dec F2012 2013F 2014F

Loans & Adances 92,045,775 117,099,104 143,066,299

Net Interest Income (excl. Provisions) 7,642,431 13,327,195 19,404,494

Non-Interest Income 29,987,271 29,050,038 31,083,541

Attributable Earnings 2,124,913 5,130,844 9,366,039

EPS (USc) 0.1 0.2 0.4

DPS (USc) - - -

NAV/Share (USc) 1.9 2.1 2.6

Ratios

RoaA (%) 0.8 1.7 2.8

RoaE (%) 5.7 11.9 18.6

Net Interest Margin 3.0 5.0 6.6


Earnings Yeild (%) 3.3 7.9 14.5

Dividend Yeild (%) NA NA NA

PE (x) 30.0 12.6 6.9

PBV (x) 1.6 1.4 1.2

Equity Research Zimbabwe May 2013 Banking

STRENGTHS WEAKNESSESStrong management team High cost base

Strong parent company Breakdown in credit histories

Access to lines of credit No scope to expand regionally

Extensive network/clientele Less flexible/agile

Solid NGO clientele

Extensive skills pool

OPPORTUNITIES THREATSTechnology transfer New entrants into the market

Recapitalisation of industry High credit risk

and commerce Indegenisation

Huge credit appetite from pvt Systemic risk

sector Domestic disintermediation -

5,000

10,000

15,000

20,000

-

1

2

3

4


Barclays - volume vs price


Source: IES

20

Nature of business Barclays is a world-class bank and one of the leading commercial banks in Zimbabwe. The bank operates 43 ATMs from an installed capacity of 76 and, 36 branches which are located in the large commercial centres, with the other branches dotted around the country. Barclays commands approximately 8% and 3% market share, in terms of deposits and total lending respectively. FY 2012 Financial & Operational Review Improved performance For FY 2012, Barclays Bank posted an improved performance showing a 51% growth in net income to USD 2.1m. This was mainly on the back of growth in both NII and NFI (non-funded income) as well as cost containment and prudent asset quality. Although market share has retreated due to increased competition, the bank is currently not focused on league table rankings but on positioning for sustainable profitability. Access to low cost deposits and growth in advance book propelled NII Funded income growth of 14% (to USD 7.6m) was slower than the 57% (to USD 91.7m) increase in advances as most of the growth in the advances book was recorded in the last quarter. NIMs improved to 5.7% from 3.5% as the bank continued to access low cos deposits. We estimate that the bank’s cost of funds was below 1%. NFI contributed the lion’s share The 16% (to USD 30.0m, excluding group support) growth in non-funded income was mainly driven by a 29% increase in custody compensation to USD 7.8m as well as a 100% growth in foreign exchange income to USD 1.5m. Non funded income to total income was static at 81%. High cost to income ratio Staff cost increased 18% to USD 18.9m making a 56% contribution to total opex from 54% for the corresponding period. The bank’s cost to income ratio remained high at 92% versus 93% in FY 2011. Although the bank remained conservative adj. opex was covered 88% by non-funded income (prior period 86.8% covered). Strong bottom line growth, albeit off a low base PBT surged 44% to USD 3.1m as impairments grew by 5% to USD 0.5m. The bank’s effective tax rate reduced to 30% from 34%. All this translated to a 51% jump in attributable earnings to USD 2.1m. Asset quality remained solid The balance sheet increased 8% to USD 281.5m on the back of 57% and 6% growth in advances and deposits,

respectively. The quality of the advances book remained solid with impairments less than 1% of the book. Gross NPLs were 1.1% of advances. The capital adequacy ratio was 18% against a regulatory minimum of 12%. Liquidity was also high with a liquidity ratio of 58%. Outlook Blue chip lending book ensures minimal rates of default Impaired assets at below 1% of the book highlight the conservative nature of the bank in the absence of a credit bureau, which has resulted in information asymmetry. Furthermore, there is effectively no lender of last resort and interbank market is limited. Continuing to benefit from size and scale Benefiting from a strong brand, we believe that Barclays will continue to access cheap funds, particularly current account deposits, which are low interest yielding. We estimate that interest paid on demand deposits ranged between 0% and 2.65%. Volume growth to drive commissions and fees Volume growth in transactions has been the main driver of commission and fee income. The strength of the Barclays’ brand name should continue to enable volume growth in commission related transactions. This is further enhanced by the launch of new products as Barclays Bank Zimbabwe piggy-backs on parent support. The e-channel drive is expected to result in improved efficiencies enabling the bank to ramp up income on the launch of profitable products. Stronger advances growth off a low base Barclays is slowly growing the lending book, but remains very cautious. We expect the loan book to grow at a faster rate than deposits given the low loan to deposit ratio of 41%. Management says it is comfortable building towards a loan to deposit ratio of between 50% and 60%, in the current environment. Valuation and Recommendation Relative to its peers Barclays’ ratings are demanding as it trades at significant premiums to the sector average PBV of 0.9x and PER of 5.4x. Nonetheless, investors should note that valuations based on earnings are fraught with high risk due to the significant uncertainties prevailing in the local financial sector. In our view, Barclays’ valuations can quickly unwind if the operating environment changes substantially. Traditionally Barclays trades at a premium as it offers a perceived safe haven and given its conservative approach to business. In our view, Barclays is an attractive play on the Zimbabwean economy. Key attractions for Barclays remain the blue chip client base and extensive low cost deposit base, which will generate substantial funded revenue streams in the years to come. Accumulate.

21

Financial Summary – Barclays Bank Zimbabwe

Income Statement Summary 2010 A 2011 A 2012 A 2013 E 2014 ENet Interest Income Before Loss Provision 2,798,195 6,723,092 7,642,431 13,327,195 19,404,494

Y-o-Y Growth 143% 140% 14% 74% 46%

Non Interest Income 29,666,664 33,469,243 29,987,271 29,050,038 31,083,541

Y-o-Y Growth 81% 13% -10% -3% 7%

Total Operating Income (incl Prov) 32,135,478 39,687,373 37,097,520 41,791,833 49,929,243

Y-o-Y Growth 80% 24% -7% 13% 19%

Operating Expense -33,987,832 -37,569,273 -34,044,957 -34,881,606 -37,441,191

Y-o-Y Growth 97% 11% -9% 2% 7%

Profit Before Tax -1,852,354 2,118,100 3,052,563 6,910,227 12,488,052

Y-o-Y Growth -403% -214% 44% 126% 81%

Attributable Net Income/Profit After Tax -1,275,538 1,404,105 2,124,913 5,130,844 9,366,039

Y-o-Y Growth -187% -210% 51% 141% 83%

Balance Sheet Summary 2010 A 2011 A 2012 A 2013 E 2014 ECash & Short term Funds 144,328,313 158,109,934 128,111,891 122,181,013 125,774,332

Y-o-Y Growth 31% 10% -19% -5% 3%

Financial Assets held for Trading 0 1,629,137 14,509,647 15,772,316 16,966,093

Y-o-Y Growth NA NA 791% 9% 8%

Loans & Advances,Net 43,148,334 58,527,047 92,045,775 117,099,104 143,066,299

Y-o-Y Growth 112% 36% 57% 27% 22%

Deposits 184,566,138 213,908,537 225,000,636 247,434,110 277,087,186

Y-o-Y Growth 50% 16% 5% 10% 12%

Borrowings 0 0 0 0 0

Y-o-Y Growth NA NA NA NA NA

Shareholder's Equity 30,906,108 33,510,866 40,528,613 45,659,457 55,025,496

Y-o-Y Growth -4% 8% 21% 13% 21%

Per Share Data 2010 A 2011 A 2012 A 2013 E 2014 EEarning per Share (USc) -0.1 0.1 0.1 0.2 0.4

Y-o-Y Growth -186% -217% 43% 138% 83%

Dividend Per Share (USc) 0.00 0.00 0.00 0.00 0.00


Book Value Per Share (USc) 1.4 1.6 1.9 2.1 2.6

Y-o-Y Growth -4% 8% 21% 13% 21%

Tangible Book Value per share (USc) 1.4 1.6 1.9 2.1 2.6

Y-o-Y Growth -4% 8% 21% 13% 21%

Key Ratios 2010 A 2011 A 2012 A 2013 E 2014 EGross Loan to Deposit Ratio 23.7% 27.8% 41.6% 47.5% 51.8%

Gross Loan to Fund Ratio 23.7% 27.8% 41.6% 47.5% 51.8%

Net Interest Margin 1.3% 2.8% 3.0% 5.0% 6.6%

Net Interest Income to total income 8.7% 16.9% 20.6% 31.9% 38.9%

Cost to Income Ratio 104.7% 93.5% 90.5% 82.3% 74.2%

Interest Income to average interest earning assets 2.8% 4.3% 4.3% 6.5% 8.2%

Interest expense to average interest bearing liabilities 1.1% 1.1% 1.0% 1.1% 1.1%

Net Interest Spread 1.7% 3.3% 3.3% 5.4% 7.1%

Net Income Margin -4.0% 3.5% 5.7% 12.3% 18.8%

Accumulated Provision as a % of loans & Advances 1.2% 0.8% 0.6% 0.5% 0.4%

Return on Equity (average) -4.0% 4.4% 5.7% 11.9% 18.6%

Return on Assets (average) -0.6% 0.6% 0.8% 1.7% 2.8%

Non-interest income to total income 92.3% 84.3% 80.8% 69.5% 62.3%

Advances to equity 139.6% 174.7% 227.1% 256.5% 260.0%

NPLs as % of loans and advances 0.0% 0.3% 1.1% 0.0% 0.0%

22

Equity Research Zimbabwe May 2013 Tobacco/FMCG

Bloomberg Code BATZL:ZHRecommendation BUYCurrent Price (USc) 830.0

Target Price (USc) 1,000.0

Upside (%) 20.5

Liquidity

Market Cap (USD m) 144

Shares (m) 17.4

Free Float (%) 17.0

Ave. daily vol ('000) 3

Price Performance


Change (%) 304.8


Change (%) 84.4


Turnover 51,853 65,594 78,713

EBITDA 17,784 22,775 27,329

Net Finance Income (734) (592) (589)


EPS (USc) 70.55 97.02 117.32

DPS (USc) 65.29 89.79 108.58

NAV/Share (USC) 80.33 87.56 96.30

Ratios

RoaA (%) 36.5 45.8 50.9

RoaE (%) 109.3 115.6 127.6

EBITDA Margin (%) 34.3 34.7 34.7



Dividend Yield (%) 7.9 10.8 13.1

PE (x) 11.8 8.6 7.1

PBV (x) 10.3 9.5 8.6

EV/EBITDA (x) 8.4 6.6 5.5

BATZ processes tobacco products mainly for the domestic market with exports being cut rag tobacco. The company manufactures c1.8bn cigarettes, commanding a market share of approximately 70%. BATZ markets both Global Drive Brands (e.g. Dunhill & Newbury) and local brands like Madison, Everest, Kingsgate and Berkeley. Madison is the flagship brand contributing about 68% of volumes. Premium brands constitute up to 25% of sales volumes. BATZ has a strong countrywide distribution network operating out of five depots with outlying areas being serviced by third parties.

• Dominant position BATZ holds a dominant market share estimated at 73% of the Zimbabwean market. This is largely due to the prohibitive set-up costs of production, marketing and distribution functions. Furthermore, smokers are notorious for their strong brand loyalties and new players would incur significant costs. • Strong cash generation Cash generation was strong with net operating cash flow of USD 8.8m, implying a cash interest cover of 12.0x. Net gearing significantly improved to 17% from 43%. • Generous dividend policy The company’s dividend policy of paying out 100% of net earnings and a high dividend yield (c8% in FY 13) provides attractive returns to investment. • Ratings are undemanding Return on shareholder funds and asset utilisation are impressive at 109% and 37%, respectively. Furthermore, the company has a generous dividend policy. In our view, these factors warrant above average ratings. Ratings are not demanding at PER+1 of 9.5x and EV/EBITDA of 6.6x versus PER of 13.3x and EV/EBITDA 12.9x for our comparative sample. We maintain our BUY recommendation.

-10 20 30 40 50 60

-

200

400

600

800

1,000


BATZ - volume vs price


Source: IES

STRENGTHS WEAKNESSESMarket leader Low disposable incomes

Strong brand Energy disruptions

Strong cash generation Commodities driven

Strong distribution network

Strong management

OPPORTUNITIES THREATSNew products Commodity price shocks

Economic recovery Not a dominant manufacture locally

Well established competition

23

Nature of business BATZ processes tobacco products mainly for the domestic market with exports being cut rag tobacco to Mozambique. The company manufactures approximately 1.8bn cigarettes. BATZ’s main competitor, Savvanna, is the largest manufacturer of cigarettes although the bulk of its production is exported. The company markets both Global Drive Brands (e.g. Dunhill & Newbury) and local brands like Madison, Everest, Kingsgate and Berkeley. Madison is the flagship brand contributing about 67% of the volumes. FY 2012 Financial & Operational Review Stellar financial results BATZ reported an excellent set of FY 2012 results, showing a solid 151.1% y-o-y growth in net profits to USD 12.3m, materially beating our estimates of USD 7.3m. The performance was anchored by an improved sales mix, margin expansion on higher efficiencies and price adjustments. The company effected price increases of between 53% and 85% in December 2011 following the 43% increase in excise duty to US 10 per 1,000 stick. Overall sales volumes declined by 11% to 1.5bn sticks, negatively affected by the increase in excise duty and retail selling prices as well as the slowdown in GDP growth. Nonetheless, sales volumes of premium brand, Dunhill grew strongly at 43%. Main stream brand, Madison maintained its pole position contributing 68% to overall sales volumes. Export sales of cut rag volumes to Mozambique declined by 16% y-o-y after their leaf procurement process was revised and new sources identified. Healthy margin business Improved production efficiencies, price reviews, cost management and the change in the sales mix aided margins as GP margins expanded to 57.7% from 46.2% while operating margins widened to 34.0% from 18.5%, resulting in EBIT increasing 139.8% y-o-y to USD 16.9m (IESe USD 8.8m and management guidance of approximately USD 10.0m). Costs were well contained despite the company having increased marketing initiatives and undertaking upgrades to its distribution fleet. Overall opex grew 10% while selling and marketing costs increased 28% to USD 3.9m and admin expenses inched up 4% to USD 9.2m. Net finance charges grew 81% to USD 0.7m due to increased short term borrowings. Earnings flared off The effective tax rate declined to 27% from 30% boosting attributable earnings. Net margins came in at 23.7% from 12.3%. A generous final dividend of USD 0.42 was declared bringing the total for the year to USD 0.65. This implies a cover of 1.1x.

Cash generation remained solid Cash generation remained strong, with cash generated from operations up 76.9% y-o-y to USD 13.0m. Net cash inflows of USD 8.8m represented a cash interest cover of 12.0x. Pristine balance sheet Net gearing significantly improved to 16.7% from 42.5%. Trade debtors increased 51% to USD 8.9m reflecting the growth in the business. Return on shareholders’ funds improved to 109.3% from 70.6% while asset utilisation increased to 36.5% from 14.3%. Outlook Input cost increase are a particular concern Leaf tobacco makes up approximately 40% of the non-excise cost of production. Local leaf auction floor prices rose strongly at approximately 28% in the 2011/12 season with the full effects to be felt in FY 2013 (there is a 12 months lag). We believe that margins can be sustained at current levels as BATZ works on a cost plus mark up basis where in the absolute margins are maintained and volatility in raw material prices is passed on to the consumer. BATZ, being the market leader is able to command absolute margin. Going forward we expect BATZ to maintain its EBIT margin at approximately 32% mainly anchored by improved production efficiencies and effective distribution. Management cautious of future prospects The company remains cautious in light of liquidity constraints (pressure on disposable incomes) and slower than anticipated economic growth. For FY 13 volumes are expected to be slightly lower than 2012. Management expects Dunhill and Newbury (premium brands) to contribute approximately 10% of sales volume by FY 2014 from 5% achieved in 2012. Valuation and Recommendation Cigarette demand is closely linked to GDP levels, and BATZ’s long term growth is therefore dependent on economic growth. We believe that BATZ is well placed to benefit from the steady increase in consumption expenditure likely to emanate from a young population in a growing economy. BATZ is a well managed, strong cash generating company operating in one of the most profitable sectors in the economy as well as having strong brands and a solid distribution network. Furthermore, the company has a generous dividend policy. In our view, these factors warrant above average ratings. Ratings are not demanding at PER+1 of 9.5x and EV/EBITDA of 6.6x versus PER of 13.3x and EV/EBITDA 12.9x for our comparative sample. We maintain our BUY recommendation.

24

Financial Summary – BAT Zimbabwe


Y-o-Y % NA 50.9% 74.1% 30.3% 26.5% 20.0%

Gross Profit 8,125 6,996 18,368 29,891 38,090 45,708

Y-o-Y % NA -13.9% 162.6% 62.7% 27.4% 20.0%

EBITDA 337 638 7,234 17,784 22,775 27,329

Y-o-Y % NA 89.3% 1033.9% 145.8% 28.1% 20.0%

EBIT/Operating Profit, exlc exceptionals -454 -234 6,370 16,858 21,792 26,300

Y-o-Y % NA -48.5% -2822.2% 164.6% 29.3% 20.7%

Attributable Net Income/Profit After Tax 300 -499 4,883 12,262 16,864 20,393

Y-o-Y % NA -266.3% -1078.6% 151.1% 37.5% 20.9%

Per Share data


Y-o-Y % NA -266.3% -1078.6% 151.1% 37.5% 20.9%


Y-o-Y % NA NA NA 151.1% 37.5% 20.9%

NAV/Basic Share 35.4 30.8 48.8 80.3 87.6 96.3

Y-o-Y % NA -13.0% 58.4% 64.7% 9.0% 10.0%


Gross Margin 53.7% 30.6% 46.2% 57.6% 58.1% 58.1%

EBITDA margin % 2.2% 2.8% 18.2% 34.3% 34.7% 34.7%

EBIT margin% -3.0% -1.0% 16.0% 32.5% 33.2% 33.4%


RatiosROaA 1.4% -1.5% 15.3% 36.5% 45.8% 50.9%

ROaE 1.0% -8.7% 70.6% 109.3% 115.6% 127.6%



25

CBZH is a diversified financial services group with investments in mortgage finance, banking, private equity, short term insurance, life insurance, property and asset management. Zimbabwe’s banking behemoth, CBZH, continues to post robust profit growth. The major profit drivers include strong performance of NII, an improvement in fee and commission income coupled with cost containment. Despite a 30% plus RoaE, the bank trades at significant discounts (10% - 30%) to its peers, mainly due to the poor perception of its asset quality. In our view, CBZH, as the largest bank in the country by all matrices should re-rate accordingly.

• Dominant position The group has the largest depositor base in the country at over USD 1.0bn and an advances book of USD 854.7m, controlling 27% of deposits and 28% of advances. • Diversifying income streams The group is diversifying its income streams and has ventured into life and short-term insurance. The build up of long tenure funds allows the group to offer improved mortgage facilities and to unlock its landbank. The diversified businesses are likely to contribute more to the bottom line with enhanced recovery. • Undemanding multiples On a sum of the parts valuation we estimate a fair value for CBZ Holdings of USc 24 per share, implying a 73% upside potential on the current price. The SOP valuation summary displays, by our accounts, a huge and fundamental undervaluation of CBZ Holdings (NAV terms) by the market. Ratings are undemanding and the bank appears to be in better shape than the market has given it credit for. Nonetheless, we remain more cautious because of the uncertainty of bad debts. We maintain our SPEC BUY rating.


Bloomberg CodeRecommendation SPEC BUYCurrent Price (USc) 13.9

Target Price (Usc) 24.0

Upside (%) 73.3

Liquidity

Market Cap (USD '000) 95

Shares (m) 684

Free Float (%) 29.0

Ave. daily vol ('000) - 1 yr. 517.6

Price Performance


Change (%) 113.1


Change (%) 15.4


Loans & Adances 854,690 922,386 1,014,843

Net Interest Income (excl. Provisions) 95,338 108,110 120,888

Non-Interest Income 48,796 54,394 59,493


EPS (USc) 6.6 7.7 9.6

DPS (USc) 0.3 0.6 1.0

NAV/Share (USc) 23.5 30.9 39.9

Ratios

RoaA (%) 3.9 4.0 4.2

RoaE (%) 32.1 28.4 27.0



Earnings Yeild (%) 47.4 55.9 69.1

Dividend Yeild (%) 2.2 4.5 6.9

PE (x) 2.1 1.8 1.4

PBV (x) 0.6 0.4 0.3

STRENGTHS WEAKNESSESLarge depositor base Exposure to government

banker to the government High cost/income ratio hist.

Diversified income stream

Access to external credit lines

Well capitalised with large branch ntwk

OPPORTUNITIES THREATSGrowth in local market on recap High cost platform

Established presence in Invest. Bnking Prolonged stretch to recapitalisation

Improving macro env. For Zimbabwe for the local economy

Recovery of public sector

Foreign lines of credit -

5,000

10,000

15,000

20,000

25,000

-

5

10

15

20


CBZH - volume vs price

Volume ('000) RHS Price (USc) LHS Source: IES

26

Nature of business CBZ Holdings is a diversified financial holding company with operations spanning commercial banking, asset management, short-term insurance, life insurance and property. The banking and principal subsidiary, CBZ Bank, is the country’s largest bank with 22% of total system assets, 28% of deposits and 31% of advances. The group operates 58 branches, 89 installed ATMs (39 are active) and 419 POS machines. FY 2012 Financial & Operational Review Strong performance Zimbabwe’s banking behemoth released another punchy set of results, showing a 48.7% growth in attributable earnings to USD 44.9m for EPS of US 7.43c. The strong performance was driven by a strong NII performance, increased insurance underwriting performance as well as reduced loan loss provisions. A final dividend of US 0.172c was declared implying an annualised dividend yield of 2.5% and a cover of 24.8x. Total income increased 17.1% to USD 144.1m on account of a 27.0% growth in funded income making a 66% contribution to total income from 61%. NIMs improved CBZH reported an expansion in NIM to 8.3% from 6.3% in the prior period despite the increase in cost of funds, which grew by 160bps to 6.2% as the contribution of term deposits increased to 33% from 20%. The decline in non-funded income was attributed to a 56% decline in other operating income to USD 7.2m. Efficiencies declined The CIR deteriorated to 57.8% from 56.5% as opex grew 19.8%. The growth in opex was on the back of an 18% increase in staff costs to USD 38.0m and 19% growth in admin expenses to USD 32.3m. Staff costs contribution to total opex declined to 54% from 55% in the prior period. Loan loss provisions of USD 4.6m were less than a third of the corresponding period’s figure. The bank continued to contribute the lion’s share The bank recorded a PBT of USD 17.7m, mortgage business USD 5.1m and short term insurance USD 0.6m. The asset management and property divisions posted losses of USD 0.2m and USD 0.01m, respectively. Loan book growth was curtailed The group’s balance sheet strengthened, increasing by 15.9% to USD 1.2bn as advances and deposits grew 8.1% and 24.4%, respectively. Offshore deposits grew 47.0% to USD 178.8m to make a 17.0% contribution to total deposits from 15%. FuM grew 26.0% to USD 111.1m. Liquidity ratio averaged 32.3% for the period versus 25.9% in the comparative period Return on

shareholders funds improved to 32.2% from 29.4%, while asset utilization (RoaA) edged up to 3.9% from 3.5%. Refinancing eased the pressure on the advances book NPLs declined 13% in absolute terms to USD 41.9m, representing 4.7% of advances down from 5.9%. Provisions to total advances worsened to 4.0% from 2.8%. We are skeptical about the reported NPLs figures given the tight liquidity conditions and non-disclosure of the size of the advances book that was restructured and/ or refinanced. Furthermore, the amount of collateral recalled during the period was not disclosed. In our view, a significant portion of the book was restructured and /or financed which helped ease pressure on asset quality resulting in low reported NPLs. According to the RBZ, the banking sector system NPLs were approximately 12.5% at end December 2012, implying an absolute figure of approximately USD 437.5m. In our opinion, without the restructuring and or refinancing, CBZH’s actual NPLs would have been significantly higher than reported given the aggressive growth in advances book over the years which compromised quality. The group’s share of system NPLs would likely have been higher than its share of advances, in our view. Outlook In our view, as the largest bank in the country, CBZ has and is likely to continue benefiting from its size. The group is concentrating on consolidating its position through quality and efficiency enhancements. Management guided for a 10% growth in total income for FY 2013 and a CIR of between 55 and 60%. The balance sheet is expected to grow by 19.5% driven by a 20% and 8.3% growth in deposits and advances, respectively. The increase in the lines of credit expected to propel deposits growth and improve liquidity. Valuation and Recommendation Ratings are undemanding and the bank appears to be in better shape than the market has given it credit for. We expect the bank’s earnings to find support from higher exposure to SME and retail segments, improvement in other income and moderate asset quality pressures. Nonetheless, we remain more cautious because of the uncertainty of bad debts. We maintain our SPEC BUY rating.

27

Financial Summary – CBZ Holdings

Income Statement Summary 2009 A 2010 A 2011 A 2012 A 2013 E 2014 ENet Interest Income Before Loss Provision 16,525 26,378 75,054 95,338 108,110 120,888

Y-o-Y Growth NA 60% 185% 27% 13% 12%

Non Interest Income 25,216 55,190 48,037 48,796 54,394 59,493

Y-o-Y Growth NA 119% -13% 2% 11% 9%

Total Operating Income (incl Prov) 38,353 79,972 108,654 139,502 156,174 175,546

Y-o-Y Growth NA 109% 36% 28% 12% 12%

Operating Expense -26,179 -54,390 -69,556 -83,300 -87,175 -90,925

Y-o-Y Growth NA 108% 28% 20% 5% 4%

Profit Before Tax 12,139 25,543 38,206 55,556 68,346 83,945

Y-o-Y Growth NA 110% 50% 45% 23% 23%


Y-o-Y Growth NA 115% 72% 49% 18% 24%

Balance Sheet Summary 2009 A 2010 A 2011 A 2012 A 2013 E 2014 ECash & Short term Funds 132,147 131,052 142,454 180,187 348,844 437,234

Y-o-Y Growth NA -1% 9% 26% 94% 25%

Financial Assets held for Trading 2,374 22,148 7,958 24,896 27,801 28,243

Y-o-Y Growth NA 833% -64% 213% 12% 2%

Loans & Advances,Net 244,952 444,605 790,340 854,690 922,386 1,014,843

Y-o-Y Growth NA 82% 78% 8% 8% 10%

Deposits 360,827 578,368 829,897 1,032,352 1,237,796 1,374,353

Y-o-Y Growth NA 60% 43% 24% 20% 11%

Borrowings 0 0 0 0 0 0

Y-o-Y Growth NA NA NA NA NA NA

Shareholder's Equity 63,247 85,672 119,249 160,677 211,699 273,069

Y-o-Y Growth NA 35% 39% 35% 32% 29%

Per Share Data 2009 A 2010 A 2011 A 2012 A 2013 E 2014 EEarning per Share (USc) 0.5 2.7 4.3 6.6 7.7 9.6

Y-o-Y Growth NA 440% 59% 53% 18% 24%

Dividend Per Share (USc) 0.00 0.00 0.30 0.30 0.62 0.96

Y-o-Y Growth NA NA NA 0% 106% 55%

Book Value Per Share (USc) 9.2 12.5 17.4 23.5 30.9 39.9

Y-o-Y Growth NA 35% 39% 35% 32% 29%

Tangible Book Value per share (USc) 9.2 12.5 17.4 23.5 30.9 39.9

Y-o-Y Growth NA 35% 39% 35% 32% 29%

Key Ratios 2009 A 2010 A 2011 A 2012 A 2013 E 2014 EGross Loan to Deposit Ratio 68.8% 77.8% 97.8% 86.2% 77.9% 77.3%

Gross Loan to Fund Ratio 68.8% 77.8% 97.8% 86.2% 77.9% 77.3%

Net Interest Margin 3.4% 4.1% 6.3% 8.3% 7.6% 7.6%

Net Interest Income to total income 43.1% 33.0% 69.1% 68.3% 69.2% 68.9%

Cost to Income Ratio 62.7% 66.7% 56.5% 57.8% 53.6% 50.4%

Interest Income to average interest earning assets 10.7% 9.7% 14.0% 15.2% 14.9% 13.9%

Interest expense to average interest bearing liabilities 2.3% 4.6% 4.9% 6.6% 6.5% 6.0%

Net Interest Spread 8.4% 5.1% 9.0% 8.6% 8.4% 7.9%

Net Income Margin 21.3% 22.0% 27.8% 32.2% 33.8% 37.2%

Accumulated Provision as a % of loans & Advances 1.4% 1.1% 2.7% 4.0% 4.4% 4.5%

Return on Equity (average) 25.9% 23.6% 29.5% 32.1% 28.4% 27.0%

Return on Assets (average) 3.6% 3.1% 3.5% 3.9% 4.0% 4.2%

Non-interest income to total income 65.7% 69.0% 44.2% 35.0% 34.8% 33.9%

Advances to equity 387.3% 519.0% 662.8% 531.9% 435.7% 371.6%

28

Dairibord has continued to reinvigorate itself as a growth stock, through multiple investment projects from manpower to upgrading its equipment. The company has managed to defend its market share despite the increased competition, with market share across its product portfolio ranging above 50%. • Improving fundamentals Dairibord’s main bottleneck has been limited raw milk supply. From highs of over 60m litres of raw milk intake in 2005, the intake declined to a low of around 12m litres in 2009. However, the trend has reversed and the company is taking in more and better quality milk. For FY 2012, total raw milk intake was xxm litres. • Relatively low per capita milt consumption Compared to a high of 25 litres in 1990, the current per capita milk consumption at approximately 15 litres is very low. We expect notable improvements as the economy continues to recover, with the re-emergence of the middle class. • High raw milk process negatively impacting

margins The limited supply of milk in Zimbabwe has resulted in a high cost of milk/litre of US 60c compared to regional comparative which are under US 43c/litre.

• Malawi negatively impacted by forex shortages Dairibord Malawi’s operational performance has been adversely affected by the incessant foreign currency shortages. However, the unit is increasing exports to offset the effect. • Valuation show upside potential Dairibord trades at a calculated forward PER of 13.8x and a forward EV/EBITDA of 7.1x which compares well with our Sub-Saharan Africa peer average of 21x and 13.6x EV/EBITDA. HOLD.

Bloomberg Code: DZHL:ZWRecommendation HOLDCurrent Price (USc) 29.0


Upside (%) 11.8

Liquidity


Shares ('000) 357.7

Free Float (%) 53.0


Price Performance


Change (%) 75.8


Change (%) 45.0

Financials (USD'000) 31 Dec 2012 2013F 2014F

Turnover 106,889 119,715 131,687

EBITDA 14,013 14,999 19,121

Net Finance Income/(Cost) (379) (810) (974)


EPS (USc) 2.0 2.1 2.8

DPS (USc) 0.4 0.3 0.4

NAV/Share (USc) 13.6 15.3 17.8

Ratios

RoaA (%) 14.2 13.2 14.9

RoaE (%) 15.5 14.5 16.9

EBITDA Margin (%) 13.1 12.5 14.5




PE (x) 14.7 13.8 10.4

PBV (x) 2.1 1.9 1.6

EV/EBITDA (x) 7.6 7.1 5.6

-

800

1,600

2,400

3,200

4,000

-

6

12

18

24

30

36


DZL - volume vs price


STRENGTHS WEAKNESSESQuasi monopoly with strong brands Milk is a basic good and price sensitive

Value added products Capacity utilisation levels still low at 40%

Regional presence, Malawi


OPPORTUNITIES THREATSContinued regional expansion Cheap imports from SA

Recovery of domestic consumption Prolonged time to recovery

Growing domestic milk volumes Exchange rate risk in Malawi

Recovery of farming sector High stockfeed prices

Equity Research Zimbabwe May 2013 Food

Source: IES

29

Nature of business Dairibord Holdings specialises in the production of a range of products including beverages, milk and milk products, cordials, condiments, canned and processed foods, sauces, spreads and confectionery, which are marketed to the domestic and foreign markets. Fully owned subsidiaries include a transport company NFB Logistics and it has a 40% stake in ME Charhons, the largest biscuit and confectionary company in Zimbabwe. In Malawi, it has a 60:40 JV in Dairibord Malawi Limited which produces 4.5m litres of milk per annum. FY 2012 Financial & Operational Review The limited supply of milk in Zimbabwe has resulted in a high cost of milk/litre of US 60c compared to regional comparative which are under US 43c/litre. Although national milk production increased by 6% from 51m litres in FY 11 to 54m litres in 2012 prices remained high as demand for milk outstrips supply. Dairibord‘s local milk intake rose at a rate of 8% from 19.5m litres to 21.2m litres, which was faster than the growth in national production. In Malawi, milk supply increased by 4% and Dairibord’s milk intake decreased by 10% due to forward integration by milk producers and spoilage at the farms due to power outages. Thus in a market where incomes are low, Dairibord’s competitiveness has been eroded since imports are cheaper than locally produced milk. Revenue less responsive to volume growth Volume contribution from the beverage division was maintained at 46% but revenue contribution on the line remained unchanged at 32%. Volumes at the Foods division contributed 18% compared to 16% in the prior period and the revenue contribution responded positively growing from 31% to 34%. Liquid milk volume contribution declined to 36% from 38% and the revenue contribution was 300 basis points less at 33%. Disposal of loss making units Dairibord was able to dispose of the 40% equity stake in Charhons Biscuits for USD 1m and as at the end of the year USD 0.2m had been received. The company that bought Charhons, namely Cairns, is under judicial management and we strongly believe Dairibord will not receive its money in full. In Malawi the company was able to dispose of Mulange Peak Foods but the transaction was concluded after the year end. Outlook Sales growth is expected to normalise in line with GDP forecast of around 5%-10% after three years of above

average growth. Margins can therefore be expanded through cost containment and efficiencies and we expect the operating margin to be maintained at the current levels of 11%. Margins are expected to expand in 2014 and beyond after the implementation of a rationalisation exercise. Once of restructuring cost are likely to impact 2013 numbers as well as increased finance charges. Staff rationalisation on course Dairibord has a staff complement of about 1,038 permanent employees, 600 contract and 1,100 independent vendors. The group has eleven processing plants, ten in Zimbabwe and one in Malawi. Management intends to implement an ambitious restructuring program by retrenching some production level employees in Mutare and Bulawayo and salvaging some of the production facilities to be relocated to a centralised production facility in Harare. This will result in a reduction in processing factories from 11 to 9, although the facilities will be retained for sales and distribution functions for the company. Staffing levels are targeted to be reduced by 12% to 913 for permanent employees. The company projected a net cost saving of USD 1m per annum after the restructuring exercise. Valuation and Recommendation Dairibord trades at a calculated forward PER of 13.8x and a forward EV/EBITDA of 7.1x, which compares well with our Sub-Saharan Africa peer average of 21x and 13.6x EV/EBITDA. However, comparatively low milk production and a high operating leverage for the company justify the discount in our view. Dairibord embarked on a rationalisation programmed at the beginning FY 2013 to reduce the operating leverage of the company but our view is that the company was late in implementing this strategy given that small, flexible operations were able to eat into its market share as management was trying to revive archaic equipment and systems. Alternatively if Dairibord had made its structure leaner soon after dollarisation the cost saving of USD 1m would have been enjoyed for the past two years. We thus believe management is being reactive to shrinking margins due to high operating leverage irrespective of volume increases. The shelf space occupied by Dairibord’s competitors such as Dendairy, Alpha and Omega and Kefalos across the product range should be a worrying development for the company. HOLD.

30

Financial Summary – Dairibord Zimbabwe Holdings

US$ Thousands 2009 2010 2011 2012 2013 E 2014 ERevenues 43,425 74,982 95,983 106,889 119,715 131,687

Y-o-Y % NA 72.7% 28.0% 11.4% 12.0% 10.0%

Gross Profit 13,894 23,910 31,141 34,679 39,506 46,090

Y-o-Y % NA 72.1% 30.2% 11.4% 13.9% 16.7%

EBITDA 4,638 8,464 10,475 14,013 14,999 19,121

Y-o-Y % NA 82.5% 23.8% 33.8% 7.0% 27.5%


Y-o-Y % NA 82.5% 23.8% -6.4% 11.4% 32.5%


Y-o-Y % NA 97.8% 12.7% 0.0% 6.1% 33.5%

Per Share data

Attributable Diluted EPS 6.01 0.02 0.02 1.98 2.10 2.80

Y-o-Y % NA -99.7% 10.4% 9741.6% 6.1% 33.5%


Y-o-Y % NA NA NA 180139% -29.0% 42.4%

NAV/Basic Share #DIV/0! 0.1 0.1 0.1 0.2 0.2

Y-o-Y % NA NA 20.0% 12.5% 12.3% 16.4%


Gross Margin 32.0% 31.9% 32.4% 32.4% 33.0% 35.0%

EBITDA margin % 10.7% 11.3% 10.9% 13.1% 12.5% 14.5%

EBIT margin% 10.7% 11.3% 10.9% 9.2% 9.1% 11.0%


RatiosROaA 20.5% 17.0% 17.6% 14.2% 13.2% 14.9%

ROaE 21.9% 19.7% 18.3% 15.5% 14.5% 16.9%

Earning yield on current price 21.10% 0.06% 0.07% 6.94% 7.36% 9.83%


31

Equity Research Zimbabwe May 2013 Breweries/Beverages

Delta continues to post a strong operating performance propelled by sturdy margin recovery on improved mix and efficiencies as well as volume growth. Volume growth in the core beverages is expected to be at least in line with GDP growth and value growth is anticipated to remain above volume growth in the near to medium term. The slowing capex allows the divided cover to be reduced. • Dominant market share Delta enjoys a dominant position in Zimbabwe, commanding approximately 96% of the beer market and about 92% of the sparkling beverages market. Management estimates that imported lagers constitute approximately 5% of which Delta brings in 2%. The group aggressively markets its brands, and in so doing stimulates volume growth. Marketing costs are approximately 2% of revenues. • Sustainable margin expansion Operational efficiencies have been enhanced with investment in new equipment setting the scene for sustained growth. Margins are expected to further expand on improved efficiencies, reduced maintenance costs, supply chain savings and an enhanced product mix. • Pristine balance sheet and strong cash

generation Delta generates excellent cash flow, with approximately 60% of sales being for cash. As a consequence, the balance sheet continues to strengthen. • Valuation show upside potential In our view, Delta has a compelling story with its pristine balance sheet, strong cashflows and solid brands. Ratings are relatively undemanding at a PER EV/production of USD 325 for our comparative sample. Delta remains the ZSE’s bellwether stock. We maintain our LT Buy recommendation.

Bloomberg Code: DELTA:ZHRecommendation LT BUYCurrent Price (USc) 142.0


Upside (%) 16.2

Liquidity

Market Cap (USD m) 1,714

Shares (m) 1,207

Free Float (%) 48.1

Ave. daily vol ('000) - 1 yr. 697

Price Performance


Change (%) 102.9


Change (%) 49.5

Financials (USD '000) 31 Mar F2013 2014F 2015F

Turnover 631,276 768,610 862,856

EBITDA 161,519 203,333 235,496



EPS (USc) 8.4 9.9 11.7

DPS (USc) 3.4 4.5 5.2


Valuatuion Ratios

RoaA (%) 26.2 29.1 30.1

RoaE (%) 33.3 31.9 31.3

EBITDA Margin (%) 25.6 26.5 27.3



PE (x) 16.5 14.0 11.9

PBV (x) 4.9 4.1 3.5

EV/EBITDA (x) 2.7 2.2 2.0

EV/Hectolitre 331.3 322.3 325.5

STRENGTHS WEAKNESSESDominant position Low disposable incomes

No exchange risk Weak macro economy

Resurging volumes Frequent energy disruptions

Strong parent company

Leading brands, volumes up

OPPORTUNITIES THREATSStabilising economy Increase in excise taxes

Recovery in public finances Commodity price shocks

Aid inflows Disruptions to utilities

Growth in local premium brands More aggressive competition

-

5,000

10,000

15,000

20,000

25,000

-

40

80

120

160


Delta - volume vs price


Source: IES

32

Nature of business Delta is the largest manufacturer, distributor and marketer of beverages in Zimbabwe. The operating divisions within the group are: beverages (comprising lager beer, sorghum (traditional) beer, sparkling beverages (SBs), alternative beverages (Maheu) and a related transport operation), a maltings business and Megapak (a 51-49 venture with South Africa’s Nampak. The group also has a 30% shareholding in Afdis (a manufacturer, importer, distributor and marketer of branded wines and spirits), and a 49% holding in Schweppes Zimbabwe. The lager business has two breweries (in Harare and Bulawayo), which have a market share of 96%. Lion and Castle account for 65% to 70% of its production, but it also has its own brands: Zambezi, Bohlinger’s and Pilsener. The unit has an installed brewing capacity of 3.0m hl. Due to years of under utilisation and limited maintenance, current available capacity is 2.0m hl pa. The traditional beer has 14 traditional sorghum breweries, which have a combined available capacity of 5.0m hl. Sparkling beverages (SBs) available capacity is 2.4m hl pa with the PET market estimated at 5% and is expected to grow as the economy recovers. FY 2013 Financial & Operational Review The brewing giant posted another punchy set of results showing a solid 39% growth in net income to USD 102.5m, beating our estimates of USD 96.0m. The robust performance was supported by an improved sales mix, price adjustment in sorghum, margin expansion, reduced finance costs as well as a stronger performance by associates. A final dividend of US 2.23c per share was declared, implying an annualised dividend cover of 2.5x. Overall beverage volumes were flat y-o-y at 6.9m hl on account of 4% growth in lager to 2.1m hl, a 9% increase in SBs to 1.6m hl, and a 42% jump in Maheu (alternative beverages) to 132,000hl, offset by an 8% decline in sorghum to 3.1m hl. Management highlighted that there was a slowdown in the last quarter across all beverages which was attributed to the general economic slowdown as well as adverse effects of the excise duty increase in December 2012 and the resultant retail disruption. Malting tonnages grew by 6% to 37,000t. Plastic tonnages rose 31% to 9,461t on improved performance by the beverages, particularly premiumisation in SBs. Sales value grew ahead of volume growth at 14% to USD 631.3m, anchored by an 8% growth in lager gross sales to USD 325m, a 14% jump in SBs gross sales to

USD 231m and a 15% increase in sorghum beer gross sales to USD 118m, while alternative beverages saw a 50% surge to USD 11m. EBIT margins (on net sales) improved to 24.7% from 20%, driving operating profit growth of 37%. This was on the back of an improved product mix, reduced maintenance and improved supply chain management. In our view, this underlines the operational gearing Delta has in the beverages division, with extra volume translating directly into added profitability. Interest of USD 0.6m was paid, some 122% below that of FY 12, due to increased treasury operations. Cash generation remained strong, with approximately 60% of sales on a cash basis. Net operating cash flow was USD 134m, representing a cash interest cover of 234x. The balance sheet strengthened through this very strong operating performance. Capital expenditure of USD 83.6m resulted in a significantly expanded balance sheet with negligible net gearing of 1%. Outlook Delta has maintained its dominant position, commanding approximately 96% of the beer market and about 92% of the sparkling beverages. Capex is expected to ebb as the company focuses on productivity as well as investing in its brands. Capex/EBITDA is anticipated to recede to between 30% and 50% in the medium to long term. Strong fundamentals to sustain sturdy operating performance Per capita consumption of circa 16 litres p.a. (for beer excluding sorghum beer) and 13 litres p.a. for sparkling beverages are low in Zimbabwe by developing world standards suggesting tremendous growth potential off a low base. Margin expansion We believe the company has solid opportunities to expand the operating margin as a result of the combination of a favorable shift in mix to high end products, improved efficiencies, competitive pricing, reduced maintenance costs and supply chain savings. Valuation and Recommendation In our view, Delta has a compelling story with its pristine balance sheet, strong cashflows and solid brands. There are high barriers to entry in this industry and Delta enjoys a dominant position with a solid distribution network. Although the price has rallied +45% YTD, we believe there is still upside for long-term investors. Ratings are relatively undemanding at a PER of 16x versus PER of 20x for our comparative sample. Delta remains the ZSE’s bellwether stock. We maintain our LT Buy recommendation.

33

Financial Summary – Delta Corporation

Production Summary 2010 2011 2012 2013 2014 E 2015 EBrewery Capacity -Lager 1,149 1,608 1,980 2,060 2,184 2,232

Brewery Capacity % -Lager 63.8% 80.4% 99.0% 85.8% 91.0% 93.0%

Bottling Capacity -SBs 768 1,175 1,482 1,615 1,920 2,160

Bottling Capacity % -SBs 54.9% 83.9% 74.1% 67.3% 80.0% 90.0%

Brewery Capacity -Sorghum 3,127 2,908 3,348 3,080 3,100 3,000

Brewery Capacity % -Sorghum 61.3% 57.0% 67.0% 61.6% 62.0% 60.0%

Income Statement Summary 2010 2011 2012 2013 2014 E 2015 EUSD Thousands

Revenues 324,468 408,001 554,767 631,276 768,610 862,856

Y-o-Y % NA 25.7% 36.0% 13.8% 21.8% 12.3%

Gross Profit 226,750 257,400 353,056 404,916 496,522 560,857

Y-o-Y % NA 13.5% 37.2% 14.7% 22.6% 13.0%

EBITDA 48,921 81,722 118,660 161,519 203,333 235,496

Y-o-Y % NA 67.0% 45.2% 36.1% 25.9% 15.8%


Y-o-Y % NA 76.8% 44.0% 37.3% 28.4% 17.2%

Net Income 39,683 51,219 73,276 104,123 122,668 143,961

Y-o-Y % NA 29.1% 43.1% 42.1% 17.8% 17.4%

Per Share Data


Y-o-Y % NA 45.5% 38.6% 39.6% 17.9% 17.4%

Dividend per share 0.0 1.5 2.1 3.4 4.5 5.2

Y-o-Y % NA NA 38.7% 63.5% 31.4% 17.4%

NAV per share 0.1 0.2 0.2 0.3 0.3 0.4

Y-o-Y % NA 28.2% 26.0% 25.8% 19.6% 19.2%

Margin Performance 2010 A 2011 A 2012 A 2013 A 2014 E 2015 EGross Margin 69.9% 63.1% 63.6% 64.1% 64.6% 65.0%

EBITDA margin % 15.1% 20.0% 21.4% 25.6% 26.5% 27.3%

EBIT margin% 11.9% 16.7% 17.7% 21.4% 22.6% 23.6%


RatiosROaA 17.7% 22.7% 24.1% 26.2% 29.1% 30.1%

ROaE 27.8% 3.3% 3.1% 33.3% 31.9% 31.3%



34

Equity Research Zimbabwe May 2013 Telecoms

Econet is the dominant player in the domestic telecoms market, commanding 72% of the mobile telecoms industry with a subscriber base of 7.0m. Econet has a head start over other players, in terms of penetration in data, which is expected to be the next growth avenue. To us, this secures high revenue visibility. In our view, the weak competition provides excellent growth prospects for Econet. • Strong cash generation Cash generation was solid with EBITDA/OCF of 97%. Given the high cash generation, Econet will fund most of its capex requirements from internal resources and increase dividend pay outs post peak capex funding. • Margins and ARPUs remain healthy Although EBITDA margins eased to 47% from 49%, negatively impacted by the increased cost of the network and fuel, they remain healthy and higher than regional peers of approximately 45%. ARPUs increased 6% to USD 10.33. Nonetheless, as the expansion unfolds we expect EBITDA margins to ease as ARPU’s decrease and costs increase. • High revenue growth potential from EcoCash Econet harbours significant growth potential from its broadband and EcoCash segment, more particularly in the latter. In its first year of operation, EcoCash managed to sign up 24.0% of ECONET’s mobile subscribers vs. 20.3% for Safaricom Kenya’s M-Pesa in its first year in 2008. EcoCash processed USD 300.0m worth of transactions in its first year of operation. • Still one of the best priced telecom stocks At current levels, Econet prices at a TTM PER of 5.0x, almost a 50% discount to its SSA ex. SA peers. We rate the counter LT BUY, after the recent rally (up 55% YTD).

Bloomberg Code: ECWH:ZHRecommendation LT BUYCurrent Price (USc) 70.0


Upside (%) 21.4

Liquidity


Shares (mn) 1,640.0

Free Float (%) 52.0


Price Performance


Change (%) 75.0


Change (%) 44.0

Financials (USD m) 31 Feb F2012 2013F 2014F

Turnover 611 694 780

EBITDA 276 316 355


Attributable Earnings 166 188 217

EPS (USc) 9.7 10.9 12.7

DPS (USc) 1.2 3.6 4.2

NAV/Share (USc) 22.1 29.6 38.1

Ratios

RoaA (%) 22.9 21.3 22.0

RoaE (%) 49.7 42.3 37.4

EBITDA Margin (%) 45.2 45.5 45.4


Subscribers' 000 5,960 6,736 7,302

PER (x) 7.2 6.4 5.5

PBV (x) 3.2 2.4 1.8

RoaA (%) 22.9 21.3 22.0

RoaE (%) 49.7 42.3 37.4

Earnings Yield (%) 13.8 15.6 18.1


EV/sub (USD) 218 193 178

EV/EBITDA 4.7 4.1 3.7

ARPU (USD) 8.5 8.6 9.0

STRENGTHS WEAKNESSESUncorrelated portfolio of Strong competitive environment

defensive businesses Conglomerate feel

Strong brands

Vertical integration

Geographical diversification

OPPORTUNITIES THREATScontinued regional growth Cheap imports from SA

Franchise expansion Prolonged time to recovery

Growth in disposable incomes

Stronger retail presence with

Spar franchise

-

1,000

2,000

3,000

4,000

5,000

6,000

-

20

40

60

80

100


Econet - volume vs price


Source: IES

35

Nature of business Econet Wireless (Private) Limited is a communications and technology company. It is the largest GSM mobile operator in Zimbabwe with a market share of over 69% and more than 5.0m subscribers and 400 base stations. Econet offers a unique blend of branded subscriber and pre-paid mobile phone services. Econet also owns Data Control and Systems (51%) trading as Ecoweb, one of the largest ISPs in Zimbabwe. This is supported by Econet’s wireless infrastructure and earth station, which also provides direct international dial access to more than 244 countries and territories worldwide. The company also has a 51% stake in Transaction Processing Systems (Pvt) Ltd, a provider of financial transaction switching, point of sale and other value added services that look to exploit the convergence of banking, IT and telecoms. Econet also owns 69% of Mutare Bottling Company as well as 100% of TN Bank. FY 2013 Financial & Operational Review Mixed set of numbers Econet released a mixed set of H1 2013 financials, posting solid topline growth but a muted bottomline. Revenue grew 16.7% to USD 339.5m benefiting from the continued investment into the network which saw mobile subscribers grow by 24.4% to 7.0m. Broadband subscribers grew 75.3% to 2.44m whilst EcoCash users reached 1.68m. Data revenue increased by 50% after the roll out of 116 new 3G base stations. Healthy margins maintained EBITDA grew 16.4% to USD 152.8m registering an EBITDA margin of 44.8%, a reasonable 30 bps lower than that in H1 12. We view this as very encouraging, indicating Econet’s ability to preserve trading margins as voice ARPUs decline. Costs pressures emanated largely from fuel and network expansion cost. ARPUs declined 17% to USD 8.90 due to the dilutive effect of lower value subscribers and new services that are still to realise their full potential. Non-cash charges impacted on operating profit The depreciation charge surged 53.7% to USD 32.5m and the mobile operator achieved an operating profit of USD 120.3m (+9.3% y-o-y) for the period. The jump in depreciation related to a 63.5% increase in capital expenditure to USD 63.1m. Syndicated loan eased interest bill Finance cost declined by 16.9% after the group refinanced the network expansion by taking a syndicated loan amounting to USD 307.0m at a weighted average cost of approximately 6.0% and tenure from three to seven years. Short term debt reduced to USD 47.0m from USD 145.8m at year-end.

HEPS rose moderately to USD 0.46 in H1 13 from USD 0.44 in H1 12 The mobile operator concluded the interim period with earnings attributable to shareholders of USD 77.9m and EPS of USD 0.46. The slower growth in net income against PBT was as a result of the effective tax rate increasing by 260 bps to 30.5%, owing largely to the decline in capex allowances. This resulted in a 19.9% increase in the income tax expense to USD 34.6m. Outlook Expanded new revenue streams Management states that the future of the company lies in innovation and providing value added services to its subscribers. Data presents significant opportunities for the company. Econet has three data revenue streams: internet services, SMS (text messaging) and EcoCash. Econet has a head start over other players, in terms of penetration in data which is expected to be the next growth avenue. Margins likely to be squeezed We believe Econet’s margins are likely to ease and settle around 45%, in line with African peers. The reasons being the roll out of the retail units, increased competition and the high base the company is coming off from. Furthermore, the acquisition of the bank might results in reduced dividends as the group recapitalizes the banking unit to meet the new minimum regulatory requirements. Subscriber growth to decelerate Due to the near saturation of the addressable telephony market in Zimbabwe, with penetration at over 90%, we expect to see Econet’s subscriber base increase modestly beyond FY 2014 Improved free cashflows as capex has peaked The company is post its peak funding period having rolled out the network countrywide. We expect that capex to revenue will probably recede to between 15% and 20% by FY 2014 as the company focuses on sweating the existing assets. We expect Econet to generate higher cash flows from operations over the next few years. Over 99% of the company‘s customers are on the prepaid package, thus mitigating the company‘s receivables position. Once past its peak capex funding, we expect Econet to increase its dividend payout. Valuation and Recommendation At current levels, Econet prices at a TTM PER of 5.0x, at almost a 50% discount to its SSA ex. SA peers. We rate the counter LT BUY, after the recent rally (up 55% YTD).

36

Income Statement Summary 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Total Revenue 88 363 493 611 694 780

Y-o-Y Growth . 313% 36% 24% 14% 13%

EBITDA 27 179 243 276 316 355

Y-o-Y Growth NA 575% 35% 14% 14% 12%

Operating Expense (44) (112) (158) (177) (199) (225)

Y-o-Y Growth NA 154% 41% 12% 12% 13%

Depreciation and Amortization (18) (21) (40) (46) (51) (56)

Y-o-Y Growth NA 13% 93% 16% 9% 11%

Net Finance income (1) (4) (7) (8) (18) (11)

Y-o-Y Growth NA 395% 63% 12% 117% -35%

Profit Before Tax 3 148 195 239 250 290

Y-o-Y Growth NA 4725% 32% 22% 5% 16%

Net Income/Profit After Tax (2) 115 139 166 188 217

Y-o-Y Growth NA -5283% 21% 19% 13% 16%

Per Share Data 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Earning per Share (USc) (0) 7 8 10 11 13

Y-o-Y Growth NA -5283% 21% 19% 13% 16%

Dividend Per Share - 2 1 1 4 4

Y-o-Y Growth NA NA -47% -1% 209% 16%

Book Value Per Share 5 10 17 22 30 38

Y-o-Y Growth NA 101% 76% 33% 34% 29%

Key Ratios 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

EBITDA margin % 30.2% 49.4% 49.2% 45.2% 45.5% 45.4%

EBIT margin% 9.2% 43.6% 41.0% 37.6% 38.2% 38.2%

Net Income Margin % -2.5% 31.6% 28.2% 27.1% 27.1% 27.8%

ROaA -1.7% 40.3% 27.1% 22.9% 21.3% 22.0%

ROaE -3.1% 93.8% 61.9% 49.7% 42.3% 37.4%

Earning yield on current price -0.2% 9.5% 11.6% 13.8% 15.6% 18.1%


Key Statistics 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Market Share 60% 73% 69% 70% 68% 65%

Subscribers Base '000 927 2,376 4,531 5,960 6,736 7,302

Average Monthly Blended ARPU (USD) 8 13 9 9 9 9

Financial Summary – Econet Wireless

37

Equity Research Zimbabwe May 2013 Agriculture

Hippo Valley has historically been a low cost sugar producer, whose advantages included irrigation facilities implying insulation against drought, climatic benefits with a 12 month cycle crop generating sufficient biomass and adequate heat for sugar cane plantation. Capacity yield levels are 2-3x higher than those of South Africa sugar producing companies. • Enhanced efficiencies Since dollarization, Hippo, undertook several projects including mill refurbishment, to re-establish cane supply and sugar milling capacity utilisation. We expect this to significantly improve its total sugar output and yield per hectare beyond 300,000t and 110t/ha, respectively. • Recapitalisation of out growers We expect cane deliveries to the mill from out growers to improve in the long-term on the back of the European Union national Sugar Adaptation Strategy (NSAS). The increased deliveries are likely to be coupled with improved quality due to availability and early application of all necessary chemicals. • Valuation In valuing Hippo we used relative comparison, by taking averages of EV/EBITDA and EV/Production ratios for regional sugar companies. We derived a target price of USD 1.47, implying 34% upside on current price. Accumulate.

Bloomberg Code: HIPPO:ZHRecommendation ACCUMULATECurrent Price (USc) 110.0


Upside (%) 33.9

Liquidity


Shares (m) 193.0

Free Float (%) 20.4

Ave. daily vol ('000)

Price Performance


Change (%) 10.0


Change (%) (6.4)

Financials (USD '000) 31 Mar Current 2013F 2014F

Turnover 144,078 160,760 179,672

EBITDA 31,563 38,582 42,223

Net Finance Income (5,999) (5,326) (6,973)


EPS (USc) 12.1 11.6 12.2

DPS (USc) 0.0 1.7 2.4

NAV/Share (USc) 114.1 124.6 135.6

Ratios

RoaA (%) 10.0 8.6 8.4

RoaE (%) 11.2 9.7 9.4

EBITDA Margin (%) 21.9 24.0 23.5

Valuation Ratios

Earnings Yield (%) 11.0 10.5 11.1


PE (x) 10.1 10.6 10.0

PBV (x) 1.1 1.0 0.9

EV/EBITDA (x) 8.1 6.6 6.1

STRENGTHS WEAKNESSESEuropean Union support of the local sugar

industry

Dependent on favourable weather

patterns

High sugar recoveries

Susceptible to commodities price

movement

Historically a low cost producer Low quality sugar production

A return to pricing based on fundamentals Power disruptions

OPPORTUNITIES THREATSSuccessful relaunch of outgrower scheme

will boost prod

The land scenario still remains a

contentious issue

Improved quality of sugar to fetch higher

prices Slow economic growth

Increase in sugar production Low disposable incomes

Increased production of by-products

Lack of adequate liquidity in the

market

-

100

200

300

400

500

600

-

30

60

90

120

150


Hippo - volume vs price


Source: IES

38

Nature of business Hippo Valley grows sugar cane on 12,300ha of arable land and has a 50% stake in the 442ha Mkwasine Sugar Estates, which engages in the growing of sugar cane and other agricultural operations. Cane production normally totals in the region of 1.4m tonnes per annum at an average yield of 112t per hectare. Hippo also has a 33.3% stake in Sugar Industries Ltd, the sole packer and distributor of refined sugar in Botswana and a 49% stake in NCP Distillers, which is engaged in the conversion of molasses into alcohol. The distillery uses up to 17,000t of the 70,000t of molasses produced annually by the mill. Other interests include a 50% stake in Zimbabwe Sugar Sales Ltd, a sugar broking entity and Chiredzi Township Ltd that develops and sells township stands. H1 2013 Financial & Operational Review Hippo Valley Estate reported half year results that showed a 29.5% growth in revenue to USD 90.7m on the back of increased cane volumes from both private farmers and the company’s own estates. Operating income, however, decreased by 18% due to pressure on the selling prices of sugar on the international market. The situation was exacerbated by the weaker Euro/US dollar exchange rate which negatively impacted on export proceeds. Demand for sugar remained firm after increasing by 15% from 215,117t to 247,741t in the same period last year. The cane delivery numbers indicate a growth of 40.2% but the growth did not translate to an increase in revenue as inefficiencies from old equipment reduced conversion rates of cane to sugar. Hippo Valley H1 2013 Results


The water in the storage dams that supply the industry is very low and the company had to manage carefully

the dam levels to link up with the 2012/13 rainfall season and a drought would likely put the company in a very precarious position. The cash flow statement reflected an operating cash flow of USD 4.8m a decrease of 72% mainly due to investment in working capital that doubled from USD 11.2m to USD 25.6m. The USD 19.9m absorption of cash in working capital is consistent with the first half being the high point of the sugar season. Current assets increased 39% due to accumulation of sugar inventories and trade receivables also increased as collections are getting difficult in this environment. Outlook Increased sugar production The company expects to produce between 225,000t and 242,000t this season and this is in line with our earlier forecast that the company will produce circa to 230,000t. The company continues to provide inputs and extension services to third party can growers so as to enhance cane production and deliveries to the mill. Hippo valley aims to restore production levels to the installed capacity of 300,000t. Longer-term the completion of the Tokwe Mukosi dam will result in increased production of sugarcane, raw & refined sugar, and maximise beneficiation of by products. Firm domestic demand Although margins shrunk in the first half we still believe Hippo is in line to achieve our forecast numbers as local demand will carry the company. Per capita consumption is estimated at 24.6kg, with the consumption pattern influenced by availability rather than price. Valuation and Recommendation In valuing Hippo we used relative comparison, by taking averages of EV/EBITDA and EV/Production ratios for regional sugar companies. We derived a target price of USD 1.47, implying 34% upside on current price. Accumulate.

39

US$ Thousands 2010 2011 2012 2013 E 2014 ERevenues 100,108 101,532 144,078 156,970 173,986

Y-o-Y % NA 1.4% 41.9% 8.9% 10.8%

Gross Profit 32,252 41,268 59,774 62,788 68,725

Y-o-Y % NA 28.0% 44.8% 5.0% 9.5%

EBITDA 18,411 13,130 31,563 41,597 44,367

Y-o-Y % NA -28.7% 140.4% 31.8% 6.7%

EBIT/Operating Profit, exlc exceptio 18,397 12,175 32,388 33,275 35,963

Y-o-Y % NA -33.8% 166.0% 2.7% 8.1%

Attributable Net Income/Profit After 23,646 8,794 20,946 15,857 17,279

Y-o-Y % NA -62.8% 138.2% -24.3% 9.0%

Per Share data

Attributable Diluted EPS 0.14 0.05 0.12 0.09 0.10

Y-o-Y % NA -62.8% 138.3% -24.3% 9.0%

Dividend Per share (DPS) - - - - -

Y-o-Y % NA NA NA NA NA

NAV/Basic Share 0.97 1.02 1.14 1.18 1.23

Y-o-Y % NA 5.4% 11.8% 3.6% 3.8%

Margin Performance2010 2011 2012 2013 E 2014 E

Gross Margin 32.2% 40.6% 41.5% 40.0% 39.5%

EBITDA margin % 18.4% 12.9% 21.9% 26.5% 25.5%

EBIT margin% 18.4% 12.0% 22.5% 21.2% 20.7%

Net Income Margin % 23.6% 8.7% 14.5% 10.1% 9.9%

RatiosROaA 13.4% 4.2% 10.0% 9.9% 10.6%

ROaE 28.2% 5.1% 11.2% 7.9% 8.3%

Earning yield on current price 0.5% 0.2% 0.5% 0.4% 0.4%

Dividend yield current price 0.0% 0.0% 0.0% 0.0% 0.0%

Financial Summary – Hippo Valley Estates

40

Due to its orientation towards FMCGs, Innscor’s business is generally not very capital intensive. As a result, cash generation is strong and return on assets and capital employed high. Increased efficiencies and tight working capital management continue to drive profitability. In our view, the stable environment provides an opportunity for the group to unbundle and unlock value to shareholders. • Strong cash generation Innscor has unparalleled cash generation abilities in fast foods and retail, which provide capacity for growth, through organic expansion, acquisitions, adding new brands and entering new markets. • Earnings leverage from franchise system Fast Foods and retail outlets operate as franchise units, although the majority are owned by Innscor. Earnings leveraged on a strong franchise system can provide significant earnings momentum as franchise income outstrips the fixed nature of the franchise support system. • Valuation remains attractive In our view, Innscor’s valuation is attractive considering its impressive growth prospects and the defensive nature of its earnings. Innscor is dominant in its businesses and we expect the earnings growth rate to improve substantially with the improved economic climate. We downgrade our recommendation from Accumulate to Hold due to the recent strong rally.

Equity Research Zimbabwe May 2013 FMCG

Bloomberg Code: INAF:ZHRecommendation HOLDCurrent Price (USD) 93.0

Target Price (USD) 101.0

Upside (%) 8.6

Liquidity


Shares (m) 541.6

Free Float (%) 52.0


Price Performance


Change (%) 75.5


Change (%) 75.5

Financials (USD '000) 31 Oct Current 2013F 2014F

Turnover 627,077 683,514 786,042

EBITDA 68,528 81,521 101,285



EPS (USc) 7.1 7.5 9.5

DPS (USc) 1.8 2.5 3.2

NAV/Share (USc) 24.4 30.1 37.1

Ratios

RoaA (%) 15.5 13.8 15.0

RoaE (%) 31.5 30.7 30.9

EBITDA Margin (%) 10.9 11.9 12.9




PE (x) 13.0 12.4 9.8

PBV (x) 3.8 3.1 2.5

EV/EBITDA (x) 7.6 6.4 5.1



Strong brands







Spar franchise

-

500

1,000

1,500

2,000

-

30

60

90

120


Innscor - volume vs price


41

H1 2013 Financial & Operational Review Mixed set of interims Innscor posted a mixed set of numbers with a decent bottom line performance on account of a strong showing from associates (Natfoods and Irvine’s); however, the company reported muted performance at both EBITDA and top line mainly due to a poor performance from Colcom where EBITDA margins declined 870bps to 6%. Sales growth was constrained as a result of the 13% revenue decline at SPAR due to the store rationalisation. Headline earnings (excluding Natfoods disposal) grew by a solid 14% while adj. EBITDA margins declined slightly to 10.1% from 10.4% resulting in a slow growth in adj. EBITDA, up 3.3% y-o-y. An interim dividend of US 0.80c a share was declared, implying a dividend cover of 4.6x. Overall cash generation remained strong although cash generated from operations declined 8% as the debtors’ book at TV Sales and Home grew by USD 3.2m. Net cash inflow of USD 17.5m represented a cash/interest cover of 12.5x. The balance sheet remained manageable although net gearing worsened to 18.4% from 12.2%. Net finance charges declined 21% despite an increase in borrowings as borrowing costs reduced to approximately 7.5% p.a. Capex amounted to USD 26.9m and is set to result in improved efficiencies. BAKERIES & FAST FOODS Revenue grew 16% to USD 137.8m while EBITDA margins declined 90bps to 14.5% resulting in a 9% growth in EBITDA to USD 20.0m. Volumes for Bakeries increased by 30% y-o-y and efficiencies continued to improve. Fast Foods customer counts for Zimbabwe increased by 5% y-o-y following a slow start to the year. The increase in customer counts can be attributed to new product offering, enhanced pricing strategies and new counters. An additional seven counters were opened during the period (5 in Harare and 2 in Zvishavane). Regional customer counts grew 3% y-o-y. Eight counters were opened in Kenya and 2 in Zambia. DISTRIBUTION GROUP AFRICA Volumes grew by 16% y-o-y for the Zimbabwe business although average realizations decreased on account of the change in sales mix. Revenues declined 2.7% to USD 47.2m. Margins expanded on improved efficiencies as focus was on good margin higher volume products and, EBITDA margins improved to 9.2% from 7.1%. EBITDA thus grew 27% to USD 4.4m. Distribution Group Africa (Zambia operations) achieved 7% volume growth for the period and it gained market share. In Malawi

volumes declined by 28% as trading conditions remained tight as the local currency remained weak. A small loss was recorded in Malawi. SPAR Revenue declined 13.5% to USD 88.5m and EBITDA margins eased 100bps to 2% resulting in EBITDA decreasing by 41% to USD 1.8m. The rationalization of the SPAR Corporate Stores continued and a non-recurring cost of USD 0.5m was charged relating to asset impairment and restructuring costs. Nonetheless, the stores treaded profitably. SPAR Distribution Centre supported 44 store operating under SPAR, SPAR Express, SaveMor and TOPS brands. Although it remained profitable performance was negatively impacted by the closure of larger independent stores due to brand non-compliance. Zambia Corporate stores posted improved results with the network comprising 6 corporate stores and 6 franchised stores. COLCOM Colcom reported disappointing results as EBITDA margins shrunk to 6% from 15% in the prior period. Sales volumes grew 25% y-o-y underpinned by entry level products i.e. high volume and low margin products. Revenue grew 18% to USD 30.0m. Furthermore, production was negatively affected by frequent equipment failure especially towards the peak trading period. Provisions amounting to USD 1.3m were made relating to stock obsolescence and doubtful debts. HOUSEHOLD GOODS Revenue grew 14% y-o-y to USD 27.2m and EBITDA margins declined 80bps to 22.3% resulting, in a 10% growth in EBITDA to USD 6.1m. TV SALES & HOME - Volumes were almost static on the corresponding period although the sales mix improved on higher furniture sales enhancing revenue growth. The debtors’ book increased to USD 12.2m from USD 9.5m at year-end in June 2012. CAPRI - Volume growth remained strong growing by 42% y-o-y on improved manufacturing quality and increased range of products and finishes. ASSOCIATE AND OTHER BUSINESSES NATIONAL FOODS - Volumes grew 24% y-o-y to 241,000 metric tonnes translating to a 24% growth in topline to USD 143.8m. Realisations were maintained at USD 597 per tonne. Efficiencies improved on better

42

procurement, line automation and enhanced logistics. EBITDA margins expanded to 8.0% from 4.3% enhanced by income from asset disposal and stock holding. IRVINE’S - Irvine’s posted solid results anchored by a 10% volume growth in day-old chicks. Improved efficiencies resulted in enhanced margins. Cash generated was channelled to securing stockfeed. Outlook The group continues to invest in its brands Rationalisation, restructuring and upgrades of production facilities are part of the group’s strategy to become a low cost producer and to enhance competitiveness. For FY 2013 the group plans to spend approximately USD 47.0m on capex, of which USD 38.0m will be for expansion, mainly in the Fast Foods businesses. The capex will not only increase capacity, but also improve production facilities and reduce costs. Two additional lines each with capacity of 80,000 loaves per day were installed and commissioned in February 2013 bringing the total installed capacity to 560,000 loaves per day. Another two additional lines each with an 80,000 capacity are set for commissioning in early 2014. Innscor plans to automate most of the functions in the Fast Foods business to restructure operations so as to reduce costs. Long term profit drivers remain in place Innscor is well placed to benefit from a rise in disposable incomes. The Zimbabwean economy is expected to continue experiencing strong growth over the next few years with the possibility of accelerated growth on improved reforms.

The restructuring of the Corporate stores is expected to turn around the operations and return the unit to profitability. In our view, the key profit drivers for Natfoods are the growth in FMCG volumes, improving consumer spend and improving production efficiencies. We have lowered our FY 2013 and FY 2014 net income estimates by 6% and 9%, respectively. Valuation and Recommendation Innscor remains dominant in its businesses. Although the future of the group is aligned to the economy at large, the sectors in which the group is invested are currently exuding growth rates in excess of that of the broader economy. The group continues to focus on managing costs and driving volume growth. Cash generation remains strong and Innscor should continue to generate substantial free cash flow, which creates financial flexibility (for dividends, acquisitions, stock repurchase, among other applications). We believe that the restructuring of the corporate stores will yield positive results. Although Colcom is operating in a mature industry, improved efficiencies should enhance profitability. The share price has rallied strongly gaining 35% YTD, hence we see limited upside in the short term. The counter is likely to weaken on profit taking. Our SOP valuation ascribes a value of USD 547.0m i.e. US 101c per share. We downgrade our recommendation from Accumulate to Hold due to the recent strong rally.

43


Y-o-Y % NA 58.3% 27.9% 21.5% 9.0% 15.0%

Gross Profit 87,605 137,966 184,637 225,077 245,334 282,135

Y-o-Y % NA 57.5% 33.8% 21.9% 9.0% 15.0%

EBITDA 13,829 29,115 47,663 68,528 81,521 101,285

Y-o-Y % NA 110.5% 63.7% 43.8% 19.0% 24.2%


Y-o-Y % NA 177.7% 71.8% 47.1% 16.9% 26.5%


Y-o-Y % NA 73.8% 65.1% 48.3% 4.7% 27.0%

Per Share data


Y-o-Y % NA 73.8% 65.1% 48.3% 4.7% 27.0%

Dividend Per share (DPS) - 0.80 1.20 1.75 2.49 3.17

Y-o-Y % NA NA 50.1% 45.8% 42.6% 27.0%

NAV/Basic Share 18.71 20.99 18.78 24.45 30.06 37.08

Y-o-Y % NA 12.2% -10.5% 30.2% 22.9% 23.4%


Gross Margin 34.4% 34.2% 35.8% 35.9% 35.9% 35.9%

EBITDA margin % 5.4% 7.2% 9.2% 10.9% 11.9% 12.9%

EBIT margin% 3.2% 5.6% 7.5% 9.1% 9.7% 10.7%


RatiosROaA 8.0% 8.8% 12.2% 15.5% 13.8% 15.0%

ROaE 15.5% 15.1% 25.7% 31.5% 30.7% 30.9%



Financial Summary – Innscor Africa

44

NMBZH is a bank holding company comprising NMB Bank as the only operating unit. The bank’s divisions include retail banking, corporate banking, treasury and international banking. The retail unit has a total of 11 branches. The focus has been on re-engaging lines of credit, resulting in strong balance sheet growth and increased profitability.

• Increasing funded income contribution The contribution of NII to total income increased to 50% from 47%, whilst non-funded income declined to 50% from 53%. This represents an increased focus in the bank’s core business of financial intermediation and the opening up of new lines of credit. • Strong focus on technology NMB Bank is an efficient bank, given its heavy reliance on electronic delivery channels in servicing its clients’ needs and providing innovative alternative delivery channels. In terms of service offerings, NMB Bank remains miles ahead of the competition enhancing its ability to maintain a loyal customer base. Electronic delivery channels also allow the bank to provide improved (faster) services to customers, at lower cost.

• Well run entity with strong partners In our view, NMBZ Holdings is a well run entity and has made significant progress in cleaning the advances book. Furthermore, the bank has strong partners in African Century, FMO, Norfund and Africinvest. These can potentially increase the bank’s access to lines of credit. In our view, NMBZH is poised for significant profitability growth in FY 2013 and beyond. Ratings are undemanding at PER+1 of 4.2x and PBV of 1.0x. Spec Buy.

-

400

800

1,200

1,600

-

3

6

9

12

15


NMBZH - volume vs price


Bloomberg Code NMBZH:ZHRecommendation SPEC BUYCurrent Price (USc) 10.0


Upside (%) 31.0

Liquidity


Shares (m) 384.4

Free Float (%) 29.1

Ave. daily vol ('000) - 1 yr. 51.7

Price Performance


Change (%) 42.9


Change (%) 33.3


Loans & Adances 146,600 187,438 230,330

Net Interest Income (excl. Provisions 17,494 21,541 29,040



EPS (USc) 0.3 6.9 10.1

DPS (USc) - - -

NAV/Share (USc) 1.1 28.1 38.2

Ratios

RoaA (%) 3.8 4.2 5.5

RoaE (%) 27.9 27.9 30.3



Earnings Yeild (%) 2.7 68.9 100.8

Dividend Yeild (%) - - -

PE (x) 5.6 4.2 2.9

PBV (x) 1.4 1.0 0.8

STRENGTHS WEAKNESSESFocus on HNW and niche markets Adverse liquidity position

IT platform to reduce costs High cost/income ratio hist.

Strong partners

Reputable management

OPPORTUNITIES THREATSImproving macro env. For Zimbabwe Lack of lender of last resort

Recovery of public sector Short term deposits

Increased foreign lines of credit Increasing competition

Established presence in Inv. Banking

Foreign lines of credit


Source: IES

45

Nature of business NMBZH is a bank holding company comprising NMB Bank as the only operating unit. The bank’s divisions include retail banking, corporate banking, treasury and international banking. The retail unit has a total of 11 branches. The focus has been on re-engaging lines of credit, resulting in strong balance sheet growth and increased profitability. FY 2012 Financial & Operational Review NMBZH reported a strong set of financials showing a 67% increase in attributable earnings to USD 7.6m. The strong performance was anchored by a strong non-funded income growth as well as cost containment. Core banking business contribution increased Funded income grew 23% to USD 17.5m on the back of a 20% growth in advances. The 60% growth in non-interest income to USD 17.5m was supported by a 47% growth in forex earnings to USD 1.9m, a 33% increase in fee and commission income to USD 13.0m as well as a fair value gain of USD 2.5m. The contribution of NII to total income increased to 50% from 47%, whilst non-funded income declined to 50% from 53%. Efficiencies improved The cost to income ratio improved to 61% from 69% as opex growth was contained, increasing by 26% to USD 21.5m. The major increases in opex were staff costs which grew by 33% to USD 10.3m and depreciation, +89% to USD 1.4m. We estimate that adjusted PBT (excluding fair value adjustments) grew 20% to USD 7.5m, thus adjusted net income amounted to only USD 4.1m. Plausible asset quality The balance sheet grew 35% to USD 226.5m on the back of a 37% and 20% growth in deposits and advances, respectively. Gross NPLs to total advances deteriorated 15.7% from 8.6%. Impairments as a percentage of the total book also deteriorated to 2.7% from 1.9%. The group targets an NPL ratio of 5.0% for the short to medium term with a long term target of 3.0%. Post the balance sheet date, NMBZH raised USD 14.8m capital through a private placement and an additional USD 1.4m in Tier II capital. Capital raising Post balance sheet date, the bank raised fresh equity amounting to approximately USD 14.8m by placing 103,714,287 new ordinary shares with strategic foreign investors at a subscription price of USD 0.1430 per ordinary share. The strategic foreign investors were: Africinvest Capital Partners (Africinvest), a

member of the Tuninvest group which is a part of an investment and financial services group called Integra.

FMO, a Dutch development bank Norfund, a Norwegian development finance

institution In addition to the equity investment, Norfund provided an additional USD 1.4m in the form of a 7 –year, non-dilutive subordinated loan with an annual coupon of 3-month LIBOR plus 12%. The subordinated loan was approved by the RBZ as tier II capital The capital raising and asset disposals (of the Borrowdale land and the sale of the stake in the leasing business) should result in the group having capital of approximately USD 45.0m. Management aims to then comply with the regulatory minimum capital requirements of USD 50.0m by June 2013 through organic growth. The Tier II capital of USD 1.4m is expected to help accelerate organic growth that will result in the bank achieving compliance. Management is optimistic that with the high profile Foreign Investors on board, these can unlock lines of credit for the bank with an additional USD 50.0m likely by end 2013. The anticipated lines of credit are envisaged to result in the bank extending mortgage finance, lending into mining and agricultural sectors as well as enhancing tenure on loans. Management highlighted that issues that may result in the Foreign Investors electing for an early buy-back (breach of Share Subscription Agreement) include non-compliance with regulatory issues as well as poor performance by the NMBZH share price on the ZSE. Outlook The recent investment in IT should result in improved service delivery and efficiencies. New product launches including credit card will aid transactional volume and by extension fee income, which management anticipate will more than mitigate against the recent reduction in bank charges as part of the MoU with the Central Bank. At a recent results briefing management also indicated that the impact could be in the region of USD 3.0m. The company will continue to focus on increasing lines of credit given the firm demand for loans in the market. Management is targeting a CIR of below 70% in the medium term and below 60% in the long run, while the target NPL ratio is 5.0% for the short to medium term with a long term target of 3.0%. Valuation and Recommendation In our view, NMBZ Holdings is a well run entity and has made significant progress in cleaning the advances book. Furthermore, the bank has strong partners in African Century, FMO, Norfund and Africinvest. These can potentially increase the bank’s access to lines of credit. In our view, NMBZH is poised for significant profitability growth in FY 2013 and beyond. Ratings are undemanding at PER+1 of 4.2x and PBV of 1.0x. Spec Buy.

46

Financial Summary – NMBZ Holdings

Income Statement Summary 2009 A 2010 A 2011 A 2012 A 2013 E 2014 ENet Interest Income Before Loss Provision 803 6,871 14,260 17,494 21,541 29,040

Y-o-Y Growth NA 756% 108% 23% 23% 35%


Y-o-Y Growth NA 37% 7% 35% 14% 11%


Y-o-Y Growth NA 96% 41% 23% 19% 24%


Y-o-Y Growth NA 108% 11% 11% 11% 9%

Profit Before Tax 941 943 6,194 10,002 13,450 19,681

Y-o-Y Growth NA 0% 557% 61% 34% 46%

Attributable Net Income/Profit After Tax 2,278 692 4,538 7,571 10,037 14,687

Y-o-Y Growth NA -70% 556% 67% 33% 46%


Y-o-Y Growth NA 50% 76% 80% -49% -51%

Financial Assets held for Trading 7,135 17,300 0 0 0 0

Y-o-Y Growth NA 142% -100% NA NA NA

Loans & Advances,Net 13,004 60,315 122,261 146,600 187,438 230,330

Y-o-Y Growth NA 364% 103% 20% 28% 23%

Deposits 22,275 62,672 139,226 191,422 204,719 227,804

Y-o-Y Growth NA 181% 122% 37% 7% 11%




Y-o-Y Growth NA 120% 24% 32% 33% 36%


Y-o-Y Growth NA 39% -100% 69% 2452% 46%




Y-o-Y Growth NA 62% -1% 32% 2455% 36%


Y-o-Y Growth NA 62% -1% 32% 2455% 36%















47

Despite the fact that New dawn Mining is listed on the Toronto Stock Exchange (TSX) and has access to international capital markets, we think that capital raising initiatives are likely to remain thwarted given the issue of indigenisation in Zimbabwe (at least in the short to medium term). The company plans to reach annualised gold production of 100,000oz and group revenues to be approximately USD 150.0m. The ultimate objective is to become a mid-tier Zimbabwe gold producer (250,000oz per annum). This will require approximately USD 40.0m in capex. • A pure gold play We like New Dawn Mining given that it is the only counter that offers a pure direct exposure to the gold mining sector in Zimbabwe. In addition, it is listed in Canada (TSX) and has access to international capital markets. After the CAG acquisition, it still only has 45.6m shares outstanding. This places it on a good footing to raise more capital for expansion purposes through equity-based funding techniques. • Huge unexplored potential Zimbabwe possesses huge unexplored potential. Subtler and more complex geological features have not been considered as well as lower grade halos, often occurring adjacent to reefs. The company currently focuses on lower grade tonnage bulk exploration. New Dawn controls prime geologically favourable ground. • An EV/Resource oz of USD 62 points to under-

valuation New Dawn is currently trading at a significant discount to other African gold producers given an average EV/resource oz of USD 100. Expansion projects have been put on hold due to capital constraints on unclear indigenisation policy. SPEC BUY.

-

10

20

30

40

50

-

20

40

60

80

100

120


New Dawn Mining - volume vs price

Volume ('000) RHS Price (CADc) LHS

Bloomberg Code ND:CNRecommendation SPEC BUYCurrent Price (USc) 72.7

Current Price (CADc) 75.0


Upside (%) 120.0

Liquidity


Shares (m) 45.6

Free Float (%) 15.0


Price Performance


Change (%) 1,019.1


Change (%) 546.6

Financials (USD '000) 31 Sep Current 2013F 2014F

Turnover 61,947 58,410 61,798

EBITDA 7,371 2,903 4,989


Attributable Earnings 2,305 396 2,406

EPS (USc) 5.5 0.9 5.3

DPS (USc) - - -

NAV/Share (USc) 96.9 97.2 96.4

Ratios

RoaA (%) 3.6 0.5 3.1

RoaE (%) 5.9 0.9 5.5

EBITDA Margin (%) 11.9 5.0 8.1



Dividend Yield (%) NA NA NA

PE (x) 13.3 80.7 13.8

PBV (x) 0.8 0.7 0.8

EV/EBITDA (x) 5.1 13.0 7.5

EV/Oz produced (USD) 999.3 998.3 868.1

STRENGTHS WEAKNESSESBalance sheet has negligible debt (Net Gearing of 5.5%) Over reliance on gold- Limited diversification.

Fully funded capex Power constraints and mining labour wages

20+ years mine life at max output leading to higher production costs thereby

Significant gold assets around the country through increasing cash costs.

its three gold camps ( Kadoma, Bulawayo & Kwekwe)

TSX Listing enables group to access international

capital markets

OPPORTUNITIES THREATSFirst mover advantages in Zimbabwe Production disruption due to ZESA power outages

Exploration upside- There is scope to expand Turk mine Indigenisation regulations may threaten capital

(SRK discovery of an additional 1.5-2.0m oz of resources) raising initiatives especially on foreign

Potential for Bulk mining at the Gweru and Kadoma Camp markets such as the TSX.

Potential of 1.2m tonnes per annum tailings Lack of skilled labour due to brain drain

retreatment plant

Equity Research Zimbabwe May 2013 Mining

Source: IES

Source: IES

48

Nature of business New Dawn is a gold mining, exploration and development company with five producing mines and one non-operational mine property. In addition, New Dawn holds a large portfolio of exploration properties located in the greenstone belt that runs in a north-east – southwest direction across the centre of Zimbabwe. It operates three mining camps all within a 300km radius, namely Bulawayo, Gweru and Kadoma. The Bulawayo gold camp comprises Turk- Angelus and Old Nic, while Gweru houses Campredown and Golden Quarry. Kadoma gold camp consists of Dalny and Venice. The proven reserves for the group are 869,600t at a grade of 3.83g/t while the inferred resources are 3,525,393t at 4.91g/t. The milling capacity is 2,000 tonnes per day. Q2 2013 Financial & Operational Review Gold production for the quarter increased by 2% q-o-q to 9,253oz, however production was below levels attained in Q3 and Q4 2012 due to disturbances witnessed at some of its mines from September to December 2012. Revenue declined 9.8% q-o-q to USD 15.0m (up 0.9% y-o-y) negatively impacted by the decline in world international gold prices. The average revenue per ounce received decreased to USD 1,608 from USD 1,712 for the preceding quarter. The average cash costs for all mines increased by 13% y-o-y to USD 1,306/oz (down 7% q-o-q) as the positive operational results for Turk and Angelus were insufficient to outweigh the reduction in revenue and high costs at Dalny Mine, Golden quarry and Camperdown Mine complex. Adjusted EBITDA for the quarter was USD 0.4m, 78% q-o-q, while EBITDA for the half year declined by 99% to USD 98,382. The company posted a loss for the quarter of USD 14,727 versus a profit of USD 140,631 for the corresponding period. The net loss for the six months was USD 0.8m against a profit of USD 2.2m for the prior period. Outlook Ramp-up curtailed due to funding constraints Although most of the operating mines have been profitable, the planned increase in production to c100,000oz by 2014 has been curtailed due to funding constraints on an unclear indigenisation policy. The short-term focus is on stabilising production with the currently installed plant and infrastructure. Dawn Mining is still to be cleared by the Minister of Youth, Indigenisation and Empowerment with regards

the company’s indigenisation plans. With regards to these indigenisation plans, the company reports that it has signed non-binding term sheets with several indigenous investor groups that are intended to provide the requisite indigenous element at the New Dawn level. The company has also engaged NIEEB with regards to equity participation by NIEEF at the New Dawn level through an equity instrument analogous to a warrant, as well as the process, structure and timeframes required to implement the CSOT and ESOS components. Secondary listing on ZSE New Dawn made an offer to the minorities of Falgold through a scheme of Arrangement, which has since been sanctioned by both the minority interests and the High Court of Zimbabwe. The final significant condition precedent to completing the Scheme of Arrangement is regulatory approval by the Government of Zimbabwe. New dawn offered USD 0.20 cash for each Falgold share held or one New Dawn share for every five Falgold shares held. A maximum of 2,899,888 common shares of New Dawn are issuable in respect of this transaction Once all regulatory approvals are granted New Dawn plans to have a secondary listing on the ZSE. Weak gold price The gold price has retreated from highs of USD 1,600/oz to the current levels of USD 1,350/oz. If the weakness in the gold price is sustained this can negatively impact on the cash costs of the company and its planned expansion projects. Valuation and Recommendation New Dawn is currently trading at a significant discount to other African gold producers given an average EV/resource oz of cUSD 100. In addition, we consider our theoretical valuation for New Dawn of USD 1.60 per share based on the DCF method as a base case valuation as we think there is significant potential to discover further gold resources. SPEC BUY.

49

Financial Summary – New Dawn Mining

Income Statement Summary 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Total Revenue 9,023 7,481 5,645 16,381 38,294 61,947 58,410 61,798

Y-o-Y Growth -17% . 190% 134% 62% -6% 6%

EBITDA 755 64 (408) 2,373 6,394 7,371 2,903 4,989

Y-o-Y Growth -92% -742% -681% 169% 15% -61% 72%

Operating Expense (9,305) (8,538) (6,737) (14,954) (33,377) (56,909) (58,040) (59,468)

Y-o-Y Growth -8% -21% 122% 123% 71% 2% 2%

Depreciation and Amortization (1,037) (1,120) (684) (947) (1,477) (2,333) (2,532) (2,658)

Y-o-Y Growth 8% -39% 38% 56% 58% 9% 5%

Net Finance income 272 102 14 27 (385) (704) (300) (60)

Y-o-Y Growth -63% -86% 86% -1536% 83% -57% -80%

Profit Before Tax 1,950 (2,426) (3,637) 1,304 5,138 3,777 475 2,721

Y-o-Y Growth -224% 50% -136% 294% -26% -87% 473%

Net Income/Profit After Tax 1,265 (2,471) (3,738) (786) 4,298 2,305 396 2,406

Y-o-Y Growth -295% 51% -79% -647% -46% -83% 507%

Per Share Data 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Earning per Share (USc) 4 (9) (13) (2) 10 5 1 5

Y-o-Y Growth -295% 51% -81% -513% -46% -84% 485%

Dividend Per Share NA NA NA NA NA NA NA NA

Y-o-Y Growth NA NA NA NA NA NA NA

Book Value Per Share 50 59 47 81 88 97 97 96

Y-o-Y Growth 19% -21% 72% 9% 10% 0% -1%

Key Ratios 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

EBITDA margin % 8.4% 0.8% -7.2% 14.5% 16.7% 11.9% 5.0% 8.1%

EBIT margin% -3% -14% -19% 9% 13% 8% 1% 4%

Net Income Margin % 14.0% -33.0% -66.2% -4.8% 11.2% 3.7% 0.7% 3.9%

ROaA 7.3% -12.4% -18.4% -2.5% 8.2% 3.6% 0.5% 3.1%

ROaE 9.3% -15.6% -24.3% -4.0% 13.7% 5.9% 0.9% 5.5%

Earning yield on current price 6.0% -11.7% -17.7% -3.4% 14.1% 7.5% 1.2% 7.3%

Dividend yield current price NA NA NA NA NA NA NA NA

Key Statistics 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Gold Produced (oz) - 8,651 6,967 14,018 26,689 37,623 37,662 43,311

Gold Sold (oz) - 8,651 6,029 14,089 25,166 37,415 37,285 42,878

Cash Costs/oz (USD) - 641 610 631 940 1,178 1,260 1,197

Revenue/oz (USD) - 865 936 1,163 1,656 1,780 1,567 1,441

50

OK Zimbabwe has been swift to turnaround its operations as a result of management’s extensive experience, aggressive strategy and successful utilisation of recapitalisation funds. The group is now clawing back its market share from local and regional players, who had cropped up due to the crippling economic environment.

• Highly developed IT system OK Zimbabwe has a fully developed IT system which covers full store computerisation including ordering, across the operational chain to the point of sale interface. The company wants to further harness its IT backbone by integrating a comprehensive financial product through the OK Mart card cardholders to link the card to bank accounts making it possible for them to withdraw and deposit cash as well as make purchases from OK stores. Management views this as a complementary product to the current offerings and insists the company will not be venturing into the banking business. • Central distribution centres vital for growth The high level of imports have made the central warehousing and distribution centre a key component of the supply chain and OK is working on upgrading the facilities at two warehouses in Harare and are in the process of acquiring a third warehouse.

• Enjoying a first mover advantage Using a 50:50 blend of EV/EBITDA valuation matrix and the DCF method we value OK at US 23.7c. The share price has rallied strongly, up +93% YTD. Given the improved performance and strong cash generation, we believe that the company can substantially increase its dividend payout. Given the defensive nature and consistent growth prospects of OK Zimbabwe, we believe downside risk to the share is limited. HOLD.

Equity Research Zimbabwe May 2013 Retail

Bloomberg Code OKZIM:ZHRecommendation HOLDCurrent Price (USc) 29.0


Upside (%) (18.4)

Liquidity

Market Cap (USD'm) 327.9

Shares (m) 1,130.8

Free Float (%) 44.9


Price Performance


Change (%) 190.0


Change (%) 107.0

Financials (USD'000) 31 Dec Current 2013F 2014F

Turnover 412,563 528,081 565,046

EBITDA 19,212 25,348 26,557




EPS (USc) 1.00 1.44 1.50

DPS (USc) 0.36 0.50 0.53

NAV/Share (USc) 4.62 5.71 6.71

Ratios

RoaA (%) 18.9 21.1 19.1

RoaE (%) 24.0 27.9 24.2





PE (x) 28.9 20.1 19.3

PBV (x) 6.3 5.1 4.3

EV/EBITDA (x) 15.2 11.5 11.0

STRENGTHS WEAKNESSESDefensive food/FMCG business Weak consumer incomes

Expansive retail network No credit available for white goods

Key locations with high traffic Weak banking sector results in self

Strong cash generator financing

OPPORTUNITIES THREATSIncreasing disposable incomes Competition from locals

Resurgence of public sector spend Entry of regional players

Recovery in local income Protracted economic recovery

Franchising

-

7,500

15,000

22,500

30,000

-

5

10

15

20

25


OK Zim - volume vs price


Source: IES

51

Nature of business OK Zimbabwe is the longest established retail chain in the country, with 53 outlets dotted around Zimbabwean towns and cities with a high concentration of the outlets in Harare with 30 outlets. The group operates under four brands namely Bon Marché, OK Stores, OK Express and OK Mart. Forty-four of the stores are branded as OK Stores. The OK Stores vary between 750m² and 2,000m² while OK Express stores are smaller outlets (typically 500m²). Seven outlets are branded Bon Marché and cater for the upper income market and two are branded OK Mart. The company's business covers three major categories: groceries, basic clothing and textiles, and house ware products. The groceries category includes butchery, delicatessen, takeaway, bakery, and fruit and vegetable sections. Total retail space is approximately 68,000m². Aside from offering local and imported goods, the company has developed its own brands through the OK Pot ‘O’ Gold, OK Value and Bon Marché Premier Choice labels. H1 2013 Financial & Operational Review Sales growth ahead of GDP growth and inflation OK Zimbabwe released a set of results that defy the current depressed economic environment sales grew at an astounding figure of 24.6%. These surprising numbers were underlined by improved facilities and offering, improvement in customer count and basket size, customers coming back from the informal market and the new OK Mart brand. Overhead expenses were up 21.7%, slightly less than sales growth but nonetheless the growth was significant, driven by high cost of utilities, increased usage of generator power and cost of security. Sales per square metre rose by 22.84% from US$ 4 702 to USD 5,776 mainly due to the opening of new stores; however management could not provide same store sales figures which are a better indicator of growth. Margins resilient Gross margins were maintained at 17% as pressure from competition intensified as well as a higher propensity to consume low margin basic items. This was achieved on the back of negotiating better terms with suppliers and also bypassing middlemen through direct sourcing. Earnings per share grew by 21.1% to 0.46cents and an interim dividend of 0.2 cents, a 33% growth. Although management has invested heavily in

security shrinkage was 10 basis points higher y-o-y from 0.7% to 0.8% representing a dollar figure of USD 1.2m compared to us$1 m same period last year. Outlook Growth to come from opening new stores OK Zimbabwe is currently and a new outlet was opened in Victoria Falls. Management is in negotiation to open an outlet in Hwange and refurbishments are earmarked for Chinhoyi, Kadoma and Lobengula. Management guideline has indicated that post refurbishment revenue increases by between 35-40% and we expect a significant jump in revenue in the second half. The company will seek grow gross margins by increasing the proportion of high valued merchandise in sales as most customers were spending on low margin items. The risk to this strategy however is the weak fundamentals in the Zimbabwe economy. Fundamentals such as low disposable income, high dependence levels, low wage growth, diminished alternative sources of income and reduced diaspora remittances will limit the scope for upward price adjustment as well as high quality products offering. Traditionally the first half of Ok contribute 40% to revenue and we expect the second half to be much better given the timely completion of refurbishments at Ok Fife Avenue, Bon Marche Avondale and OK Marimba. We are therefore targeting revenue of close to USD 530m and a gross margin of 17% and net profit margin of 2.75% giving a net attributable profit of close to USD 14m. Valuation and Recommendation The company has strong brand equity, a fully developed IT system, an extensive branch network and ideal store location. Using a 50:50 blend of EV/EBITDA valuation matrix and the DCF method we value OK at US 23.7c. The share price has rallied strongly, up +93% YTD. Given the improved performance and strong cash generation, we believe that the company can substantially increase its dividend payout. Given the defensive nature and consistent growth prospects of OK Zimbabwe, we believe downside risk to the share is limited. HOLD.

52


Y-o-Y % NA 37.3% 60.3% 28.0% 7.0%

Gross Profit 30,252 43,512 70,162 89,774 96,058

Y-o-Y % NA 43.8% 61.2% 28.0% 7.0%

EBITDA 4,898 8,136 19,212 25,348 26,557

Y-o-Y % NA 66.1% 136.1% 31.9% 4.8%

EBIT/Operating Profit 2,561 5,422 15,451 22,013 22,983

Y-o-Y % NA 111.7% 185.0% 42.5% 4.4%

Attributable Net Income/Profit After Tax 1,225 4,286 10,306 14,802 15,433Y-o-Y % NA 249.8% 140.5% 43.6% 4.3%

Per Share data


Y-o-Y % NA 153.7% 133.4% 43.6% 4.3%

Dividend Per share (DPS) 0.00 0.00 0.36 0.50 0.53

Y-o-Y % NA NA NA 41.3% 4.3%

NAV/Basic Share 2.3 3.8 4.6 5.7 6.7

Y-o-Y % NA 66.8% 20.1% 23.4% 17.5%


Gross Margin 16.1% 16.9% 17.0% 17.0% 17.0%

EBITDA margin % 2.6% 3.2% 4.7% 4.8% 4.7%

EBIT margin% 1.4% 2.1% 3.7% 4.2% 4.1%


RatiosROaA 7.6% 10.0% 18.9% 21.1% 19.1%

ROaE 7.9% 15.6% 24.0% 27.9% 24.2%



Financial Summary - OK Zimbabwe

53

Padenga Holdings operates, three farms, located on the shores of Lake Kariba in Zimbabwe. The company produces crocodile skins and meat for export to Europe and Asia. Padenga is one of the largest Nile crocodile farming operations in Africa, supplying about 33% of the world’s demand. • Luxury goods market demand to double Growth in the luxury branded goods market is expected to double in the next decade led by demand from emerging markets. Padenga is thus prioritising value addition to the skins where possible in a manner that will not compete with existing customers. • Diversified skin production The company acquired a 50% stake in Lone Star Alligator Farms, USA for a consideration of USD m. • Better quality skins on fewer animals Padenga’s emphasis is on producing large crocodile skins for the premium markets. In 2009, the company decided to reduce the number of its skins produced from 60,000 skins a year to 42,000 skins. This strategy has paid off, as they are now producing better quality skins enhancing the average skin price. • Valuation We have valued Padenga using a combination of the EV/EBITDA and NAV valuation techniques, deriving a target of US 7.9c. Forward ratings are undemanding at PER+1 of 6.8x and PBV of 0.7x. We maintain our BUY recommendation.

Bloomberg PADENGA:ZHBloomberg BUYCurrent Price (Usc) 4.9


Upside (%) 62.9

Liquidity

Market Cap (USD 000) 26.3

Shares (000) 541.6

Free Float (%) 51.4


Price Performance


Change (%) (13.4)


Change (%) 7.8

Financials (USD 000) 31 Dec Current 2013F 2014F

Turnover 17,941 20,632 25,377

EBITDA 5,372 5,158 6,344




EPS (USc) 0.6 0.7 1.0

DPS (USc) 0.2 0.1 0.1


Ratios

RoaA (%) 9.8 10.4 11.8

RoaE (%) 10.7 11.4 13.3

EBITDA Margin (%) 29.9 25.0 25.0


Earnings Yield (%) 12.6% 14.7% 19.0%

Dividend Yield (%) 3.2% 2.9% 2.9%

PE (x) 7.9 6.8 5.3

PBV (x) 0.8 0.7 0.7

EV/EBITDA (x) 5.3 5.6 4.5

STRENGTHS WEAKNESSESGroup synergies Strong competitive environment

Branded products Conglomerate feel

Strong marketing Advances to farmers at a cost to Diversified operations the company

OPPORTUNITIES THREATSFranchise expansion Cheap imports

Growth in disposable incomes Prolonged time to recovery

New product development Drought

-

500

1,000

1,500

2,000

2,500

-

2

4

6

8


Padenga - volume vs price



Source: IES

54

Nature of business Padenga Holdings is a wholly owned Zimbabwe holding company for businesses engaged in the rearing, slaughter and processing of crocodiles with the end products being meat and skins. Padenga supplies approximately 33% of the world’s demand for large, high quality skins making it one of the largest single exporters of crocodile skins in the world. Between eight and nine kilogrammes of exportable meat is produced per animal, based on a slaughter size of 2.1 metres. The group currently operates three farms on Lake Kariba, producing the Nile crocodile Crocodylus Niloticus, and also has an abattoir which slaughters the animals on behalf of the farms. The production of crocodiles incorporates both ranched stock raised from wild eggs collected on permit and incubated on-farm, and stock produced from captive domestic breeders. H1 2013 Results & Operational Review Padenga’s interim results include Lone Star Alligator Farms which Padenga acquired in July 2012. The group recorded turnover of USD 3.9m and an operating loss before tax of USD 1.7m. The loss attributed to shareholders for the period amounted to USD 1.7m. The results are in line with expectations because of the seasonality of the business. Padenga received a quality bonus of USD 2.1m from their customers against skins delivered. The operation recorded an operating loss before tax of USD 2.7m. The results are better than anticipated by management as expenses were 3% lower than forecast. Padenga is still expected to meet full year budgeted profit. Culling and sales in Zimbabwe are scheduled to start in the fourth quarter of the year as normal. Operations at Lone Star Alligator Farms were very impressive, the subsidiary recorded a turnover of USD 1.7m, an operating profit of USD 1.1m and a profit before tax of USD 1.0m from the sale of 7,882 alligator skins. The results were commendable and above expectations. For the Zimbabwe operation, focus was on egg collection and incubation as well as refurbishment of pen floors and construction of breeder pens at Ume Crocodile Farm. The annual egg collection and incubation was consistent with the group’s production requirements yielding 58,899 hatchlings. This brought the total grower stock to 168,737 animals, with an additional 4,995 breeders in pens across the three farms. At Lone Star Alligator Farm the skin quality attained was praiseworthy as the quality grade attained was better than anticipated consequently the

price achieved per skin was higher than budgeted. The annual hatchling procurement programme conducted in August and September 2012 yielded 9,623 animals inducted into pens and these will be culled in October 2013. The group has managed to double the pens capacity, pens that held 10,000 animals will accommodate 20,000 animals this is in anticipation of volume growth in 2013/14. Padenga H1 2013 Results


Outlook It is the intention of management to align the financial year with production cycle. Regulatory approvals are being sought from the relevant authorities. Once obtained shareholders will be requested to approve the change of the company’s financial period to run for eighteen months up to December 2013. The demand for luxury products which use crocodilian skins remain burly. The group expects the local operation to cull and sell 43,000 skins in the culling season starting in April 2013. Management will remain focused on stringent cost control and are confident that the group will record a profit by year end. Significant volume growth is expected in Lone Star Alligator Farms as a result of a strategy to acquire additional hatchlings during the 2013 season for realisation in 2014. Valuation and Recommendation We have valued Padenga using a combination of the EV/EBITDA and NAV valuation techniques, deriving a target of US 7.9c. Forward ratings are undemanding at PER+1 of 6.8x and PBV of 0.7x. We maintain our BUY recommendation.

55

US$ Thousands 2011 2012 2013 E 2014 ERevenues 19,655 17,941 20,632 25,377

Y-o-Y % NA -8.7% 15.0% 23.0%

Gross Profit 12,934 13,509 15,474 19,033

Y-o-Y % NA 4.4% 14.5% 23.0%

EBITDA 6,315 5,372 5,158 6,344

Y-o-Y % NA -14.9% -4.0% 23.0%

EBIT/Operating Profit 5,151 4,016 4,525 5,693

Y-o-Y % NA -22.0% 12.7% 25.8%

Attributable Net Income/Profit After Tax 3,702 3,413 3,988 5,156

Y-o-Y % NA -7.8% 16.9% 29.3%

Per Share data

Attributable Diluted EPS 0.68 0.63 0.74 0.95

Y-o-Y % NA -7.8% 16.9% 29.3%

Dividend Per share (DPS) 0.00 0.16 0.15 0.14

Y-o-Y % NA NA -9.3% -3.0%

NAV/Basic Share 5.7 6.1 6.7 7.5

Y-o-Y % NA 8.3% 9.6% 12.0%

Margin Performance2011 2012 2013 E 2014 E

Gross Margin 65.8% 75.3% 75.0% 75.0%

EBITDA margin % 32.1% 29.9% 25.0% 25.0%

EBIT margin% 26.2% 22.4% 21.9% 22.4%

Net Income Margin % 18.8% 19.0% 19.3% 20.3%

RatiosROaA 26.2% 9.8% 10.4% 11.8%

ROaE 24.1% 10.7% 11.4% 13.3%

Earning yield on current price 14.1% 13.0% 15.2% 19.6%

Dividend yield current price 0.0% 3.3% 3.0% 2.9%

Financial Summary – Padenga Holdings

56

The property market has been characterised by limited demand for CBD offices and suburban retail space, yet despite this Pearl Properties expects to grow its rental income and occupancy levels through improving the quality of its lettable space. New property developments are also expected to attract higher quality tenants and thus improve on rental income and yields. • Good yields from office parks Office parks remain the highest in terms of rental growth and higher occupancy levels, however there is limited upside for continued rental growth. Consequently the group is targeting to grow its lettable area and holds a land bank worth 10% of the total portfolio. • Entry into residential sector is expected to yield

high return of 25% We are excited about the group’s prospective property developments in the lucrative sector. The country has a massive housing backlog, estimated at 1.2m units, which in the short to medium term should support high rentals. Uopward movement on prices for residential properties could however be constrained by limited liquidity and the lack of mortgage finance. • Valuations show upside Using relative comparison, we derive a value of US 4.1c, implying an upside of 26%. Pearl has a significant property portfolio and planned property developments are likely to make the company derive significant growth going forward. We rate the counter a LT BUY.

Bloomberg Code:Pearl:ZW PEARL:ZWRecommendation LT BUYCurrent Price (USc) 3.3


Upside (%) 26.2

Liquidity


Shares (m) 1,238.2

Free Float (%) 42.7


Price Performance


Change (%) 16.1


Change (%) 32.7


Turnover 8,830 10,155 11,475

EBITDA 4,015 5,077 5,164

Net Finance Income 450 113 153


EPS (USc) 0.73 0.59 0.46

DPS (USc) 0.07 0.04 0.04

NAV/Share (Usc) 9.23 6.76 5.51

Ratios

RoaA (%) 3.3 3.9 3.8

RoaE (%) 8.2 9.2 8.6

EBITDA Margin (%) 45.5 50.0 45.0


Earnings Yield (%) 26.7 21.8 16.8


PE (x) 3.7 3.0 3.0

PBV (x) 0.3 0.3 0.2

EV/EBITDA (x) 7.8 6.1 6.0

-

2,500

5,000

7,500

10,000

12,500

-

1

2

3

4


Pearl - volume vs price


Equity Research Zimbabwe May 2013 Property

Source: IES

STRENGTHS WEAKNESSESFocused and experienced management Limited free cashflow for new projects

Sizeable land bank

Diversified property portfolio

Manageable arrears level

OPPORTUNITIES THREATSImproving economic fundamentals Increasing debtors

Operating cots stabilising

Increased use of project finance

57

FY 2012 Results & Operational Review Pearl reported rental income growth of 9.4% to USD 8.8m, which management attributed to new lettings, rent reviews and the reopening of a suburban shopping mall that was under refurbishment. Consequently the average rental per square metre increased by 11.6% to USD 8.16 (2011: USD 7.33). Rental yield eased to 8.6% (2011: 9.8%) mainly due to the slower growth in rentals relative to investment property values. Net property income was up 4.2% to USD 7.2m (2011: USD 6.91m) and after accounting for administration expenses it was up by 2.9% to USD 4.0m. Operating profit before tax and fair value adjustment declined by 13.2% to USD 4.7m due to investment income falling radically from USD 1.0m in the prior period to USD 0.2m. The decline in investment income was because the group continued to focus on core operations by disposing equity investments to fund planned property refurbishments. On the balance sheet, investment properties grew by 10% from USD 109.7m in the prior period to USD 120.2m attributed to the completion of the refurbishment of the George Square Shopping Mall. Superb debt management strategies improved cash collection and resulted in tenant arrears falling by 20.4% to 9.0%. Efforts to reduce arrears to sustainable levels continue with payment plans being negotiated with defaulting tenants. Demand for office parks and industrial warehousing space remains sturdy with office park rentals per square meter at USD12.19 against USD 10.93 and Industrial space at USD 3.46 against USD 3.03. New lettings in the CBD however remain a challenge as tenants prefer to rent office parks outside the CBD. Outlook The local property sector remains largely a buyers market mainly due to the liquidity strained environment. New developments for commercial and retail properties in the country have, however, been limited with properties such as the 22 storey Joina Centre in the CBD still having some vacant space due to businesses rightsizing and moving out of the core CBD space. The group expects growth in rental income to come from improved yields from the refurbished space as well as growth in rental income from additional new space. Cost management strategies such as making payment plans for defaulting tenants and re-letting to quality tenants to reduce on debtors’ write-offs should benefit the group. Pearl has a significant property

portfolio and planned property developments are likely to make the company derive significant growth going forward. In a trading update management reported that, rental income for the two months to end February 2013 was USD 1.5m, up 6.4% on budget whilst net property income was also up 23% on budget at USD 812,948. Property expenses and administration expenses were both 24% and 21% ahead of budget, respectively. Valuation and Recommendation Using relative comparison, we derive a value of US 4.1c, implying an upside of 26%. Pearl has a significant property portfolio and planned property developments are likely to make the company derive significant growth going forward. We rate the counter a LT BUY.

0

4

8

12

16

0

0.5

1

Industrial CBD Office

Office Parks

Retail Surbaban

Retail CBD

USD/m2

Property Portfolio Review

Average rental per m2 ($) Occupancy rate (%)

Rental Yields (%)

Industrial31%

CBD Office33%

Office Parks20%

Retail Suburban

7%

Retail CBD9%

Pearl Properties Gross Lettable Area Split

Source: Company & IES

58

Financial Summary – Pearl Properties


Y-o-Y % NA 66.7% 14.5% 9.4% 15.0% 13.0%

Gross Profit 4,229 6,055 6,913 7,202 8,631 9,754

Y-o-Y % NA 43.2% 14.2% 4.2% 19.8% 13.0%

EBITDA 2,061 3,286 3,902 4,015 5,077 5,164

Y-o-Y % NA 59.4% 18.7% 2.9% 26.5% 1.7%


Y-o-Y % NA 59.4% 18.7% 2.9% 26.5% 1.7%


Y-o-Y % NA 576.5% 14.5% -51.1% 21.6% 2.5%

Per Share data


Y-o-Y % NA 576.5% 14.5% -51.1% -18.5% -22.9%


Y-o-Y % NA NA NA 14.7% -48.1% 2.5%

NAV/Basic Share 6.1 7.2 8.6 9.2 6.8 5.5

Y-o-Y % NA 18.5% 19.8% 7.3% -26.8% -18.6%


Gross Margin 100.0% 85.9% 85.6% 81.6% 85.0% 85.0%

EBITDA margin % 48.7% 46.6% 48.3% 45.5% 50.0% 45.0%

EBIT margin% 48.7% 46.6% 48.3% 45.5% 50.0% 45.0%


RatiosROaA 5.1% 3.8% 3.7% 3.3% 3.9% 3.8%

ROaE 6.3% 19.6% 18.9% 8.2% 9.2% 8.6%



59

Seed Co’s FY 2013 net income declined by 34% after a largely disappointing rainy season as well as the tight liquidity conditions. Taking advantage of the normalisation in input product prices in the first two years of dollarisation, management took a strategic decision to ramp up production and shore up carryover stocks. The result of this was that for the first time in five years, the group had enough seed stock to ensure that it can take advantage of any increase in demand. However the increase was largely financed at relatively high cost. Coupled with nonperforming debtors the strain on capital resources impacted the performance of the company. • Zimbabwe, eye of the storm The crippling liquidity constraints in the local economy impacted Seed Co significantly through reduced credit to retailers. The company faced significant challenges getting payments from government and some local retailers hence it made a deliberate strategy to hold back seed from problem clients and concentrated distribution to performing retailers. • Solid regional operations Regional operations continued to grow with Zambia recording a good season and earnings responded positively. Zambia remains a tax haven in the group given that the corporate tax rate in Zambia for agricultural entities is a maximum 10%. Volumes in Malawi were slightly up and the company is in the process of installing a new plant with a target for completion of 12 months. In Kenya the highland varieties are starting to gain a strong foothold.

• Valuation The reduction in the average cost of borrowings will significantly improve pre-tax margin and gross margins are expected improve on price adjustments. Ratings are undemanding at an EV/EBITDA of 7.7x and PER of 10.9x compared to peers that are trading at an average EV/EBITDA of 11.3x and PER of 21x. BUY.

Bloomberg Code SEEDCO:ZHRecommendation BUYCurrent Price (USc) 71.0


Upside (%) 27.2

Liquidity


Shares (m) 194.2

Free Float (%) 40.1


Price Performance


Change (%) (16.5)


Change (%) (21.1)

Financials (USD 000) 31 March Current 2013F 2014F

Turnover 110,642 125,006 140,632

EBITDA 23,578 28,301 33,158



EPS (USc) 6.5 10.6 12.7

DPS (USc) - - -

NAV/Share (USc) 43.3 44.7 49.1

Ratios

RoaA (%) 7.9 12.5 14.4

RoaE (%) 15.1 24.0 27.0

EBITDA Margin (%) 21.3 22.6 23.6




PE (x) 10.9 6.7 5.6

PBV (x) 1.6 1.6 1.4

EV/EBITDA (x) 7.7 6.5 5.5

STRENGTHS WEAKNESSESSignificant market share Dependence on reg governments

Strong brands & Syngenta r/ship Aggressive competition

Growing presence in SSA and imported varities

Strong research and dev. unit Over reliance on maize

Hybrids protected by patents

OPPORTUNITIES THREATSQuintessential recovery play on Drought

Zimbabwe agric sector Lower aid inflows and less public

Growth in Angola, Malawi & Tanzania spend on small holder farmer

Gvt opening up to GMO varieties input schemes

Fertiliser and fuel price shocks

-150 300 450 600 750 900

-20 40 60 80

100 120


SeedCo - volume vs price


Source: IES


60

Nature of business SeedCo is a developer and marketer of certified seed, concentrating mainly on maize hybrids but with varieties for wheat, barley, cotton, soya, sorghum and groundnuts. The company has a dominant market share in the hybrid maize seed market controlling around 80% of the Zimbabwean market. SeedCo has a research collaboration agreement with Syngenta, a European based global agribusiness involved in seed and crop protection. Quton, is the only cotton seed producer in Zimbabwe with a production base of about 10,000t a year and about 20 seed varieties. Seed production is equally split between Zimbabwe and the region. Annual regional production amounts to 50,000t, and the group’s total capacity is about 70,000t. FY 2013 Results & Operational Review As advised in the company’s 3rd quarter trading update, Seed Co’s net profit for FY 2013 was lower than FY 2012 decreasing by 34% to USD 12.6m. Overall sales volumes declined by 10% while winter cereal sales volumes shrunk by 41%. In Zimbabwe the whole market’s aggregate volumes dropped by close to 40%, negatively impacted by the reduced Government input programmes, a late start to the rainy season as well as the tight liquidity conditions. Regional operations contributed 67% (approximately USD 74.1m) to group turnover and approximately 70% to net profit (USD 8.8m). Gross profit margins increased to 46% from 45% on price adjustments in most markets although it was lower than the target of 49% on account of the devaluation of the Malawi kwacha. Operating margins decreased to 21% from 25%, resulting in operating profits declining by 15%. Opex grew 5% mainly driven by once off retrenchment costs of USD 2.0m, as the group right sized to increase efficiency and agility. Excluding the retrenchment cost we estimate that opex declined by 2%. Cost savings of approximately USD 1.2m p.a. are anticipated post the rightsizing. Finance charges were high due to borrowings to finance carryover stock as well as the slower receipts from government and related institutions. Cashflows were strained on increased borrowings repayments as well as capex. Net cash generated from operations improved significantly due to reduced working capital requirements as seed production was reduced. Net cash from operations of USD 11.6m (up 3.6x), represented a cash interest cover of 1.6x. Gearing remained static at 54%. The average cost of borrowings reduced to 11.65% p.a. from approximately 19% at the interim stage. The Government of Zimbabwe reduced its arrears to USD 4.7m from about USD 13.7m at H1 2013 while quasi government institutions owed the group approximately USD 11.2m.

The Zambian government owed approximately USD 8.0m while the Malawi government owed USD 2.0m. Outlook R&D remained strong as the company released 16 new varieties and approximately USD 4.5m was spent on R&D. Seed production has been reduced especially in Zimbabwe were there was significant carryover stock and SeedCo hopes to end FY 14 with a stock carryover of approximately 16,000t. The regional expansion has benefited the group as Tanzania and Kenya contributed approximately USD 2.0m to the bottom line. The floating of the Malawi kwacha will have a positive impact on the business going forward. The introduction of e-voucher system is also likely to aid SeedCo’s volumes as farmers will have the choice on which seed brand to buy. Management is upbeat about the prospects of the business as the demand for seed in the region remains firm. Valuation and Recommendation SeedCo maintained its dominant market share in the hybrid maize seed category with its strong brands. In our view, the group is well positioned to harness value with its wide spread geographical presence. Strategic relations with global players such as Monsanto will continue to improve seed varieties for SeedCo’s hybrid offering. The reduction in the average cost of borrowings will significantly improve pre-tax margin and gross margins are expected to improve on price adjustments. Ratings are undemanding at EV/EBITDA of 7.7x and PER of 10.9x compared to peers that are trading at an average EV/EBITDA of 11.3x and PER of 21x. BUY.

61

USD Thousands 2009 2010 2011 2012 2013 2014 E 2015 ERevenues 53,850 76,990 97,826 117,708 110,642 125,006 140,632

Y-o-Y % NA 43.0% 27.1% 20.3% -6.0% 13.0% 12.5%

Gross Profit 27,610 33,367 49,737 53,036 50,873 61,253 70,316

Y-o-Y % NA 20.9% 49.1% 6.6% -4.1% 20.4% 14.8%

EBITDA 12,060 16,438 21,748 23,691 23,578 28,301 33,158

Y-o-Y % NA 36.3% 32.3% 8.9% -0.5% 20.0% 17.2%

EBIT/Operating Profit, exlc exceptionals 17,362 18,425 25,426 26,854 24,735 29,151 34,252

Y-o-Y % NA 6.1% 38.0% 5.6% -7.9% 17.9% 17.5%

Attributable Net Income/Profit After Tax 12,938 12,823 17,435 19,159 12,610 20,501 24,601

Y-o-Y % NA -0.9% 36.0% 9.9% -34.2% 62.6% 20.0%

Per Share data

Attributable Diluted EPS 6.77 6.69 9.07 9.93 6.49 10.56 12.67

Y-o-Y % NA -1.2% 35.6% 9.5% -34.6% 62.7% 20.0%

Dividend Per share (DPS) - - - - - - -

Y-o-Y % NA NA NA NA NA NA NA

NAV/Basic Share 30.97 37.78 42.66 42.44 43.33 44.66 49.09

Y-o-Y % NA 22.0% 12.9% -0.5% 2.1% 3.1% 9.9%

Margin Performance2009 2010 2011 2012 2013 2014 E 2015 E

Gross Margin 51.3% 43.3% 50.8% 45.1% 46.0% 49.0% 50.0%

EBITDA margin % 22.4% 21.4% 22.2% 20.1% 21.3% 22.6% 23.6%

EBIT margin% 32.2% 23.9% 26.0% 22.8% 22.4% 23.3% 24.4%

Net Income Margin % 24.0% 16.7% 17.8% 16.3% 11.4% 16.4% 17.5%

RatiosROaA 19.9% 17.4% 18.2% 16.9% 7.9% 12.5% 14.4%

ROaE 23.3% 19.5% 22.6% 23.4% 15.1% 24.0% 27.0%

Earning yield on current price 9.5% 9.4% 12.8% 14.0% 9.1% 1487.2% 1784.6%

Dividend yield current price 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Financial Summary – Seed Co

62

Equity Research Zimbabwe May 2013 Industrial Holdings

The group benefits from an increased tobacco crop through many of its divisions, with the revised crop estimate now standing at approximately 155 million kg’s, down from the initial 170 million kg’s predicted at the beginning of the season. We believe the tobacco sector will continue to recover in Zimbabwe and TSL is well placed to benefit from any growth. • Strong balance sheet The group’s cash flow statement reflects good cash generation with operating cash flow of USD m.The balance sheet remained in good shape, with net gearing of negative 1.0%. Debtors increased by 1.9x due to the tobacco out-grower scheme.

• Agric recovery With the majority of the group’s divisions focused on agriculture, any increase in agricultural activity will benefit TSL, in particular growth in the tobacco sector, which we believe will propel growth in going forward.

• Valuation shows upside Although the economic outlook is expected to remain challenging, we believe that TSL can weather the storm (given the strong balance sheet) and that it offers sustainable profitability. The restructuring of the group has gone on well and we expect margins to improve on improved efficiencies and increased capacity utilisation. Although the counter has gained strongly gaining 72% YTD we believe that profitability is set to improve significantly. Ratings are undemanding at a forward PER of 6.0x and a PBV of 0.6x. Our sum of parts valuation indicate a fair value of USD 85m. We maintain our LT Buy recommendation.

Bloomberg Code TSL:ZHRecommendation LT BUYCurrent Price (USc) 18.5


Upside (%) 16.2

Liquidity


Shares (m) 347.3

Free Float (%) 15.8


Price Performance


Change (%) 184.6


Change (%) 64.4


Turnover 31,958 38,829 43,294

EBITDA 7,123 8,976 10,446



EPS (USc) 1.6 1.9 2.2

DPS (USc) 0.4 0.5 0.6

NAV/Share (USc) 16.3 17.8 19.4

Ratios

RoaA (%) 6.7 7.7 8.0

RoaE (%) 10.9 11.7 12.2

EBITDA Margin (%) 22.3 23.1 24.1




PE (x) 11.5 9.5 8.4

PBV (x) 1.1 1.0 1.0

EV/EBITDA (x) 8.9 7.1 6.1

-

5,000

10,000

15,000

20,000

25,000

30,000

-

5

10

15

20

25


TSL - volume vs price


STRENGTHS WEAKNESSESStrong management Increased competition

Solid asset base Poor perfromnace by some business units

Strong agricultural recovery reducing profitability

Conglomerate - uncorrelated businesses

OPPORTUNITIES THREATSManufacturing sector recovery Competition

Good tobacco crop Liquidity constraints

Economic recovery Inconsistent utilities supply

Source: IES

63

Nature of business TSL Limited is the holding company of a group of entities with main operations in the inputs to agriculture, storage and distribution, auctioning of tobacco, car hire, printing and packaging, horticulture and property. The group also owns 40% of ZSE listed Hunyani which is involved in the manufacture, corrugated cardboard and printing. The TSL group has a number of industrial properties some of which are rented out while others are owner occupied. The group also hold 30% shareholding in Cut Rag Processors, which manufactures cigarettes on a toll basis. Cut Rag process about 400 to 600 tonnes of cigarettes per month, both for own brands and contract. The auction facility income is based on the value of tobacco that goes under the hammer and TSF gets 3% of the auctioned value. FY 2012 Results and Operational Review Net profit surged 126% y-o-y For FY 2012, TSL posted a strong set of results showing attributable earnings of US$ 5.1m, up 126% y-o-y. The strong performance was driven by significant volume growth at Bak Logistics, cost control in the tobacco operations as well as restructuring benefits, which included discontinuing loss making units. Margins expanded EBITDA margins expanded to 22.4% from 10.6% driven by cost containment and improved efficiencies, resulting in operating profits increasing five folds. A final dividend of 0.43 US cents a share was declared, implying a dividend cover of 4.0x and yield of 3.7%. The LDR is Friday 15 February 2013. Cashflows were constrained on increased working capital requirements mainly to finance the tobacco out-grower scheme. The company expects to receive approximately 2.5m kg of tobacco from the out-grower scheme. The balance sheet remained in good shape, with net gearing of negative 1.0%. Debtors increased by 1.9x due to the tobacco out-grower scheme. The disposal of TS Timber was completed during the year. The property holding company commenced operations in the second half of FY 2012 and operated for only four months. Bak Logistics is expected to contribute significantly to group profits as it continues to expand its revenue streams. Outlook At the AGM, management advised that the group is in good shape and is on track to achieve FY 2013 targets. TSL Classic expects to receive approximately 2.5m kg of tobacco leaf from its out-grower scheme. The tobacco national crop is expected to be bigger than

that achieved in 2012 with estimates indicating for a crop size of between 160mkg and 170m kg. The logistics business is expected to grow its warehouse space by approximately 15% and should have a good outturn on the back of the strong tobacco season. The de-listing of Chemco is on-going. Cut Rag (associate) completed its relocation and is expected to make a strong contribution. Efficiencies at Tobacco Sales Floor are expected to be improved. The average prices are slightly ahead of prior year with an average price of approximately USD 3.69/kg having being achieved. Valuation and Recommendation Strong balance sheet and a good asset play Although the economic outlook is expected to remain challenging, we believe that TSL can weather the storm (given the strong balance sheet) and that it offers sustainable profitability. The restructuring of the group has gone on well and we expect margins to improve on improved efficiencies and increased capacity utilisation. Although the counter has gained strongly gaining 72% YTD we believe that profitability is set to improve significantly. Ratings are undemanding at a forward PER of 6.0x and a PBV of 0.6x. Our sum of parts valuation indicates a fair value of USD 85m. We maintain our LT Buy recommendation.

64


Y-o-Y % NA 59.3% -21.1% 8.5% 21.5% 11.5%

Gross Profit 14,766 23,520 18,575 20,338 24,710 27,552

Y-o-Y % NA 59.3% -21.0% 9.5% 21.5% 11.5%

EBITDA 3,867 3,469 3,528 7,123 8,976 10,446

Y-o-Y % NA -10.3% 1.7% 101.9% 26.0% 16.4%


Y-o-Y % NA -27.7% -55.0% 437.2% 33.3% 19.7%


Y-o-Y % NA -4.0% 0.6% 129.0% 20.7% 13.7%

Per Share data


Y-o-Y % NA -4.0% 0.6% 129.0% 20.7% 13.7%

Dividend Per share (DPS) - - 0.40 0.43 0.52 0.59

Y-o-Y % NA NA NA 7.5% 20.7% 13.7%

NAV/Basic Share 12.90 13.19 14.05 16.35 17.76 19.37

Y-o-Y % NA 2.3% 6.5% 16.3% 8.7% 9.1%


Gross Margin 63.1% 63.1% 63.1% 63.6% 63.6% 63.6%

EBITDA margin % 16.5% 9.3% 12.0% 22.3% 23.1% 24.1%

EBIT margin% 13.5% 6.1% 3.5% 17.3% 19.0% 20.4%


RatiosROaA 0.0% 2.6% 1.3% 6.7% 7.7% 8.0%

ROaE 0.0% 5.3% 5.1% 10.9% 11.7% 12.2%



Financial Summary – TSL Holdings

65


In recent years, we have witnessed Implats going full steam ahead with its expansion at Zimplats in the face of unclear indigenisation demands. The company submitted proposal for its indigenization plan, which were granted by the Minister of Youth, Indigenisation and Empowerment. Recently, Zimplats lost a significant portion (27,948ha) of its land – when the government gazetted a section that it deemed excess to the company’s requirements.

• Share price has suffered Clearly, Zimplats has been tainted by the country’s political problems. Of course, political actors and the media can be held accountable here. The share price has de-rated to about AUD 10.00 from historic highs of AUD 13.00. • Interest expense and penalties to negatively

impact FY 2013 profitability Zimplats incurred a USD 16.6m in interest expense and penalties for H1 2013 which will reduce net income for the year.

• Remains fundamentally undervalued We have valued Zimplats using a DCF approach which yielded a target price of USD 13.50, indicating 55% potential upside, however the operating environment remains very fluid which might warrant more caution. On the other hand, our comparative analysis shows that Zimplats is trading on undemanding ratings of PER+1 6.0x. We are still convinced that Zimplats has the potential to create material additional value for shareholders in the long term. SPEC BUY.

Bloomberg Code ZIM:AURecommendation SPEC BUYCurrent Price (USc) 868.9

Current Price (AUDc) 900.0


Upside (%) 55.4

Liquidity


Shares (m) 107.6

Free Float (%) 11.0


Price Performance

Price, 12 months ago (AUD) 9.3

Change (%) (6.6)


Change (%) 6.6

Financials (USD m) 30 June Current 2013F 2013F


EBITDA 190 109 194



EPS (USc) 113.7 35.6 97.4

DPS (USc) - 1.0 2.0

NAV/Share (USc) 800.6 915.5 951.1

Ratios

RoaA (%) 11.5 3.1 7.3

RoaE (%) 15.3 4.1 10.4

EBITDA Margin (%) 32.7 18.2 28.3




PE (x) 7.6 24.4 8.9

PBV (x) 1.1 0.9 0.9

EV/EBITDA (x) 5.3 9.2 5.2

EV/4E Oz (USD) 2,719.6 2,831.7 2,135.3

-

20

40

60

80

100

120

-2 4 6 8

10 12 14


Zimplats - volume vs price

Volume ('000) RHS Price (AUD) LHS

STRENGTHS WEAKNESSESLow gearing enables the group to fund Weak PGM prices directly impact revenues- Eurozone

future expansion projects through debt. Crisis presents a stumbling block.

Defensive - PGMs core business Low grade ore (3.4g/ tonne of ore)

Technical & strategic support from parent company, Royalties in Zimbabwe have increased significantly

Impala Platinum eg Refining through Impala Refineries (10.0% for Platinum and 7.0% for Gold)

Shallow depth of ore (100-500m max-depth)

The underground mines are operating at full capacity

OPPORTUNITIES THREATSNgezi Phase II and III Expansion Projects Slump in PGM prices as a result of slow global economic

Increased emerging markets demand for automobiles recovery

may drive PGM prices up. Indigenisation issues leading to weak share price.

Regulatory environment i.e. APT

Mining rights ownership risks

High electricity tariffs could squeeze margins

Skills flight to neighbouring countries.

Source: IES

66

Nature of business Zimplats Holdings Limited is a mining group which explores for and produces platinum group metals (PGMs) in Zimbabwe. The company’s exploration projects include Ngezi South and North, Hartley Platinum and Selous. Zimplats is 87% owned by Impala Platinum Holdongs of South Africa. The company operates two main sites (Ngezi and Selous) and employs underground mining techniques (board and pillar method) to extract PGMs. Six metals (platinum, palladium, gold, rhodium, nickel and lithium) contributed approximately 99% to revenue. Lower grades but shallow depth The platinum mined at Zimplats is generally a low grade type (3.4g/t of ore). However, Zimplats’ main strength lies in the depth of the ore, which is relatively shallow (100 metres deep) compared with South Africa platinum mines which could be as deep at 2,000 metres. Zimplats has a vision to be the leading platinum company in Zimbabwe, producing 1.0m platinum oz per annum. In line with its vision the company has embarked on a phased expansion drive to ramp up production levels. Zimplats currently has three underground mines It is worth noting that Zimpats has shifted away from open pit mining and now employs underground mining through its three mines (Ngwarati, Rukodzi and Bimha Mine). Ngwarati and Rukodzi Mine have a combined capacity in the region of 2.2mtpa whereas the new Bimha Mine has a capacity of around 2.0mtpa. This implies that the group currently has an estimated capacity of 4.2m tones of ore per annum. However, the Phase II expansion project is expected to add another 2.0mtpa through the Mupfuti Mine (Portal 3). Zimplats also operates two concentrators at Ngezi and the Selous Metallurgical Complex (SMC) with a combined capacity of 4.2mtpa. The concentrators are currently operating at full capacity. Furthermore, Zimplats also has a smelter at the SMC with the capacity to process 6.2mtpa of concentrate. Refining is done through the parent company’s Impala Refinery Services (IRS). Of the 4.2m tonnes of ore that is mined, c3.0% (127,000 tonnes) is the concentrate. This gives about 7,500 tonnes of white matte that is then exported to South Africa to a Base Metal Refinery (IRS). Zimplats receives approximately 90% of the value of PGMs and 80% of the value of base metals from IRS. Management has indicated that the group is currently evaluating the possibility of commissioning a refinery.

Q2 2013 Results and Operational Review Total ore mined was 2% ahead of Q2 2012 and was down 4% on Q1 2013 production due to low equipment availability and bad ground conditions. However, milled tonnage was ahead of expectations at 1,126,00t (Q2 2012: 1,110,000t) on improved running time and head grade. Q1 2013 performance was negatively impacted by concentrator maintenance shutdowns. The 4E metal in converter matte production and sales declined by 66% and 75%, respectively, from the previous quarter. This was due to the fire which affected the furnance as well as a run-out. Revenue declined by 11% q-o-q to USD 83.0m and was down 15% y-o-y. Opex eased 9% due to lowers sales volumes. All this resulted in a 19% decrease in operating profits. The cash cost of production per 4E ounce declined 10% y-o-y to USD 857 (down 6% q-o-q). Overall, the group posted an operating profit of USD 17.6m, indicating a 19% decrease q-o-q (-8% y-o-y). Outlook Despite the noise on indigenisation issues, strong organic growth is likely to continue beyond the near-term Zimplats boasts a +200moz (4E) minerals inventory and is capable of growing to at least 1.0moz Pt pa in the longer-term. The group is in the midst of its Phase II expansion project that will see production move from at least 180koz Pt p.a. to at least 270k oz p.a.. Nonetheless, we believe that continued investment in this type of infrastructure requires a resolution of issues such as indigenisation and assurance of stability thereafter. Clarity regarding security of tenure is also a pre-requisite in our view, to any form of material mining investment, in any jurisdiction. Phase II is expected to increase production volumes to 6.2m tonnes of ore and 270,000oz of platinum. Management has also hinted that Phase III feasibility studies are currently underway. Valuation and recommendation We have valued Zimplats using a DCF approach which yielded a target price of USD 13.50, indicating 55% potential upside, however the operating environment remains very fluid which might warrant more caution. On the other hand, our comparative analysis shows that Zimplats is trading on undemanding ratings of PER+1 6.0x. We are still convinced that Zimplats has the potential to create material additional value for shareholders in the long term. SPEC BUY.

67


Total Revenue 236 294 120 404 527 473 388 524

Y-o-Y Growth 25% . 236% 31% -10% -18% 35%

EBITDA 135 170 (4) 196 278 190 109 194

Y-o-Y Growth 25% -102% -5615% 42% -32% -42% 77%

Operating Expense (24) (30) (33) (51) (66) (91) (96) (105)

Y-o-Y Growth 26% 7% 58% 29% 38% 5% 9%

Depreciation and Amortization (21) (24) (21) (23) (34) (35) (39) (45)

Y-o-Y Growth 18% -12% 9% 45% 5% 11% 16%

Net Finance income 3 0 (1) (6) (9) (3) (18) (4)

Y-o-Y Growth -95% -1006% 461% 34% -59% 409% -78%

Profit Before Tax 117 146 (26) 167 236 152 53 145

Y-o-Y Growth 24% -118% -740% 42% -36% -65% 174%

Net Income/Profit After Tax 100 124 (25) 122 200 122 38 105

Y-o-Y Growth 25% -120% -588% 64% -39% -69% 174%


Earning per Share (USc) 93 116 (23) 113 186 114 36 97

Y-o-Y Growth 25% -120% -588% 64% -39% -69% 174%




Y-o-Y Growth 34% -6% 30% 37% 17% 14% 4%


EBITDA margin % 57.3% 57.6% -3.0% 48.6% 52.8% 40.2% 28.2% 36.9%

EBIT margin% 48.6% 49.4% -20.7% 42.8% 46.4% 32.7% 18.2% 28.3%

Net Income Margin % 42.2% 42.3% -20.8% 30.2% 38.0% 25.9% 9.9% 20.0%

ROaA 28.4% 24.8% -4.0% 16.7% 22.4% 11.5% 3.1% 7.3%

ROaE 35.6% 32.2% -5.8% 25.6% 31.4% 15.3% 4.1% 10.4%

Earning yield on current price 10.6% 13.3% -2.7% 13.1% 21.4% 13.1% 4.1% 11.2%


Financial Summary – Zimplats Holdings

68

69

70

Contacts

General

Thedias Kasaira

Managing Director

Direct +263 4 792 064

Moblie +263 772 600 562


Dealing

Sales Trading

Tino Kambasha

Director

Direct +263 4 791 593

Mobile +263 772 572 110


Analysts

Tel +263 4 700 000/

+263 4 790 403



Tonderai Maneswa +263 772 895024


Sebastian Gumbo Derrick Ncube

Dealer Dealer

Direct +263 4 792 064 Direct +263 4 792 064

Mobile +263 772 600 562 Mobile +263 772 913 443

Email [email protected] Email [email protected]

Tatenda Mutonga Shelton Sibanda

Dealer Dealer

Direct +263 4 792 064 Direct +263 9 74 554

Mobile +263 772 568 610 Mobile +263 772 984 828


71









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This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara Edwards Securities (Pvt.) Ltd. (“Imara”) from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report only and are subject to change without notice. Neither Imara nor any other member of the Imara group of companies including their respective associated companies (together “Group Companies”), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for any purpose. © Imara Edwards Securities 2013

72

CONTENTS SECTOR PAGE

EXECUTIVE SUMMARY 3

ZIMBABWE IN FIGURES: MACROECONOMIC INDICATORS

4

ZIMBABWE – MACRO-ECONOMIC OVERVIEW

5

THE ZIMBABWE STOCK EXCHANGE OVERVIEW

10

Companies In Detail

AFRE CORPORATION LIMITED

Insurance 14

AICO AFRICA LIMITED Agriculture 17

BARCLAYS BANK ZIMBABWE LIMITED Financial 20

BAT ZIMBABWE LIMITED Tobacco 23

CBZ HOLDINGS LIMITED

Financial 26

DAIRIBORD HOLDINGS LIMITED Food 29

DELTA CORPORATION LIMITED Beverages 32

ECONET WIRELESS ZIMBABWE LIMITED Telecoms 35

HIPPO VALLEY ESTATES

Agriculture 38

INNSCOR AFRICA LIMITED Conglomerate 41

NMBZ HOLDINGS LIMITED

Financial 45

NEW DAWN MINING

Mining 48

OK ZIMBABWE LIMITED Retail 51

PADENGA HOLDINGS LIMITED Agriculture 54

PEARL PROPERTIES LIMITED Property 57

SEED CO Agriculture 60

TSL Conglomerate 63

ZIMPLATS LIMITED Mining 66

Analysts



Tonderai Maneswa +263 4 700 000


2



Executive Summary

Watershed year? Zimbabwe successfully held its constitutional referendum in March 2013 which resulted in the adoption of a new constitution. The country is due to hold “harmonised elections” i.e. Presidential and General elections at the same time, later this year. The political environment has remained relatively peaceful since the adoption of the Government of National Unity in 2009, which has resulted in improved investor sentiment. Although the term of the current Parliament is due to end on 29 June 2013, the date of the elections is still to be announced. In our view, it is unrealistic that the elections will be held before the end of June 2013 since there are several issues still to be dealt with. These include the alignment of the laws to the new constitution, a credible voters’ role, and chiefly raising the financial resources estimated at over USD 30.0m. The referendum was held in a peaceful environment and should this be carried into the election the country’s recovery could well be enhanced. Since the adoption of the multi-currency system the Government has maintained a cash budgeting framework which has helped the economic recovery. As noted by the Minister of Finance in his Q1 Economic Update, there are significant unbudgeted for pressures on the 2013 budget stemming from high employment costs, critical external loan repayment obligations, the referendum, elections and grain importation. The cash strapped Government is facing the daunting task of keeping in check its spending while ensuring the money is well spent to reconstruct the economy. Although the economic growth has slowed due to local uncertainties, heightened political rhetoric ahead of elections as well as the tight liquidity conditions, Zimbabwe still continues to witness economic recovery. We are convinced that the country enjoys a number of advantages which will make continued high growth likely. These include a high degree of literacy, a dynamic private sector, generous endowment of natural resources and a young population, with 42% under 15 years of age. Early stages on a recovery The market has gained 59% YTD on strong rallies by big caps especially Barclays (+20%), BATZ (+126%), Dairibord (+39%), Delta (+45%), Econet (+55%), Innscor (+32%), OK Zim (+93%) and Natfoods (+98%). It is no surprise that most of the companies that have rallied injected significant investments into their businesses since dollarisation and are rightly being rewarded. Despite the recent rally on the ZSE, we believe that the ZSE still carries good long-term growth potential given the increasing profitability and return of dividends. The economy is expected to record good growth underpinned by recovery in agriculture and mining. There are attractive opportunities to buy rapidly growing, monopolistic, well managed companies and strong cash generating companies such as BATZ, Dairibord, Delta, Econet, Innscor, Hippo and OK Zimbabwe. Generally, the prospects of continued good earnings growth will provide further upside potential from current levels. Nonetheless, volatility is likely to stay high in the outlook period given the uncertainties mainly around indigenisation and elections, hence, we recommend investors take a long-term view on their holdings. Most of the big cap counters are post their heavy capex projects and we believe will be able to pay attractive dividends in the future. Counters such as BATZ, Delta, Econet and OK Zim easily come to mind in this regard. Given the demand for infrastructure reconstruction we believe construction companies are well poised to take on opportunities (as the economy recovers) and counters likely to gain include Lafarge and Masimba Holdings. Given the tight liquidity conditions and limited credit lines we believe that bank asset quality pressures will remain elevated. We rate banks at best as Spec Buys and our picks in this space include ABCH, Barclays, CBZH, FBCH and NMBZH. In our opinion FMCG businesses are also likely to continue to post good financials as incremental increases in disposable incomes translates into retail spend figures and companies to look for include BATZ, Dairibord, Delta, Econet, Innscor, Natfoods and OK Zim. With the recovery in some sub-sectors of agriculture counters such as TSL and SeedCo may benefit. Some selected second tier stocks that might offer upside include Afdis, Mash Holdings, Padenga, Pearl Properties and Zimplow.

3

Zimbabwe in Figures: Macroeconomic Indicators

2009 2010e 2011 2012e 2013f 2014fPopulation (m) 13 13 13 13 13 13

Nominal GDP growth (%) 5.4 9.6 9.4 4.4 5.0 6.3

Nominal GDP (USDm) 6,133 7,433 9,433 11,914 13,400 14,200

GDP Per Capita (USD) 450 531 574 593 610 661

Inflation (y-o- ch.)CPI Annual Average 3.1 3.5 3.7 4.5

CPI End of Period (7.7) 3.1 3.5 2.9 5.0

Money and Credit (USDm)Broad Money (M3) 1,381 2,328 3,400 4,400 5,100 6,500

Domestic Debt 723 1,695 2,755 3,538 4,250 5,650

Central GovernmentRevenue (USDm) 973 2,339 2,921 3,640 3,845

Expenditure (USDm) 850 2,107 2,895 3,640 3,845

External Trade (y-o- ch. (USDm))Merchandise exports (1) 1,692 1,179 594 74

Merchandise imports 23 (1,930) (2,400) (653) (322)

Balance of Payments (US$m)Merchandise exports 1,625 3,317 4,496 5,090 5,164

Merchandise imports (3,232) (5,162) (7,562) (8,215) (8,537)

Trade Deficit (1,607) (1,845) (3,066) (3,125) (3,372)

DebtTotal Externat Debt (USDm) 7,145 7,662 8,140 12,200 13,500

Total external debt (% of GDP-e-oy) 104.0 99.8 102.1 103.6

Source IMF, RBZ, Ministry of Finance, IES

-10%

0%

10%

20%

30%

40%

50%

60%

70% GDP growth rate by sector

2010 2011 2012 est 2013 Proj Source: Ministry of Finance

Zimbabwe Exports Contribution 2010

Source: Ministry of Finance, RBZ

Mining 65%

Tobacco 17%

Agriculture 8%

Manufacturing 8%

Other 1%

2012 Contribution to revenue

VAT 31%

Companies 12%

Individualls 19%

Non-tax Revenue 6%Excise Duties 12%Other Taxes 4%

Customs Duty 12%


Contribution to GDP 2009


Manufacturing 15%

Finance & Insurance 4%

Mining 5%Other 32%Agriculture 16%

Tourism 11%

Education 3%

Transport & Communications 15%

4

Zimbabwe Macro-Economic Overview

Slowing growth in recent years In the early years of dollarization, the Zimbabwean economy experienced a strong recovery between 2009 and 201, with growth averaging 7.7%, anchored by improved policies, a favourable external environment and off-budget donor grants. The growth was mainly driven by a strong recovery in agriculture, mining and financial services. Last year, 2012, proved to be a rather challenging year as the “noise” from the inclusive government destabilised the relatively stable business environment. GDP growth, which was initially forecast at 9.4% (by the Ministry of Finance (MoF), was revised downwards three times to eventually settle at 4.4%, due to a lethargic performance from most sectors. Despite the decent recovery witnessed over the last few years, poverty remains an issue as the growth benefits did not filter through to many people outside the public sector due to lack of resources to support social programs and infrastructure development. The average annual gross income per person is USD 3,475, according to the ZimStats - Poverty Income Consumption and Expenditure Survey 2011/12. Although per capita GDP in Zimbabwe is still low, the country enjoys a number of advantages which make continued high growth likely: A high degree of literacy Generous endowment of natural resources Dynamic private sector Commodity price rally A young population, with 42% under 15 years of

age The MoF estimates that the mining sector (projected to grow by 17.1% in 2013) will anchor the economy going forward. GDP is expected to register 5% growth in 2013. The mining sector is expected to benefit from firm international commodity prices, strategies to lower electricity supply interruptions and additional private capital injections. However, the indigenisation issue remains unresolved and international commodity prices are stagnating in the face of the slowdown in the European Union and the USA. Baseline growth of 4.7% anticipated to 2017 In its September 2012 Article IV Consultation, the IMF cited two scenarios for the local economy. Under a Baseline scenario previously referred to as the unchanged policies scenario, the group forecast a slight improvement in GDP growth compared to the previous assumptions. GDP is estimated to grow at an average rate of 4.7% as investment remains subdued as a result of:

Weak business environment

Erratic electricity supply and an unfavourable agricultural season.

Absence of ambitious growth-oriented reforms Uncertainty surrounding the pending elections

According to the IMF, additional downside risks for the outlook include: Political disturbances Export price declines Higher-than-anticipated increases in imported

food and fuel prices Unfavourable weather Reversals of capital inflows Banking system instability.

Under the alternative, active scenario, the IMF assumes that the government will implement strong policy measures to address existing impediments to sustainable growth. Under this scenario, the country’s external debt ratios would decline much faster than under the baseline scenario and all indicators would be within prudent thresholds by 2023. If government strengthens fiscal disciple, improves the quality of expenditures, ensures that the implementation of the indigenisation legislation takes into account investor’s concerns, presses ahead with key structural reforms, and takes forceful steps to address financial sector vulnerabilities, the country could potentially boost growth performance by about 2-3 percentage points relative to the baseline scenario over the medium term. Real GDP is projected to grow at an average of 7% over the medium term driven by increased investment in mining and strong growth in construction, electricity and manufacturing as the business environment improves. Inflation would remain contained at an average of about 4.5% in the medium to long term. The current account deficit would decrease to around 14% of GDP by 2017, largely financed by foreign direct investment. In his Q1 2013 economic update the Minister of Finance, Mr. Tendai Biti, noted that the macro-economic environment remained stable as reflected by low inflation levels. However, the economy, exhibits a number of fundamental weaknesses which may impact on the 2013 projected growth rate of 5.0%. These weaknesses emanate from the liquidity and financing challenges, limited revenue growth, as well as a widening trade and current account gap due to depressed exports and over-dependence on imports. All this has resulted in the capacity utilisation of most productive sectors remaining well below potential, dampening prospects for fast economic recovery.

5

Inflation on the decline When the economy dollarised in 2009, inflation ended the year at -7.7%, but subsequently rose to an average of 3% for 2010, 4.1% for 2011 and 3.7% 2012. With food prices accounting for +>30% of the consumer price index, weather conditions tend to materially influence the inflation outcome. Inflation remained under control at below 3.0% during the months of January and February 2013, recording 2.5% and 2.98%, respectively. This was mainly attributed to tight liquidity and depressed demand as well as a depreciated ZAR, which gave relief to importers.

-8.0%

-5.0%

-2.0%

1.0%

4.0%

90

92

94

96

98

100

102

Jan-09 Dec-09 Nov-10 Oct-11 Sep-12

Consumer Price Index

CPI (LHS) M-o-M (RHS)y-oy

Source: ZimStats

According to an Article IV report on Zimbabwe by the IMF, the CPI inflation rate in Zimbabwe is highly correlated with both the CPI and PPI inflation rates in South Africa with a lag of five months, mostly due to the high share of imports from South Africa. Regression results indicate that a 1-percenatge point increase in the CPI inflation rate in South Africa leads to 0.6 percentage point increase in the CPI inflation rate in Zimbabwe five months later.

0 10 20 30 40

Food and non alcoholicHousing, water, electricity, gas and …

Furniture, household equip. And …Transport

Recreation and cultureClothing and footwear

Alcoholic beverages and tobaccoMiscelleneous goods and services

EducationHealth

CommucicationRestaurants and hotels

Changes in Inflation weights

2013 weights 2001 weightsSource: ZImStats

The Zimbabwe National Statistical Office (ZimStat) conducted the Poverty Income Consumption and Expenditure Survey in 2011/12. This has resulted in the reshuffling of weights amongst the CPI constituents, effective January 2013. The biggest addition was observed on Education (+2.82), followed by Communication (+2.42), Food and non alcoholic

beverages (+1.63), while Housing, water, electricity and gas gained 1.51 percentage points. Furnishing, household equipment and routing maintenance suffered the biggest downward adjustment of (-5.2 percentage points) Generous endowment of natural resources Although over 40 different minerals are produced, approximately 85% of mineral production is currently derived from chrome, coal, diamonds, gold and platinum. Mining is an important export earner, making up more than 65% of total export earnings. The mining sector’s contribution to GDP has grown from an average of 10.2% in the 1990s to an average of 16.9% from 2009-2011, overtaking agriculture. Mining output

2000 2005 2006 2007 2008 2009 2010 2011 2012e 2013fAsbestos (t) 145,203 122,041 96,956 84,520 11,489 3,116 2,020 0 0 0

Coal (t) 3,807,827 3,370,826 2,107,115 2,080,221 1,509,000 1,667,000 2,000,000 2,922,000 1,500,000 2,000,000Chrome (t) 668,043 667,199 700,000 616,558 442,584 201,000 500,000 599,000 420,000 282,000

Gold (kg) 22,070 14,023 11,353 7,018 3,579 4,966 8,000 12,949 15,000 17,000

Nickel (mt) 7,122 9,220 8,825 8,582 6,354 4,858 6,120 7,992 8,500 10,000

Platinum (kg) 505 4,833 4,998 5,086 5,496 6,849 9,000 10,827 11,000 12,500

Palladium (kg) 366 3,879 4,022 3,999 4,274 5,354 6,000 8,422 8,800 10,000

Source: Zimbabwe Chamber of Mines Output for the mining sector is estimated to have increased by 10.1% in 2012. The main drivers in 2012 were increased production in diamond (+38%), gold (+16%) and nickel (+6%). The increase in gold production has been supported by significant activity from the small scale miners, who now contribute an estimated 15% to the total production. This has also resulted in significant upliftment of disposable incomes for ordinary people. The mining sector is expected to grow by 17.1x% in 2013 underpinned by significant increases in diamond (+41%), gold (+13%), nickel (+18%) and platinum (+14%) output and a moderate performance from other minerals. Mining output in January and February 2013 increased anchored by growth in platinum, coal, nickel and chrome. Gold production for the two months amounted to approximately 2,155kgs, while platinum production was 2,227kgs. Generally, production is still in line with the 2013 budget macro-economic framework. Although mining output is set to increase, investment continues to be constrained by high capital costs and an unwillingness by large investors to commit capital given the uncertainties fuelled by the indigenisation legislation. Significant realisation of the potential of the country’s mining industry will require up to USD 5.0bn in investment towards the recapitalisation of mining houses over the next three to five years.

6

Strong recovery in cash crops With a majority of the population (+68%) staying in rural areas a higher agricultural output translates into higher consumer spending and improved living standards. According to the Poverty Income Consumption and Expenditure survey 2011/12, agriculture income contribute 17.5% to average annual gross income. Furthermore, the highest proportion (71.8%) of employed people are employed in agriculture. Zimbabwe’s agricultural production has witnessed strong recovery since 2009 from its cumulative decline of 86% between 2002 and 2008. The recovery was underpinned by improved production in tobacco, maize, sugar, cotton and tea. A considerable amount of investment also supported the recover as the sector is the sector most supported sector by the state having received +USD 2.7bn since dollarisation. Agricultural output ('000 tonnes)

2000 2005 2006 2007 2008 2009 2010 2011 2012f 2013fMaize 1,545 750 1,485 953 575 1,140 1,300 1,452 968 1,400

Tobacco 198 74 55 80 45 58 123 133 145 170

Beef 71 90 90 95 90 93 101 94 94 94Cotton 304 198 198 260 235 226 260 250 350 283

Soya beans 99 50 70 102 48 115 135 84 71 115

Horticulture 63 60 64 66 60 45 50 45 51 54

Dairy( m litres) 153 95 90 50 46 40 45 63 65 70

Source: Min. of Finance Zimbabwe, FAO The country’s agricultural production remains susceptible to the vagaries of the weather as no significant investment has been made in irrigation systems post the chaotic land reform exercise. The 2012-13 cropping season was adversely affected by the late start to the rainy season as well as the dry spell in some parts of the country. Although the performance of all crops is still to be determined, a cereal deficit is anticipated for 2013 due to the dry spell and lack of fertilizers that resulted in a poor harvest. The grain milling industry estimates that it requires approximately 150,000t of maize before the next harvest. The country has to date imported 432,400t of maize to meet the cereal gap of 436,121t. Nonetheless, tobacco has performed strongly with cumulative receipts of USD 483.6m (+26% y-o-y) to 22 May 2013 on 130.5m kgs (+28% y-o-y). The average price was about USD 3.71 per kg, compared to USD 3.76 last year. The tobacco national crop is expected to be bigger than that achieved in 2012 with estimates indicating a crop size of between 160mkg and 170m kg. Lost competitiveness in manufacturing Manufacturing accounts for just over 15% of total production, with the output of food related products

the biggest component. Industrial production is estimated to have grown by a modest 2.3% last year (from 13.9% in 2011) and manufacturing’s share of GDP has fallen from a high of almost 25% in the early 1990s. The sector continues to be impacted by the de-industrialisation of the lost decade, power outages, high utility costs, working capital constraints and outdated equipment. The shortage of liquidity is squeezing much needed investment expenditure, as many companies cannot expand using debt. Growth in some sub-sectors was negative in 2012, especially for clothing and footwear as well as metals and metal products. Capacity utilisation for the manufacturing sector averaged between 40% from 52.7% in 2011 and a figure of 40% - 50% is expected in 2013. Despite this, food related manufacturing companies have done well, recording capacity utilisation of approximately 60%. According to the MoF the manufacturing sector is expected to grow by 3% in 2013. Subsectors, which are expected to perform relatively, better include beverages +7.4%, foodstuff +4%, furniture +3.7% and paper, printing and publishing +2.6%. A survey conducted by the Consumer Council of Zimbabwe indicates that 65% of the products in retail shops are imports. Foodstuffs capacity utilisation which was expected to reach 57% in 2012 stubbornly remained at the 44% recorded in 2011. Opening up of traditional source markets to spur recovery Zimbabwe's tourism industry has continued to recover anchored by increased arrivals from the traditional source markets (America and Europe) and earned approximately 13% of the nation’s GDP in 2012. The sector recorded a 4.3% growth in 2011 followed by a 3.9% in 2012 and is expected to grow by 4% in 2013, underpinned by hotels and restaurants sector. According to the Zimbabwe Tourism Authority, tourism earnings jumped 4% in 2011 to USD 662.0m while the number of visitors rose 8% to 2.4m underpinned by arrivals from Asia (+80%), Middle East (+52%), America (+30%) and Europe (+23%). In our view, the tourism sector has the potential to be one of the fastest growing sectors in Zimbabwe’s economy, benefiting from the continued recovery in both global and domestic economic activity, and also on the back of targeted marketing strategies. We believe that the longer-term potential of the industry remains unquestionably encouraging as Zimbabwe has top resorts and the infrastructure is still relatively intact and grossly underutilised.

7

0

100

200

300

400

500

600

700

0

500

1,000

1,500

2,000

2,500

3,000

2000 2002 2004 2006 2008 2010

Tourism Trends Arrivals LHS '000s

Receipts RHS USDm

Source: RBZ, ZTA

USDm

Construction still reeling from years of economic slowdown The construction industry is a good economic barometer: it is the first to feel the impact of a recession and is a good indicator of the stage of economic recovery. Minimal construction activity has occurred despite the infrastructural decay, due to liquidity constraints and the high cost of local building materials. Estimates indicate that Zimbabwe will require approximately USD 15.0bn in the next five years, for infrastructure development. Local pension funds are heavily invested in commercial property. That said, we believe significant growth will come from the residential market as the mortgage market redevelops. Banks’ asset quality remain a major concern Banking institutions in Zimbabwe have seen strong deposit and credit growth ahead of GDP growth over the last three years albeit off a very low base. According to the MoF, the domestic savings rate remains very low at 2% of GDP negatively impacting on investments. Total bank deposits were USD 4.4bn as at end 2012, up 30.7% y-o-y largely driven by increases across all classes of deposits as follows: demand deposits 12.2%, savings 42.9%, short term deposits 33.1% and long term 67.2%. Nonetheless, the deposits remained volatile with short term deposits accounting for more than 60% of total. The aggressive lending regime which was followed by banks post dollarisation has resulted in huge non-performing loans on the balance sheet of mostly indigenous banks. The Bankers association of Zimbabwe estimates that 12.3% of loans mainly concentrated in 8 banks are not performing. Loan origination from weak banks remains high, funded by unstable short-term deposits. Non-performing loans (NPLs) increased from 6% on average at the end of December 2011 to 12.3% at the end of November 2012. The NPLs are extremely high when compared to the prudential 3% promulgated in the Basel III requirements. NPLs could rise further with the ongoing deceleration in economic activity. The intransigencies

unearthed at Interfin confirm persistent concerns over the lending practices, risk management and the quality of corporate governance in some of the smaller banks. We continue to reiterate that most of the lending decisions have been based on the size of the collateral being offered and relationships rather than cash flow. In the absence of credible information compounded by the absence of the national credit bureau, abuse by clients will remain high and rampant. Furthermore, the value of the collateral, which is real estate in most cases, tends to be overstated and inevitably harder to realise if the need arises. This has allowed the official NPLs numbers to be low. In our view, many banks are sitting on a significant unknown quantity of NPLs and these continue to grow. Precarious BOP position Exports declined by 10% y-o-y for the three months to March 2013 to USD 689.0m while imports grew 14% y-o-y to USD 1.7bn. The trade deficit worsened to USD 1.1bn (160% of total exports) in the first quarter of 2013 from USD 757m (99% of total exports) for the corresponding period. Mineral shipments accounted for the bulk of exports at 68.8%, followed by tobacco 14.8%, manufacturing 10.5%, agriculture 3.1% and hunting 0.4%. Platinum dominated mineral exports at USD 210m, gold was at USD 124m and diamonds were USD 113.7m. The import bill indicates that finished products account for 50% (2011:42%) of total imports with capital goods accounting for only 25% (2011:14%).

0

2,000

4,000

6,000

8,000

10,000

2005 2006 2007 2008 2009 2010 2011 2012e 2013f

Foreign Trade

Exports ImportsUSDm

source: RBZ The country is relying mostly on non-concessional debt flows to finance current account transactions, which exacerbates the country’s already precarious external debt position. Foreign Direct Investment (FDI) and portfolio investment have remained subdued on the back of the intensification of the Indigenization initiatives that gathered substantial momentum in 2012.

8

Limited fiscal space Since dollarisation, the GNU has maintained a cash budgeting system which has helped the economic recovery. Nonetheless, current expenditure remains too high, particularly on wages and salaries which account for 70% of the total budget. In contrast, capital expenditure outlays are only 5% of the budget. According to the MoF Q1 2013 update, there are significant unbudgeted for pressures on the 2013 budget stemming from high employment costs, critical

external loan repayment obligations, the referendum, elections and grain importation. The government plans to import approximately 150,000t of maize from Zambia at a cost of USD 60.0m to USD 70.0m to ensure food security. Huge debt overhang With external public debt estimated at USD 12.2bn (104% of GDP) as at December 2012, the country remains saddled with debt which negatively impacts on development and economic growth. Approximately 60% of the debt is in arrears.

9

At eighth place, ranked by market capitalisation (circa USD 5.2bn as at 17 May 2013), Zimbabwe is not one of the largest markets in sub-Saharan Africa. However, with 74 listed companies, the ZSE has more depth and diversity than some of the region’s markets. The stocks on the exchange include financial, insurance, retail, construction, transport, pharmaceuticals, property, telecommunications, manufacturing and agricultural-related stocks. There are currently two indices on the Stock Exchange; the Mining Index with four companies and the Industrial Index comprising of 70 companies. The indices are calculated using a 2009 base date and are weighted by market capitalisation. The Industrial Index is dominated by price movements in a few big cap stocks such as Delta which represents 20% of the index, Econet (19%), Innscor (8%), SeedCo (6%) and Hippo (5%). Trading on the ZSE Presently trading is by call over, using an open-cry floor system on a matched bargain basis. This trading system is paper based and settlement is on a T+7 basis against physical delivery of scrip (seven day settlement for both shares and payment). Custodial options: Barclays Nominees Stanbic Nominees Standard Chartered Bank Zimbabwe Limited Three Anchor Investments T/A Old Mutual

Custodial Services ZB Bank Limited

Share dealing is done through stockbrokers once a day, from Monday to Friday. The call over session commences at 10.00 hours. Financial instruments that can be traded on the ZSE are common stock, preference shares, corporate debentures, warrants, government stocks and fixed-interest securities. However, the bulk of trades and listings on the exchange are for common stock. Preparations for the launch of Central Scrip Depository (CSD) are well advantaged, which will eventually allow for electronic trading. The CSD system is anticipated to be launched later in the year, around September 2013. Dealing costs The set legislated transaction costs amount to 4.21% for a buy and sell.

ZSE Transcation costsBuying % Selling %

Brokerage fees 1.00 1.00

Stamp duty (buying) 0.25

Capital Gains Tax (selling) 1.00

Securities Commission Levy 0.18 0.18

Investor Protection Levy 0.05 0.05

VAT at 15% on Brokerage 0.15 0.15

Total costs 1.73 2.48Total costs for both buying and selling 4.21%Basic Charge USD 2.00 USD 2.00

Source: ZSE Foreign Participation and Regulation Foreign participation in stock market trading was introduced in mid-1993, following the partial lifting of exchange control regulations. Foreign investors may hold up to 10% of any listed company without recourse to Exchange Control. Collectively foreign ownership in a listed company may not exceed 40% of the issued capital of that company. These rulings exclude holdings which were acquired before June 1993. Any violation of the above limits would not see registration. It would be reported by the transfer secretary to both the ZSE and RBZ resulting in a directive from the RBZ to the investor to sell any excess holding. Fungibility is permitted for some dually listed companies, namely ABCH, NMBZH, Old Mutual and PPC. Patience is a virtue when trading frontier markets In the last 12 months the ZSE turned over USD 0.4bn in value or 10% of total market capitalisation. Given the size of the market, patience is generally required to build a position and equally when fund managers want to sell. The market is characterised by high levels of local institutional investors who are relatively inactive compounding the liquidity problem. Key ZSE Statistics

1995 1996 1997 2008* 2009 2010 2011 2012Market Cap USDbn 2.1 3.9 5.7 4.2 3.9 4.2 4.0 4.3

Average daily turnover USD '000 549 942 1,264 1,225 1,859 1,555 1,906 1,801

Annual turnover USDm 150 245 329 311 437 392 477 448

Number of listed companies 64 64 65 81 81 81 81 81

Market cap as % of GDP 21 58 66 86 75 67 45 36

*based on OMIR Source: IES, ZSE

The Zimbabwe Stock Exchange Overview

10

Foreign activity has dominated trading on the ZSE accounting for +46% in 2012, up from around 36% in 2009. Foreigners have remained net buyers on the market since dollarisation in 2009.

-

20

40

60


Mil

lion

s of

USD

Monthly value traded USDm Jan 11 - Apr 13

Source: IES, ZSE ZSE Outlook Given the slowdown in economic growth, we expect this to be reflected in corporate earnings. Over the past years most companies managed to post earnings growth in excess of 40% y-o-y and we forecast this to moderate to around 20% this year. Nonetheless, we believe that there are prospects of heightened economic growth post a peaceful election, albeit off a low base. Critical to sustained growth includes policy consistency, rule of law and availability of funding. The economy remains hugely undercapitalised with most companies still saddled with heavy and expensive borrowings. In our view, election talk, political rhetoric and indigenisation concerns will continue to negatively impact on investor sentiment, thus volatility will likely stay high until the local uncertainties clear, hence, we recommend investors take a long-term view on their holdings.. Although the ZSE has gained 36% YTD on strong rallies by the big caps, we believe there are still

opportunities for long term investors given the increasing profitability and return of dividends. Most of the big cap counters are post their heavy capex projects and we believe will be able to pay attractive dividends in the future. Counters such as BATZ, Delta, Econet and OK Zim easily come to mind in this regard. Given the demand for infrastructure reconstruction we believe construction companies are well poised to take on opportunities (as the economy recovers) and counters likely to gain include Lafarge and Masimba Holdings. Given the tight liquidity conditions and limited credit lines we believe that bank asset quality pressures will remain elevated. We rate banks at best as Spec Buys and our picks in this space include ABCH, Barclays, CBZH, FBCH and NMBZH. In our opinion FMCG businesses are likely to continue to post good financials as incremental increases in disposable incomes translate into retail spend figures and companies to look for include BATZ, Dairibord, Delta, Econet, Innscor, Natfoods and OK Zim. Given the recovery in some sub-sectors of agriculture, counters such as TSL and SeedCo may benefit.

(3)

7

17


Mill

ion

s of

USD


Source: IES, ZSE

11

ZSE Listed Companies

Companies Analyst Year Shares Price Mkt cap Eps (USc) P/E (x) PBV (x) EV/EBITDA (x) OPM* (%)end in issue (USc) (USDm) hist +1 +2 hist +1 +2 hist +1 +2 hist +1 +2 hist +1 +2 ST LT

Agricultural na 3,371.9 450.9Ariston TJM Sept 1,378.4 1.3 17.9 (0.1) 0.1 0.2 na 19.4 5.9 1.1 1.1 1.0 (260.7) 14.4 6.6 (0.6) 7.6 14.5 Hold HoldBorder Timbers TJM June 42.9 30.0 12.9 11.7 4.3 1.7 2.6 7.1 17.5 0.1 0.1 0.1 (6.3) (7.2) (8.7) (14.5) (19.5) (13.5) Hold HoldAICO TJM Mar 534.1 8.0 42.7 1.1 0.7 2.0 7.2 11.8 4.0 0.5 0.5 0.4 2.3 3.1 2.2 16.0 12.0 16.0 Hold HoldHippo Valley Estates TJM Mar 193.0 110.0 212.3 12.1 11.6 12.2 10.1 10.6 10.0 1.1 1.0 0.9 8.1 6.6 6.1 21.9 24.0 23.5 Buy BuyInterfresh TJM Dec 487.6 0.2 1.0 (0.5) (0.8) (0.8) na na na 0.1 0.1 0.3 (3.1) (2.6) (2.3) (24.9) (22.4) (20.0) Sell SellPadenga Holdings TJM June 541.6 4.9 26.3 0.6 0.7 1.0 7.9 6.8 5.3 0.8 0.7 0.7 5.3 5.6 4.5 29.9 25.0 25.0 Buy BuySeed Company TJM Mar 194.2 71.0 137.8 9.0 9.9 1.8 7.9 7.2 39.8 1.9 1.7 1.6 6.5 6.4 10.8 22.3 20.2 9.5 Buy Buy

Building and Allied na 3,114.8 161.7Lafarge TJM Dec 80.0 86.0 68.8 5.8 8.7 11.3 14.9 9.9 7.6 2.9 2.9 2.9 6.0 5.6 5.0 16.2 19.5 21.5 Buy BuyMasimba TJM Jun 214.8 7.0 15.0 0.5 0.6 0.6 13.3 11.6 11.0 0.8 0.8 0.7 6.3 7.3 5.6 3.4 1.1 1.6 Buy BuyPGI TJM Mar 478.3 0.9 4.3 (1.2) (0.3) (0.1) na na na 2.1 1.7 1.4 (3.6) (5.0) 56.2 (14.6) (5.7) 0.4 Sell SellTurnall TJM Dec 493.0 5.0 24.7 0.2 0.9 1.2 23.3 5.4 4.3 0.8 0.7 0.7 5.6 3.3 2.6 9.6 11.3 11.4 Hold BuyPPC TJM Sept 15.2 262.5 39.9 7.1 7.8 9.0 36.9 33.5 29.1 30.4 24.3 31.3 16.9 13.5 13.5 24.9 24.0 21.6 Hold BuyRadar TJM Jun 55.4 12.0 6.7 (0.5) 0.9 3.3 na 13.8 3.7 0.1 0.1 0.1 4.0 3.1 3.1 12.4 14.2 12.0 Hold HoldWilldale TJM Sept 1,778.0 0.1 2.3 (0.0) (0.0) (0.0) na na na 0.3 0.3 0.3 15.3 3.5 (3.2) (7.0) (3.2) (0.6) Sell Sell

Beverages, Hotels and Leisure na 4,541.3 2,263.5Afdis ATC Jun 95.2 20.0 19.0 1.2 1.6 2.0 17.0 12.4 9.9 3.8 2.9 2.2 14.9 8.2 6.6 5.8 8.1 8.1 Buy BuyDelta ATC Mar 1,202.5 142.0 1,707.5 8.4 9.9 11.7 16.5 14.0 11.9 4.9 4.1 3.5 2.7 2.2 2.0 25.6 26.5 27.3 Buy BuyInnscor ATC Jun 541.6 93.0 503.7 7.1 7.5 9.5 13.0 12.4 9.8 3.8 3.1 2.5 7.6 6.4 5.1 10.9 11.9 12.9 Accumulate BuyRTG ATC Dec 1,870.5 1.0 18.7 (0.2) (0.1) (0.0) na na na 1.7 1.3 0.0 100.3 40.8 23.5 (4.1) (2.0) 0.3 Sell SellAfrisun ATC Sept 831.5 1.8 14.6 0.1 0.1 0.2 14.7 12.6 7.5 0.8 0.8 0.7 5.5 4.5 4.2 6.0 6.4 6.6 Sell Hold

Engineering na 2,588.3 41.9CAFCA TJM Dec 8.2 50.0 4.1 17.9 24.0 31.0 2.8 2.1 1.6 0.5 0.4 0.3 1.7 1.0 0.5 10.9 12.7 14.5 Hold BuyGulliver TJM Sept 554.9 0.0 0.0 (0.5) (0.8) (1.1) 0.0 0.0 0.0 0.0 0.0 0.0 (0.9) (1.0) (0.8) (90.4) (88.3) (85.7) Sell SellPowerspeed TJM Sept 401.2 1.6 6.4 0.2 0.2 0.3 9.6 8.0 6.3 0.8 0.7 0.6 8.0 7.1 6.1 3.0 3.0 3.0 Spec Buy Spec BuySteelnet TJM Dec 538.0 Suspended Susp SuspZECO TJM Jan 463.3 0.1 0.3 (0.5) (0.5) (0.4) na na na 0.0 0.0 0.0 (0.1) (0.0) (0.1) (138.4) (110.6) (86.9) Avoid AvoidZimplow TJM Dec 622.7 5.0 31.1 1.0 1.7 2.5 5.1 3.0 2.0 0.9 0.8 0.6 3.5 2.1 1.3 17.3 23.4 28.9 Hold Buy

Financial na 4,112 307.5ABC ATC Dec 71.7 65.0 46.6 16.9 24.4 34.6 3.8 2.7 1.9 0.6 0.3 0.3 84.7 82.2 80.2 Accumulate HoldBarclays Bank ATC Dec 2,153.1 3.0 64.6 0.1 0.2 0.4 30.0 12.6 6.9 1.6 1.4 1.2 90.5 82.3 74.2 Hold AccumulateCBZ ATC Dec 684.1 13.9 94.8 6.6 7.7 9.6 2.1 1.8 1.4 0.6 0.4 0.3 57.8 53.6 50.4 Spec Buy Spec BuyInterfin ATC Dec 51.2 Suspended suspendedZBF Holdings ATC Dec 175.2 9.0 15.8 3.8 3.8 3.8 2.4 2.1 1.9 0.2 0.2 0.2 87.1 87.8 86.6 Spec HoldFBC Holdings ATC Dec 591.9 8.0 47.3 2.4 3.3 3.8 3.6 3.0 2.5 0.5 0.4 0.3 72.4 70.6 69.1 Spec Spec BuyNMB Bank ATC Dec 384.4 10.0 38.4 0.3 6.4 7.6 5.6 4.5 3.8 1.4 1.0 0.8 58.3 55.2 53.0 Spec Buy BuyTrust Holdings ATC Dec 359.7 0.4 1.4 (0.3) (1.3) (1.2) na na na 0.1 0.1 0.1 Sell Sell

Insurance 1,400.9 179.6Fidelity TJM Dec 108.9 11.5 12.5 1.8 3.2 4.6 6.3 3.6 2.5 0.5 0.4 0.3 Hold HoldAFRE TJM Dec 217.1 12.5 27.1 (4.2) (3.2) (1.6) na na na 0.5 0.6 0.7 Buy BuyNicoz Diamond TJM Dec 565.9 1.3 7.4 0.3 0.3 0.5 4.5 3.8 2.6 0.6 0.5 0.4 Hold AccumulateOld Mutual TJM Dec 67.6 240.0 162.2 (9.4) (8.0) (4.0) na na na 0.7 0.9 0.9 Buy BuyZimre TJM Dec 767.4 1.3 10.0 0.3 0.4 0.5 0.0 0.0 0.0 0.0 0.0 0.0 Spec Accumulate

OPM* - for finanial companies its cost to income ratio

Recommendation

12

ZSE Listed Companies cont’d

Companies Analyst Year Shares Price Mkt cap Eps (USc) P/E (x) PBV (x) EV/EBITDA (x) OPM (%)end in issue (USc) (USDm) hist +1 +2 hist +1 +2 hist +1 +2 hist +1 +2 hist +1 +2 ST LT

Food na 1,271.3 331.0Cairns TJM Aug 167.7 0.0 Suspended SuspendedColcom TJM Jun 159.0 26.0 41.4 3.0 3.1 3.8 8.6 8.4 6.8 1.6 1.5 1.3 5.3 4.2 3.5 13.7 15.0 16.0 Hold BuyDairibord TJM Dec 357.7 29.0 103.7 2.0 2.1 2.8 14.7 13.8 10.4 2.1 1.9 1.6 7.6 7.1 5.6 13.1 12.5 14.5 Hold BuyNational Foods TJM Jun 68.4 260.0 177.8 11.6 12.4 12.6 22.5 21.0 20.6 3.6 3.0 2.7 12.7 11.1 10.5 5.5 5.5 5.0 Buy BuyStarafrica TJM Mar 518.5 1.6 8.0 (1.7) (1.6) (1.4) na na na 1.5 0.8 0.5 (11.2) (12.8) (17.2) (11.7) (8.5) (6.2) Sell Sell

Industrial Holding na 2,888.1 153.5Apex ATC Oct 503.7 0.0 0.1 (0.0) (0.1) (0.2) na na na 0.0 0.0 0.0 0.1 0.1 0.0 0.1 (2.3) (6.5) Sell SellAstra ATC Aug 140.0 4.5 6.3 1.1 1.3 1.7 4.1 3.5 2.7 0.4 0.4 0.3 2.1 1.8 1.4 7.9 8.2 8.5 Spec SpecCFI ATC Sep 105.5 6.0 6.3 (3.1) (0.5) (1.2) na na na 0.1 0.1 0.2 (17.0) 106.8 11.3 (1.3) 0.2 1.6 Hold HoldGeneral Beltings ATC Dec 536.6 0.0 0.1 (0.5) (0.6) (0.9) na na na 0.0 0.0 0.0 (1.1) (4.6) (8.9) (22.9) (20.0) (17.4) Sell SellMeikles ATC Mar 240.8 25.5 61.4 (2.5) (0.2) 0.6 na na 40.4 0.5 0.5 0.5 32.4 9.9 6.5 (0.4) 1.3 2.0 Spec SpecPhoenix ATC Oct 87.5 0.3 0.3 0.5 0.7 1.1 0.6 0.4 0.3 0.0 0.0 0.0 2.5 2.1 1.8 2.5 2.8 3.2 Reduce HoldT A ATC Dec 164.8 9.0 14.8 0.8 1.8 2.3 11.2 5.1 3.9 0.3 0.3 0.3 0.9 0.7 0.5 10.7 11.1 11.8 Sell HoldLifestyle Holdings ATC Dec 762.0 0.0 0.0 0.5 0.6 0.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Suspended SellT S L ATC Oct 347.3 18.5 64.2 1.6 1.9 2.2 11.6 9.6 8.5 1.1 1.0 1.0 9.4 7.5 6.5 17.3 19.0 20.4 Buy Buy

Mining na 1,556.8 103.6Bindura Nickel ATC Dec 1,210.2 3.0 36.3 (10.1) (8.7) (4.0) na na na (2.4) (2.7) (1.8) (3.4) (3.1) (7.1) (823.0) (44.1) (10.8) Sell SellFalgold ATC Sept 111.2 12.0 13.3 3.7 4.4 6.0 8.7 7.8 7.5 0.0 0.0 0.0 0.0 0.0 0.0 2.9 3.2 3.2 Hold HoldHwange ATC Dec 182.1 15.0 27.3 1.7 1.9 2.0 na na 41.7 0.0 0.0 0.0 0.0 0.0 0.0 (23.6) (4.0) 3.5 Hold BuyRioZim ATC Dec 53.3 50.0 26.7 (8.2) (1.3) 1.2 na na na 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Hold Hold

Paper and Packaging na 1,363.0 20.2Amalgamated Regional Trading ATC Sep 467.3 0.6 2.8 0.1 0.3 0.5 6.5 2.4 1.3 0.3 0.2 0.2 3.7 2.7 1.9 6.7 7.9 8.2 Spec HoldHunyani Holdings ATC Oct 319.7 4.0 12.8 0.3 0.3 0.4 14.6 11.8 10.5 0.6 0.6 0.5 4.7 4.4 4.1 3.9 4.0 4.1 Hold BuyZimbabwe Newspapers ATC Dec 576.0 0.8 4.6 0.0 0.1 0.2 74.1 5.8 3.8 0.6 0.5 0.5 (6.0) (3.7) (2.8) 3.2 4.3 4.6 Sell Sell

Pharmaceuticals and Chemicals na 2,814.9 1.4Chemco ATC Oct 15 Suspended SuspendedMedtech ATC Dec 2,800 0.1 1.4 0.0 (0.0) (0.0) 136.9 na na 0.8 0.9 1.0 50.0 31.3 16.7 (1.2) (1.1) (0.9) Spec Hold

Retail stores na 4,386.2 380.0Celsys TJM June 1,599.6 Suspended SuspendedEdgars Stores TJM Jan 283.4 12.2 34.6 1.2 1.5 2.2 7.6 6.0 4.2 3.3 2.1 1.4 5.5 5.1 3.7 14.6 13.6 14.7 Add BuyOK Zimbabwe TJM Mar 1,130.8 29.0 327.9 1.0 1.4 1.5 28.9 20.1 19.3 6.3 5.1 4.3 15.2 11.5 11.0 4.7 4.8 4.7 Hold BuyPelhams TJM Mar 995.6 0.1 0.5 (0.3) (0.2) (0.0) na na na 0.3 0.2 0.1 na na na (1.9) (1.3) 17.0 Sell SellTruworths TJM Jun 376.7 4.5 17.0 0.2 0.3 0.5 13.9 9.3 5.1 2.2 2.2 2.6 10.7 7.2 5.7 4.9 5.5 8.9 Hold Buy

Tobacco na 17.4 144.3BAT Zimbabwe ATC Dec 17.4 830.0 144.3 70.5 97.0 117.3 11.8 8.6 7.1 10.3 9.5 8.6 8.1 6.3 5.3 32.5 33.2 33.4 Buy Buy

Technology na 1,640.0 1,148.0Econet ATC June 1,640.0 70.0 1,148.0 96.6 109.4 126.7 4.7 4.1 3.6 2.0 1.5 1.2 3.3 3.1 2.6 37.6 38.2 38.2 Buy Buy

Transport na 171.6 6.5Pioneer ATC Dec 55.0 2.5 1.4 (1.6) 0.1 0.3 na 17.6 7.3 0.6 0.5 0.5 (4.9) (11.3) 36.7 (3.5) (1.5) 0.4 Sell SellNTS ATC Dec 253.9 2.0 5.1 0.3 0.5 0.7 5.9 4.3 3.0 1.0 0.8 0.6 4.5 3.3 2.2 5.6 6.6 8.0 Hold Buy

Property na 7,271.1 131.6Dawn Properties TJM Mar 2,457.2 0.9 20.9 (0.0) 0.0 0.0 na 581.5 60.1 0.3 0.3 0.3 16.2 18.9 15.2 52.4 40.5 43.5 Hold HoldMashonaland Holdings TJM Sep 1,859.1 2.5 46.5 1.3 1.0 0.3 2.0 2.5 7.7 0.6 0.5 0.5 12.5 9.0 6.7 61.0 64.0 66.9 Buy BuyPearl Properties TJM Dec 1,238.2 3.3 40.2 0.7 0.6 0.5 3.7 3.0 3.0 0.3 0.3 0.2 7.8 6.1 6.0 45.5 50.0 45.0 Buy BuyZimre Properties Investments TJM Dec 1,716.7 1.4 24.0 0.4 0.5 0.5 3.9 3.1 2.8 0.4 0.4 0.3 10.7 4.9 2.2 48.8 57.0 63.9 Buy Buy

Recommendation

13

Equity Research Zimbabwe May 2013 Insurance

Bloomberg Code AFRE:ZWRecommendation BUYCurrent Price (USc) 12.5


Upside (%) 125.5

Liquidity


Shares (m) 217.1

Free Float (%) 29.0

Ave. daily vol ('000) - 12 months 46

Price Performance


Change (%) 108.3


Change (%) 145.1


Net Premiums 75,001 83,460 91,902

Surplus before tax 19,296 20,454 22,258

Net Investment Income 17,304 20,216 22,273


EPS (USc) 4.51 5.65 6.12

DPS (USc) - 1.63 1.80

NAV/Share (USc) 29.11 34.15 38.05

Ratios

RoaA (%) 8.2 9.0 8.8

RoaE (%) 23.6 24.9 24.0

Cost Margin (%) 47.7 47.3 47.6


Earnings Yield (%) 37.6 47.1 51.0


PE (x) 1.9 1.6 1.4

PBV (x) 0.4 0.4 0.3

Afre is the second biggest insurer after Old Mutual commanding a respectable market share of circa 15% for both life and nonlife business. The insurance business is dominated by two big players and the rest of the market is fragmented. Post dollarisation the insurer was negatively impacted by shareholder issues which saw the exiting of Renaissance from the group as the major shareholder and the coming of NSSA, culminating in management change. This significantly changed the fortunes of the group and the last financials indicate improving gross premium written, improvement in the liquidity position of the group and float is re-emerging for the business. • Gross premium written up 10% Afre Corporation reported a set of robust financial results underpinned by a 10% growth in gross premium written to USD 88.6m. First Mutual Life Assurance Company wrote premiums of USD 22.4m slightly lower than the prior year figure of USD 23.5m. • High collection rates driving growth The claims ratio for the business declined from 42% to 27% and the reinsurance ratio was maintained at 1%. Compared to other insurers with collection rate of 60% the group as a whole has a very high collection rate of 89% an increase of 3% on last year figures. • Delivering value through growth in premiums Ratings are undemanding with PER+1 of 1.6x and a PBV of 0.4x, we therefore recommend investors to BUY at current levels.

Strengths WeaknessStrong management Legacy issues

Diversified income stream A reduced float to invest

Well capitalised operations across the board

An indigenous operation

Strong relations with major shareholder

Opportunities ThreatsRegional expansion Slow growth in GDP

Recovery of the health sector Insurance penertrateion to GDP is low

Recovery of the public sector Political instability

Indigenisation issues at Old Mutual Increase in Fraudulent claims

-

500

1,000

1,500

2,000

-

4

8

12

16


AFRE - volume vs price


Source: IES

14

Nature of business AFRE (Africa First ReNaissance Corporation Ltd) is a diverse financial services holding company with interests in short-term insurance as well as real estate. The operating subsidiaries are namely: First Mutual, Pearl Properties, Tristar Insurance, African Actuarial Consultants, FMRE Property & Casualty (ZIM), FMRE Life & Health and FMRE Property & Casualty (Botswana). The company also owns a 57% stake in ZSE listed real estate company, Pearl Properties. FY 2012 Financial & Operational Review Strong performance Afre Corporation reported a set of robust financial results underpinned by a 10% growth in gross premium written to USD 88.6m. First Mutual Life Assurance Company wrote premiums of USD 22.4m slightly lower than the prior year figure of USD 23.5m. Employee benefits premium was 9% to USD 12.6M due to challenges relating to low salaries in the market and the withdraw of some schemes during the year. Individual Life premium declined from USD 10.7m to USD 10.1m due to the termination of the Ecolife product. The claims ratio for the division declined from 42% to 27% and the reinsurance ratio was maintained at 1%. Compared to other insurers in Zimbabwe with collection rates of 60%, FML Assurance has a very high collection rate of 89% an increase of 3 percentage points on last year’s figures. FMRE Life and Health increased gross premium written by 89% to USD 1.8m with the Health business contributing 73%, life contributed 22% and individual life contributed 5% of the gross premium written. On the Health Insurance business, FML Health Care Company increased gross premium written by 16% to USD 36.3m mainly as result of a 20% increase in membership from 66,259 to 79,242. The claims ratio for this division declined from 74% to 68% and collection increased from 85% to 87%. Tristar insurance increased gross premium written by 8% to USD 9m, with motor insurance contributing 43% followed by fire at 20% and accident at 20%. Pearl Properties achieved a rental yield of 8.7% (2011:9.8%) due to slower growth in rentals relative to the appreciation in investment property values. The average rental per square metre achieved was USD 7.87 (2011: USD 7.33). The vacancy rate was at 19.8% compared to 22.5% in 2011 as more spaces is getting occupied. Working capital declines Operating cash flow declined slightly from USD 12.3m to USD 11.2m due to investment in working capital of USD 2.9m compared to a divesture of USD 3.6m last year. Net cash utilised on investing activities declined from USD 5m to USD 2.3m. During the year Afre

borrowed fund to the tune of USD 6.6m thus resulting in a net cash increase for the group of USD 15m compared to USD 7m in FY 11. Overall the closing cash position for the group was USD 24.2m compared to USD 8.6m in the prior year. Solid balance sheet The balance sheet strengthened by 16% due to increases in investments properties and accounts receivables. The reclassification of retained profit for the non-controlling stake in Pearl Properties reduced the previous period’s retained income, and thus the NAV of the company was an adjusted USD 2.3m for 2011. Comparatively NAV grew from USD 2.3m to USD 16.2m due to an USD8m injection from the rights issue and a USD 7.7m retained income for the current financial statement. Outlook The separation of policy holders’ funds from shareholders’ funds is a distinction that Afre has with other local insures who continue to lamp the two even in the face of imminent changes on the matter from accounting standard setters. The promise to increase disclosure by management at Afre is indicative of the quality of management at the company and the reclassification of the previous results will improve the quality of information that analyst and the investment community will use to value the business. The collection figures at Afre are flattering to say the least especially in an environment which is experiencing a credit crunch. Although the insurer lost the Ecolife business, management indicated that it is working hard to reposition the company in this space. Management is targeting a gross premium written of USD 100m by the end of financial year 2013 and from the kind of growth that has been witnessed ever since the “changing of the guard”, these numbers are within reach and we believe Afre will get market share from smaller players, although but Old Mutual will remain the dominant player. Although we don’t expect the insurance sector to outperform in the current environment Afre present a compelling investment case that is driven by astute management with a clear vision. The group did not declare a dividend as it looks to strengthen the balance sheet to enable it to underwrite more risk and grow its regional operations. Management indicated that 30% of income by 2017 should be regional, and staff costs are targeted at 15% of revenue by FY 13. Valuation and Recommendation Ratings are undemanding with at a PER of 1.6x and a PBV of 0.4x, we therefore recommend investors to BUY at current levels.

15

USD Thousands 2007 2008 2009 2010 2011 2012 2013 E 2014 ENet premiums 19,023 47,194 67,045 75,001 83,460 91,902

Y-o-Y % NA 148.1% 42.1% 11.9% 11.3% 10.1%

Net Claims 10,443 28,668 38,244 37,563 43,150 47,616

Y-o-Y % NA 174.5% 33.4% -1.8% 14.9% 10.3%


Y-o-Y % NA -16.6% -60.4% 315.4% 6.0% 8.8%

Investable Surplus (Float) 36,849 38,542 50,055 53,145 63,953 72,981

Y-o-Y % NA 4.6% 29.9% 6.2% 20.3% 14.1%


Y-o-Y % NA -70.2% -87.6% 1140.1% 24.9% 8.5%

Per Share data

Attributable Diluted EPS 0.14 0.04 -0.03 4.51 5.65 6.12

Y-o-Y % NA -71.4% -179.0% -14610.8% 25.2% 8.5%


Y-o-Y % NA -100.0% NA NA NA 10.1%

NAV/Basic Share 32.4 23.0 23.0 29.1 34.2 38.1

Y-o-Y % NA -29.0% 0.1% 26.4% 17.3% 11.4%


Claims Loss Ratio 54.9% 60.7% 57.0% 50.1% 51.7% 51.8%

Cost to Income ratio/Expense Ratio 56.0% 60.4% 68.3% 47.7% 47.3% 47.6%

Combined Ratio 110.9% 121.2% 125.3% 97.8% 99.0% 99.4%

Underwriting profit margin -10.9% -21.2% -25.3% 2.2% 1.0% 0.6%

Retention Ratio 77.2% 78.8% 83.4% 84.7% 86.0% 86.0%

EBIT margin% 74.0% 24.9% 6.9% 25.7% 24.5% 24.2%


RatiosROaA 21.5% 6.6% 0.8% 8.2% 9.0% 8.8%

ROaE 41.8% 14.6% 2.1% 23.6% 24.9% 24.0%

Earning yield on current price 1.1% 0.3% -0.3% 37.6% 47.1% 51.0%

Liquidity ratio (shareholders fund/net prem) 355.5% 27.8% 3.5% 21.6% 29.3% 36.5%

Investment yield* 48.4% 57.0% 41.0% 32.6% 30.9% 29.8%

Solvency ratio (shareholdrs funds/policy liab.) 144.0% 24.3% 3.4% 20.6% 27.5% 33.8%


*Excluding unrealized gains and losses

Financial Summary – AFRE

16

Equity Research Zimbabwe May 2013 Agriculture/FMCG

Bloomberg Code AICO:ZWRecommendation HOLDCurrent Price (US c) 8.0

Target Price (US c) 25.0

Upside (%) 212.5

LiquidityMarket Cap (USD m) 42.7

Shares (m) 534.1

Free Float (%) 28.6


Price PerformancePrice, 12 months ago 13.0

Change (%) (38.5


Change (%) (33.3


Turnover 293,292 285,798 300,088

EBITDA 46,873 34,296 48,014

Net Finance Income (23,611) (15,699) (10,395


EPS (USc) 1.1 0.7 2.0

DPS (USc) 0.4 0.0 0.0

NAV/Share (USc) 15.7 16.9 20.5

Ratios

RoaA (%) 13.7 9.0 14.5

RoaE (%) 7.5 4.2 10.7

EBITDA Margin (%) 16.0 12.0 16.0



Dividend Yield (%) 5.5 NA NA

PE (x) 7.2 11.8 4.0

PBV (x) 0.5 0.5 0.4

EV/EBITDA (x) 2.3 3.1 2.2

The delayed finalisation of the recapitalisation of AICO has destroyed value for shareholders as the share price has lost 68% from its October 2010 levels. Press reports speculate that the delay is due to the major shareholders failing to agree on the modus operandi of the scheme of arrangement to recapitalise the company. The level of borrowing on the balance sheet is unsustainably high and continues to increase.

• Reduced lint recoveries impacting throughput Group financials were impacted by a 49% decline in lint prices and low input scheme recoveries due to side marketing by cotton farmers. • Disposal of non-core assets After a strategic decision to dispose of Quton to Seed just before dollarisation, AICO has weaned off subsidiaries that were of no strategic fit to its vision. This resulted in the disposal; of Exhort enterprise and in the first of FY 2013 the company concluded the sale of Scottco, the last of companies it deemed as lacking a strategic fit. This resulted in three distinct subsidiaries namely Olivine, The Cotton Company of Zimbabwe and Seed Co. • Attractive valuation Using a sum of the parts valuation and the discounted cash flow method we derived a value of US 25c, implying 213% upside potential to the current price of US 8c. AICO remains undervalued on sum of parts valuation given that its 50% holding in Seed Co alone is worth USD 65m. For the company to have a market cap of USD 42m imply that Cottco and Olivine combined have a negative equity. Hold, pending finalisation of the possible transactions.

STRENGTHS WEAKNESSESDiversified business Input scheme recoveries

Dominant market share

Strategic Partneships


OPPORTUNITIES THREATSContinued regional expansion Competition from new entrants

New products for FMCG business i.e. the Chinese

Improving disposable incomes Volatile international lint prices

SI 142 ensures favorable recoveries Drought

-500 1,000 1,500 2,000 2,500 3,000 3,500

-

5

10

15

20


AICO - volume vs price


Source: IES

17

Nature of business AICO Africa Limited is an integrated agro-industrial conglomerate. The group wholly owns Cottco, which with nine ginneries, constitutes the ginning operations of the Group. AICO also holds a 51% stake in SeedCo Limited, which in turn holds a 100% interest in Quton Seed Company, a cotton planting seed production house. The group also has a 49% stake in Olivine Holdings. H1 2013 Financial & Operational Review Lukewarm performance AICO posted a lukewarm set of financials negatively impacted by the 49% decline in lint prices, high finance charges, low input scheme recoveries, delayed start of the season for the seed business as well as the delayed buying of cotton which resulted in late lint shipments. Scottco was disposed of during the period with the group remaining with three operating units namely Cottco, SeedCo and Olivine. Group sales volumes declined 30% mainly due to the low winter cereal sales for the seed business where volumes declined by 59%. Cotton intake improved 45% to 150,000 tonnes, although the input scheme recoveries declined to below 70% from 95% achieved in the two preceding seasons. FMCG sales volumes grew 2.5% y-o-y to 6,157 tonnes. The Cotton business contributed 71% to group revenue from 64%, seed business 16% from 27% and FMCG 13% from 9%. Margins shrunk due to the high seed cotton buying prices, price discounting in the seed business and inefficiencies in the FMCG business. Gross profit margin eased to 27% from the 30% achieved in the corresponding period. The low input scheme recoveries resulted in impairments of USD 8.6m. The cotton business contributed an after tax loss of USD 16.9m from a profit of USD 5.9m in H1 12, the seed business loss of USD 10.9m versus –USD 0.2m, while FMCG unit lost USD 1.2m versus –USD 1.8m. Cash flows remained strained on the poor performance. Gearing further deteriorated to 337% from 165% at year-end and interest cover remained poor at negative 1.6x. Total debt was USD 198.1m, up 44% from year-end to finance working capital requirements.

AICO H1 2013 Results Summary


Outlook Proposed restructuring Management indicated that it is working on plans to recapitalise and this is likely to result in the unbundling of the group with Cottco and Olivine to list separately. The capital raising is expected to expunge debt and necessitate the restructuring of AICO’s loans. In addition, we expect the funding to grow and sustain current operations. As a result, both the Cottco and the FMCG business are expected to post significant profitability soon there-after. For FY 2013 Cottco is expected to record lower profits than those achieved in FY 2012 although it is expected to remain profitable. SeedCo is expected to post similar levels of profitability with potential to surprise on the upside depending on the rain season. The FMCG business desperately needs funding. Valuation and Recommendation Using a sum of the parts valuation approach and the discounted cash flow method we derived a value of US 25c, implying a 213% upside potential to the current price of US 8c. ACO remains undervalued on sum of parts valuation given that its 50% holding Seed Co is worth USD 65m alone. For the company to have a market cap of USD 42m would imply that Cottco and Olivine combined have a negative equity which according to the last financial results is not correct. Hold.

18


Y-o-Y % NA 35.0% 38.7% 29.8% -2.6% 5.0%

Gross Profit 69,077 53,527 89,138 89,850 88,597 105,031

Y-o-Y % NA -22.5% 66.5% 0.80% -1.4% 18.5%

EBITDA 34,736 20,070 40,895 46,873 34,296 48,014

Y-o-Y % NA -42.2% 103.8% 14.6% -26.8% 40.0%


Y-o-Y % NA -52.5% 160.1% 15.9% -33.6% 52.9%

Attributable Net Income/Profit After Tax 7,774 -4,270 8,946 6,156 3,683 10,700

Y-o-Y % NA -154.9% -309.5% -31.2% -40.2% 190.5%

Per Share data


Y-o-Y % NA -154.7% -308.2% -31.1% -39.1% 196.0%


Y-o-Y % NA NA NA -100.0% NA NA

NAV/Basic Share 16.2 15.5 15.2 15.7 16.9 20.5

Y-o-Y % NA -3.9% -2.3% 3.4% 7.9% 21.4%


Gross Margin 57.2% 32.9% 39.5% 30.6% 31.0% 35.0%

EBITDA margin % 28.8% 12.3% 18.1% 16.0% 12.0% 16.0%

EBIT margin% 22.3% 7.8% 14.7% 13.1% 9.0% 13.0%


RatiosROaA 25.3% 5.8% 14.0% 13.7% 9.0% 14.5%

ROaE 18.2% -5.1% 11.0% 7.5% 4.2% 10.7%



Financial Summary – AICO

19

Barclays Zimbabwe is one of the leading commercial banks in Zimbabwe. Barclays’ financial results have been depressed as the bank has remained very cautious in terms of its strategy. In our view, Barclays has a distinct advantage over its indigenous peers, and will be one of the key players in Zimbabwe’s economic recovery. With over 76 ATMs, 39 branches and service centres nationwide, Barclays’ branch network is extensive. Barclays commands approximately 6% and 3% market share, in terms of deposits and total lending, respectively.

• Fee income covers opex The bank’s opex is 88% covered by fee income, hence Barclays is well poised for significant earnings growth once the advances book starts to grow. The total advances book at only USD 92.0m and impairments at less than 1% highlight the conservative nature of the bank in the absence of a credit bureau, which has resulted in information asymmetry. Volume growth in transactions has been the main driver of commission and fee income. The strength of the bank’s brand name should continue to enable volume growth in commission related transactions. • Blue chip lending book and prudential risk

management With a balance sheet in the region of USD 281.5m, the bank is selectively growing its advances book while enhancing its product offering to increase transactional volume and hence fee income. • Expensive relative to other SSA banks Barclays trades at significant premiums to the Zimbabwean sector average PBV of 0.9x and forward PER of 5.4x. Nonetheless, valuations based on earnings are fraught with high risk due to the significant uncertainties prevailing in the local financial sector. Traditionally, Barclays trades at a premium as it offers a perceived safe haven and due to its conservative approach to business. We believe that Barclays is an attractive play on the long-term Zimbabwean economy. Accumulate.

Bloomberg Code BARC:ZHRecommendation ACCUMULATECurrent Price (USc) 3.0


Upside (%) 83.3

Liquidity


Shares (m) 2,153.1

Free Float (%) 158.3

Ave. daily vol ('000) - 1 yr. 752.1

Price Performance


Change (%) (16.7)


Change (%) 20.0

Financials (USD) 31 Dec F2012 2013F 2014F

Loans & Adances 92,045,775 117,099,104 143,066,299

Net Interest Income (excl. Provisions) 7,642,431 13,327,195 19,404,494

Non-Interest Income 29,987,271 29,050,038 31,083,541

Attributable Earnings 2,124,913 5,130,844 9,366,039

EPS (USc) 0.1 0.2 0.4

DPS (USc) - - -


Ratios

RoaA (%) 0.8 1.7 2.8

RoaE (%) 5.7 11.9 18.6




Dividend Yeild (%) NA NA NA

PE (x) 30.0 12.6 6.9

PBV (x) 1.6 1.4 1.2


STRENGTHS WEAKNESSESStrong management team High cost base

Strong parent company Breakdown in credit histories

Access to lines of credit No scope to expand regionally

Extensive network/clientele Less flexible/agile

Solid NGO clientele

Extensive skills pool

OPPORTUNITIES THREATSTechnology transfer New entrants into the market

Recapitalisation of industry High credit risk

and commerce Indegenisation

Huge credit appetite from pvt Systemic risk

sector Domestic disintermediation -

5,000

10,000

15,000

20,000

-

1

2

3

4


Barclays - volume vs price


Source: IES

20

Nature of business Barclays is a world-class bank and one of the leading commercial banks in Zimbabwe. The bank operates 43 ATMs from an installed capacity of 76 and, 36 branches which are located in the large commercial centres, with the other branches dotted around the country. Barclays commands approximately 8% and 3% market share, in terms of deposits and total lending respectively. FY 2012 Financial & Operational Review Improved performance For FY 2012, Barclays Bank posted an improved performance showing a 51% growth in net income to USD 2.1m. This was mainly on the back of growth in both NII and NFI (non-funded income) as well as cost containment and prudent asset quality. Although market share has retreated due to increased competition, the bank is currently not focused on league table rankings but on positioning for sustainable profitability. Access to low cost deposits and growth in advance book propelled NII Funded income growth of 14% (to USD 7.6m) was slower than the 57% (to USD 91.7m) increase in advances as most of the growth in the advances book was recorded in the last quarter. NIMs improved to 5.7% from 3.5% as the bank continued to access low cos deposits. We estimate that the bank’s cost of funds was below 1%. NFI contributed the lion’s share The 16% (to USD 30.0m, excluding group support) growth in non-funded income was mainly driven by a 29% increase in custody compensation to USD 7.8m as well as a 100% growth in foreign exchange income to USD 1.5m. Non funded income to total income was static at 81%. High cost to income ratio Staff cost increased 18% to USD 18.9m making a 56% contribution to total opex from 54% for the corresponding period. The bank’s cost to income ratio remained high at 92% versus 93% in FY 2011. Although the bank remained conservative adj. opex was covered 88% by non-funded income (prior period 86.8% covered). Strong bottom line growth, albeit off a low base PBT surged 44% to USD 3.1m as impairments grew by 5% to USD 0.5m. The bank’s effective tax rate reduced to 30% from 34%. All this translated to a 51% jump in attributable earnings to USD 2.1m. Asset quality remained solid The balance sheet increased 8% to USD 281.5m on the back of 57% and 6% growth in advances and deposits,

respectively. The quality of the advances book remained solid with impairments less than 1% of the book. Gross NPLs were 1.1% of advances. The capital adequacy ratio was 18% against a regulatory minimum of 12%. Liquidity was also high with a liquidity ratio of 58%. Outlook Blue chip lending book ensures minimal rates of default Impaired assets at below 1% of the book highlight the conservative nature of the bank in the absence of a credit bureau, which has resulted in information asymmetry. Furthermore, there is effectively no lender of last resort and interbank market is limited. Continuing to benefit from size and scale Benefiting from a strong brand, we believe that Barclays will continue to access cheap funds, particularly current account deposits, which are low interest yielding. We estimate that interest paid on demand deposits ranged between 0% and 2.65%. Volume growth to drive commissions and fees Volume growth in transactions has been the main driver of commission and fee income. The strength of the Barclays’ brand name should continue to enable volume growth in commission related transactions. This is further enhanced by the launch of new products as Barclays Bank Zimbabwe piggy-backs on parent support. The e-channel drive is expected to result in improved efficiencies enabling the bank to ramp up income on the launch of profitable products. Stronger advances growth off a low base Barclays is slowly growing the lending book, but remains very cautious. We expect the loan book to grow at a faster rate than deposits given the low loan to deposit ratio of 41%. Management says it is comfortable building towards a loan to deposit ratio of between 50% and 60%, in the current environment. Valuation and Recommendation Relative to its peers Barclays’ ratings are demanding as it trades at significant premiums to the sector average PBV of 0.9x and PER of 5.4x. Nonetheless, investors should note that valuations based on earnings are fraught with high risk due to the significant uncertainties prevailing in the local financial sector. In our view, Barclays’ valuations can quickly unwind if the operating environment changes substantially. Traditionally Barclays trades at a premium as it offers a perceived safe haven and given its conservative approach to business. In our view, Barclays is an attractive play on the Zimbabwean economy. Key attractions for Barclays remain the blue chip client base and extensive low cost deposit base, which will generate substantial funded revenue streams in the years to come. Accumulate.

21

Financial Summary – Barclays Bank Zimbabwe

Income Statement Summary 2010 A 2011 A 2012 A 2013 E 2014 ENet Interest Income Before Loss Provision 2,798,195 6,723,092 7,642,431 13,327,195 19,404,494

Y-o-Y Growth 143% 140% 14% 74% 46%

Non Interest Income 29,666,664 33,469,243 29,987,271 29,050,038 31,083,541

Y-o-Y Growth 81% 13% -10% -3% 7%

Total Operating Income (incl Prov) 32,135,478 39,687,373 37,097,520 41,791,833 49,929,243

Y-o-Y Growth 80% 24% -7% 13% 19%

Operating Expense -33,987,832 -37,569,273 -34,044,957 -34,881,606 -37,441,191

Y-o-Y Growth 97% 11% -9% 2% 7%

Profit Before Tax -1,852,354 2,118,100 3,052,563 6,910,227 12,488,052

Y-o-Y Growth -403% -214% 44% 126% 81%

Attributable Net Income/Profit After Tax -1,275,538 1,404,105 2,124,913 5,130,844 9,366,039

Y-o-Y Growth -187% -210% 51% 141% 83%

Balance Sheet Summary 2010 A 2011 A 2012 A 2013 E 2014 ECash & Short term Funds 144,328,313 158,109,934 128,111,891 122,181,013 125,774,332

Y-o-Y Growth 31% 10% -19% -5% 3%

Financial Assets held for Trading 0 1,629,137 14,509,647 15,772,316 16,966,093

Y-o-Y Growth NA NA 791% 9% 8%

Loans & Advances,Net 43,148,334 58,527,047 92,045,775 117,099,104 143,066,299

Y-o-Y Growth 112% 36% 57% 27% 22%

Deposits 184,566,138 213,908,537 225,000,636 247,434,110 277,087,186

Y-o-Y Growth 50% 16% 5% 10% 12%

Borrowings 0 0 0 0 0


Shareholder's Equity 30,906,108 33,510,866 40,528,613 45,659,457 55,025,496

Y-o-Y Growth -4% 8% 21% 13% 21%

Per Share Data 2010 A 2011 A 2012 A 2013 E 2014 EEarning per Share (USc) -0.1 0.1 0.1 0.2 0.4

Y-o-Y Growth -186% -217% 43% 138% 83%

Dividend Per Share (USc) 0.00 0.00 0.00 0.00 0.00


Book Value Per Share (USc) 1.4 1.6 1.9 2.1 2.6

Y-o-Y Growth -4% 8% 21% 13% 21%

Tangible Book Value per share (USc) 1.4 1.6 1.9 2.1 2.6

Y-o-Y Growth -4% 8% 21% 13% 21%

Key Ratios 2010 A 2011 A 2012 A 2013 E 2014 EGross Loan to Deposit Ratio 23.7% 27.8% 41.6% 47.5% 51.8%

Gross Loan to Fund Ratio 23.7% 27.8% 41.6% 47.5% 51.8%

Net Interest Margin 1.3% 2.8% 3.0% 5.0% 6.6%

Net Interest Income to total income 8.7% 16.9% 20.6% 31.9% 38.9%

Cost to Income Ratio 104.7% 93.5% 90.5% 82.3% 74.2%

Interest Income to average interest earning assets 2.8% 4.3% 4.3% 6.5% 8.2%

Interest expense to average interest bearing liabilities 1.1% 1.1% 1.0% 1.1% 1.1%

Net Interest Spread 1.7% 3.3% 3.3% 5.4% 7.1%

Net Income Margin -4.0% 3.5% 5.7% 12.3% 18.8%

Accumulated Provision as a % of loans & Advances 1.2% 0.8% 0.6% 0.5% 0.4%

Return on Equity (average) -4.0% 4.4% 5.7% 11.9% 18.6%

Return on Assets (average) -0.6% 0.6% 0.8% 1.7% 2.8%

Non-interest income to total income 92.3% 84.3% 80.8% 69.5% 62.3%

Advances to equity 139.6% 174.7% 227.1% 256.5% 260.0%

NPLs as % of loans and advances 0.0% 0.3% 1.1% 0.0% 0.0%

22

Equity Research Zimbabwe May 2013 Tobacco/FMCG

Bloomberg Code BATZL:ZHRecommendation BUYCurrent Price (USc) 830.0


Upside (%) 20.5

Liquidity


Shares (m) 17.4

Free Float (%) 17.0


Price Performance


Change (%) 304.8


Change (%) 84.4


Turnover 51,853 65,594 78,713

EBITDA 17,784 22,775 27,329



EPS (USc) 70.55 97.02 117.32

DPS (USc) 65.29 89.79 108.58

NAV/Share (USC) 80.33 87.56 96.30

Ratios

RoaA (%) 36.5 45.8 50.9

RoaE (%) 109.3 115.6 127.6

EBITDA Margin (%) 34.3 34.7 34.7




PE (x) 11.8 8.6 7.1

PBV (x) 10.3 9.5 8.6

EV/EBITDA (x) 8.4 6.6 5.5

BATZ processes tobacco products mainly for the domestic market with exports being cut rag tobacco. The company manufactures c1.8bn cigarettes, commanding a market share of approximately 70%. BATZ markets both Global Drive Brands (e.g. Dunhill & Newbury) and local brands like Madison, Everest, Kingsgate and Berkeley. Madison is the flagship brand contributing about 68% of volumes. Premium brands constitute up to 25% of sales volumes. BATZ has a strong countrywide distribution network operating out of five depots with outlying areas being serviced by third parties.

• Dominant position BATZ holds a dominant market share estimated at 73% of the Zimbabwean market. This is largely due to the prohibitive set-up costs of production, marketing and distribution functions. Furthermore, smokers are notorious for their strong brand loyalties and new players would incur significant costs. • Strong cash generation Cash generation was strong with net operating cash flow of USD 8.8m, implying a cash interest cover of 12.0x. Net gearing significantly improved to 17% from 43%. • Generous dividend policy The company’s dividend policy of paying out 100% of net earnings and a high dividend yield (c8% in FY 13) provides attractive returns to investment. • Ratings are undemanding Return on shareholder funds and asset utilisation are impressive at 109% and 37%, respectively. Furthermore, the company has a generous dividend policy. In our view, these factors warrant above average ratings. Ratings are not demanding at PER+1 of 9.5x and EV/EBITDA of 6.6x versus PER of 13.3x and EV/EBITDA 12.9x for our comparative sample. We maintain our BUY recommendation.

-10 20 30 40 50 60

-

200

400

600

800

1,000


BATZ - volume vs price


Source: IES

STRENGTHS WEAKNESSESMarket leader Low disposable incomes

Strong brand Energy disruptions

Strong cash generation Commodities driven

Strong distribution network

Strong management

OPPORTUNITIES THREATSNew products Commodity price shocks

Economic recovery Not a dominant manufacture locally

Well established competition

23

Nature of business BATZ processes tobacco products mainly for the domestic market with exports being cut rag tobacco to Mozambique. The company manufactures approximately 1.8bn cigarettes. BATZ’s main competitor, Savvanna, is the largest manufacturer of cigarettes although the bulk of its production is exported. The company markets both Global Drive Brands (e.g. Dunhill & Newbury) and local brands like Madison, Everest, Kingsgate and Berkeley. Madison is the flagship brand contributing about 67% of the volumes. FY 2012 Financial & Operational Review Stellar financial results BATZ reported an excellent set of FY 2012 results, showing a solid 151.1% y-o-y growth in net profits to USD 12.3m, materially beating our estimates of USD 7.3m. The performance was anchored by an improved sales mix, margin expansion on higher efficiencies and price adjustments. The company effected price increases of between 53% and 85% in December 2011 following the 43% increase in excise duty to US 10 per 1,000 stick. Overall sales volumes declined by 11% to 1.5bn sticks, negatively affected by the increase in excise duty and retail selling prices as well as the slowdown in GDP growth. Nonetheless, sales volumes of premium brand, Dunhill grew strongly at 43%. Main stream brand, Madison maintained its pole position contributing 68% to overall sales volumes. Export sales of cut rag volumes to Mozambique declined by 16% y-o-y after their leaf procurement process was revised and new sources identified. Healthy margin business Improved production efficiencies, price reviews, cost management and the change in the sales mix aided margins as GP margins expanded to 57.7% from 46.2% while operating margins widened to 34.0% from 18.5%, resulting in EBIT increasing 139.8% y-o-y to USD 16.9m (IESe USD 8.8m and management guidance of approximately USD 10.0m). Costs were well contained despite the company having increased marketing initiatives and undertaking upgrades to its distribution fleet. Overall opex grew 10% while selling and marketing costs increased 28% to USD 3.9m and admin expenses inched up 4% to USD 9.2m. Net finance charges grew 81% to USD 0.7m due to increased short term borrowings. Earnings flared off The effective tax rate declined to 27% from 30% boosting attributable earnings. Net margins came in at 23.7% from 12.3%. A generous final dividend of USD 0.42 was declared bringing the total for the year to USD 0.65. This implies a cover of 1.1x.

Cash generation remained solid Cash generation remained strong, with cash generated from operations up 76.9% y-o-y to USD 13.0m. Net cash inflows of USD 8.8m represented a cash interest cover of 12.0x. Pristine balance sheet Net gearing significantly improved to 16.7% from 42.5%. Trade debtors increased 51% to USD 8.9m reflecting the growth in the business. Return on shareholders’ funds improved to 109.3% from 70.6% while asset utilisation increased to 36.5% from 14.3%. Outlook Input cost increase are a particular concern Leaf tobacco makes up approximately 40% of the non-excise cost of production. Local leaf auction floor prices rose strongly at approximately 28% in the 2011/12 season with the full effects to be felt in FY 2013 (there is a 12 months lag). We believe that margins can be sustained at current levels as BATZ works on a cost plus mark up basis where in the absolute margins are maintained and volatility in raw material prices is passed on to the consumer. BATZ, being the market leader is able to command absolute margin. Going forward we expect BATZ to maintain its EBIT margin at approximately 32% mainly anchored by improved production efficiencies and effective distribution. Management cautious of future prospects The company remains cautious in light of liquidity constraints (pressure on disposable incomes) and slower than anticipated economic growth. For FY 13 volumes are expected to be slightly lower than 2012. Management expects Dunhill and Newbury (premium brands) to contribute approximately 10% of sales volume by FY 2014 from 5% achieved in 2012. Valuation and Recommendation Cigarette demand is closely linked to GDP levels, and BATZ’s long term growth is therefore dependent on economic growth. We believe that BATZ is well placed to benefit from the steady increase in consumption expenditure likely to emanate from a young population in a growing economy. BATZ is a well managed, strong cash generating company operating in one of the most profitable sectors in the economy as well as having strong brands and a solid distribution network. Furthermore, the company has a generous dividend policy. In our view, these factors warrant above average ratings. Ratings are not demanding at PER+1 of 9.5x and EV/EBITDA of 6.6x versus PER of 13.3x and EV/EBITDA 12.9x for our comparative sample. We maintain our BUY recommendation.

24

Financial Summary – BAT Zimbabwe


Y-o-Y % NA 50.9% 74.1% 30.3% 26.5% 20.0%

Gross Profit 8,125 6,996 18,368 29,891 38,090 45,708

Y-o-Y % NA -13.9% 162.6% 62.7% 27.4% 20.0%

EBITDA 337 638 7,234 17,784 22,775 27,329

Y-o-Y % NA 89.3% 1033.9% 145.8% 28.1% 20.0%

EBIT/Operating Profit, exlc exceptionals -454 -234 6,370 16,858 21,792 26,300

Y-o-Y % NA -48.5% -2822.2% 164.6% 29.3% 20.7%

Attributable Net Income/Profit After Tax 300 -499 4,883 12,262 16,864 20,393

Y-o-Y % NA -266.3% -1078.6% 151.1% 37.5% 20.9%

Per Share data


Y-o-Y % NA -266.3% -1078.6% 151.1% 37.5% 20.9%


Y-o-Y % NA NA NA 151.1% 37.5% 20.9%

NAV/Basic Share 35.4 30.8 48.8 80.3 87.6 96.3

Y-o-Y % NA -13.0% 58.4% 64.7% 9.0% 10.0%


Gross Margin 53.7% 30.6% 46.2% 57.6% 58.1% 58.1%

EBITDA margin % 2.2% 2.8% 18.2% 34.3% 34.7% 34.7%

EBIT margin% -3.0% -1.0% 16.0% 32.5% 33.2% 33.4%


RatiosROaA 1.4% -1.5% 15.3% 36.5% 45.8% 50.9%

ROaE 1.0% -8.7% 70.6% 109.3% 115.6% 127.6%



25

CBZH is a diversified financial services group with investments in mortgage finance, banking, private equity, short term insurance, life insurance, property and asset management. Zimbabwe’s banking behemoth, CBZH, continues to post robust profit growth. The major profit drivers include strong performance of NII, an improvement in fee and commission income coupled with cost containment. Despite a 30% plus RoaE, the bank trades at significant discounts (10% - 30%) to its peers, mainly due to the poor perception of its asset quality. In our view, CBZH, as the largest bank in the country by all matrices should re-rate accordingly.

• Dominant position The group has the largest depositor base in the country at over USD 1.0bn and an advances book of USD 854.7m, controlling 27% of deposits and 28% of advances. • Diversifying income streams The group is diversifying its income streams and has ventured into life and short-term insurance. The build up of long tenure funds allows the group to offer improved mortgage facilities and to unlock its landbank. The diversified businesses are likely to contribute more to the bottom line with enhanced recovery. • Undemanding multiples On a sum of the parts valuation we estimate a fair value for CBZ Holdings of USc 24 per share, implying a 73% upside potential on the current price. The SOP valuation summary displays, by our accounts, a huge and fundamental undervaluation of CBZ Holdings (NAV terms) by the market. Ratings are undemanding and the bank appears to be in better shape than the market has given it credit for. Nonetheless, we remain more cautious because of the uncertainty of bad debts. We maintain our SPEC BUY rating.


Bloomberg CodeRecommendation SPEC BUYCurrent Price (USc) 13.9

Target Price (Usc) 24.0

Upside (%) 73.3

Liquidity

Market Cap (USD '000) 95

Shares (m) 684

Free Float (%) 29.0

Ave. daily vol ('000) - 1 yr. 517.6

Price Performance


Change (%) 113.1


Change (%) 15.4


Loans & Adances 854,690 922,386 1,014,843

Net Interest Income (excl. Provisions) 95,338 108,110 120,888



EPS (USc) 6.6 7.7 9.6

DPS (USc) 0.3 0.6 1.0

NAV/Share (USc) 23.5 30.9 39.9

Ratios

RoaA (%) 3.9 4.0 4.2

RoaE (%) 32.1 28.4 27.0



Earnings Yeild (%) 47.4 55.9 69.1


PE (x) 2.1 1.8 1.4

PBV (x) 0.6 0.4 0.3

STRENGTHS WEAKNESSESLarge depositor base Exposure to government

banker to the government High cost/income ratio hist.

Diversified income stream

Access to external credit lines

Well capitalised with large branch ntwk

OPPORTUNITIES THREATSGrowth in local market on recap High cost platform

Established presence in Invest. Bnking Prolonged stretch to recapitalisation

Improving macro env. For Zimbabwe for the local economy

Recovery of public sector

Foreign lines of credit -

5,000

10,000

15,000

20,000

25,000

-

5

10

15

20


CBZH - volume vs price


26

Nature of business CBZ Holdings is a diversified financial holding company with operations spanning commercial banking, asset management, short-term insurance, life insurance and property. The banking and principal subsidiary, CBZ Bank, is the country’s largest bank with 22% of total system assets, 28% of deposits and 31% of advances. The group operates 58 branches, 89 installed ATMs (39 are active) and 419 POS machines. FY 2012 Financial & Operational Review Strong performance Zimbabwe’s banking behemoth released another punchy set of results, showing a 48.7% growth in attributable earnings to USD 44.9m for EPS of US 7.43c. The strong performance was driven by a strong NII performance, increased insurance underwriting performance as well as reduced loan loss provisions. A final dividend of US 0.172c was declared implying an annualised dividend yield of 2.5% and a cover of 24.8x. Total income increased 17.1% to USD 144.1m on account of a 27.0% growth in funded income making a 66% contribution to total income from 61%. NIMs improved CBZH reported an expansion in NIM to 8.3% from 6.3% in the prior period despite the increase in cost of funds, which grew by 160bps to 6.2% as the contribution of term deposits increased to 33% from 20%. The decline in non-funded income was attributed to a 56% decline in other operating income to USD 7.2m. Efficiencies declined The CIR deteriorated to 57.8% from 56.5% as opex grew 19.8%. The growth in opex was on the back of an 18% increase in staff costs to USD 38.0m and 19% growth in admin expenses to USD 32.3m. Staff costs contribution to total opex declined to 54% from 55% in the prior period. Loan loss provisions of USD 4.6m were less than a third of the corresponding period’s figure. The bank continued to contribute the lion’s share The bank recorded a PBT of USD 17.7m, mortgage business USD 5.1m and short term insurance USD 0.6m. The asset management and property divisions posted losses of USD 0.2m and USD 0.01m, respectively. Loan book growth was curtailed The group’s balance sheet strengthened, increasing by 15.9% to USD 1.2bn as advances and deposits grew 8.1% and 24.4%, respectively. Offshore deposits grew 47.0% to USD 178.8m to make a 17.0% contribution to total deposits from 15%. FuM grew 26.0% to USD 111.1m. Liquidity ratio averaged 32.3% for the period versus 25.9% in the comparative period Return on

shareholders funds improved to 32.2% from 29.4%, while asset utilization (RoaA) edged up to 3.9% from 3.5%. Refinancing eased the pressure on the advances book NPLs declined 13% in absolute terms to USD 41.9m, representing 4.7% of advances down from 5.9%. Provisions to total advances worsened to 4.0% from 2.8%. We are skeptical about the reported NPLs figures given the tight liquidity conditions and non-disclosure of the size of the advances book that was restructured and/ or refinanced. Furthermore, the amount of collateral recalled during the period was not disclosed. In our view, a significant portion of the book was restructured and /or financed which helped ease pressure on asset quality resulting in low reported NPLs. According to the RBZ, the banking sector system NPLs were approximately 12.5% at end December 2012, implying an absolute figure of approximately USD 437.5m. In our opinion, without the restructuring and or refinancing, CBZH’s actual NPLs would have been significantly higher than reported given the aggressive growth in advances book over the years which compromised quality. The group’s share of system NPLs would likely have been higher than its share of advances, in our view. Outlook In our view, as the largest bank in the country, CBZ has and is likely to continue benefiting from its size. The group is concentrating on consolidating its position through quality and efficiency enhancements. Management guided for a 10% growth in total income for FY 2013 and a CIR of between 55 and 60%. The balance sheet is expected to grow by 19.5% driven by a 20% and 8.3% growth in deposits and advances, respectively. The increase in the lines of credit expected to propel deposits growth and improve liquidity. Valuation and Recommendation Ratings are undemanding and the bank appears to be in better shape than the market has given it credit for. We expect the bank’s earnings to find support from higher exposure to SME and retail segments, improvement in other income and moderate asset quality pressures. Nonetheless, we remain more cautious because of the uncertainty of bad debts. We maintain our SPEC BUY rating.

27

Financial Summary – CBZ Holdings

Income Statement Summary 2009 A 2010 A 2011 A 2012 A 2013 E 2014 ENet Interest Income Before Loss Provision 16,525 26,378 75,054 95,338 108,110 120,888

Y-o-Y Growth NA 60% 185% 27% 13% 12%


Y-o-Y Growth NA 119% -13% 2% 11% 9%


Y-o-Y Growth NA 109% 36% 28% 12% 12%


Y-o-Y Growth NA 108% 28% 20% 5% 4%

Profit Before Tax 12,139 25,543 38,206 55,556 68,346 83,945

Y-o-Y Growth NA 110% 50% 45% 23% 23%


Y-o-Y Growth NA 115% 72% 49% 18% 24%


Y-o-Y Growth NA -1% 9% 26% 94% 25%

Financial Assets held for Trading 2,374 22,148 7,958 24,896 27,801 28,243

Y-o-Y Growth NA 833% -64% 213% 12% 2%

Loans & Advances,Net 244,952 444,605 790,340 854,690 922,386 1,014,843

Y-o-Y Growth NA 82% 78% 8% 8% 10%

Deposits 360,827 578,368 829,897 1,032,352 1,237,796 1,374,353

Y-o-Y Growth NA 60% 43% 24% 20% 11%




Y-o-Y Growth NA 35% 39% 35% 32% 29%


Y-o-Y Growth NA 440% 59% 53% 18% 24%


Y-o-Y Growth NA NA NA 0% 106% 55%


Y-o-Y Growth NA 35% 39% 35% 32% 29%


Y-o-Y Growth NA 35% 39% 35% 32% 29%















28

Dairibord has continued to reinvigorate itself as a growth stock, through multiple investment projects from manpower to upgrading its equipment. The company has managed to defend its market share despite the increased competition, with market share across its product portfolio ranging above 50%. • Improving fundamentals Dairibord’s main bottleneck has been limited raw milk supply. From highs of over 60m litres of raw milk intake in 2005, the intake declined to a low of around 12m litres in 2009. However, the trend has reversed and the company is taking in more and better quality milk. For FY 2012, total raw milk intake was xxm litres. • Relatively low per capita milt consumption Compared to a high of 25 litres in 1990, the current per capita milk consumption at approximately 15 litres is very low. We expect notable improvements as the economy continues to recover, with the re-emergence of the middle class. • High raw milk process negatively impacting

margins The limited supply of milk in Zimbabwe has resulted in a high cost of milk/litre of US 60c compared to regional comparative which are under US 43c/litre.

• Malawi negatively impacted by forex shortages Dairibord Malawi’s operational performance has been adversely affected by the incessant foreign currency shortages. However, the unit is increasing exports to offset the effect. • Valuation show upside potential Dairibord trades at a calculated forward PER of 13.8x and a forward EV/EBITDA of 7.1x which compares well with our Sub-Saharan Africa peer average of 21x and 13.6x EV/EBITDA. HOLD.

Bloomberg Code: DZHL:ZWRecommendation HOLDCurrent Price (USc) 29.0


Upside (%) 11.8

Liquidity


Shares ('000) 357.7

Free Float (%) 53.0


Price Performance


Change (%) 75.8


Change (%) 45.0

Financials (USD'000) 31 Dec 2012 2013F 2014F

Turnover 106,889 119,715 131,687

EBITDA 14,013 14,999 19,121



EPS (USc) 2.0 2.1 2.8

DPS (USc) 0.4 0.3 0.4

NAV/Share (USc) 13.6 15.3 17.8

Ratios

RoaA (%) 14.2 13.2 14.9

RoaE (%) 15.5 14.5 16.9

EBITDA Margin (%) 13.1 12.5 14.5




PE (x) 14.7 13.8 10.4

PBV (x) 2.1 1.9 1.6

EV/EBITDA (x) 7.6 7.1 5.6

-

800

1,600

2,400

3,200

4,000

-

6

12

18

24

30

36


DZL - volume vs price


STRENGTHS WEAKNESSESQuasi monopoly with strong brands Milk is a basic good and price sensitive

Value added products Capacity utilisation levels still low at 40%

Regional presence, Malawi


OPPORTUNITIES THREATSContinued regional expansion Cheap imports from SA

Recovery of domestic consumption Prolonged time to recovery

Growing domestic milk volumes Exchange rate risk in Malawi

Recovery of farming sector High stockfeed prices

Equity Research Zimbabwe May 2013 Food

Source: IES

29

Nature of business Dairibord Holdings specialises in the production of a range of products including beverages, milk and milk products, cordials, condiments, canned and processed foods, sauces, spreads and confectionery, which are marketed to the domestic and foreign markets. Fully owned subsidiaries include a transport company NFB Logistics and it has a 40% stake in ME Charhons, the largest biscuit and confectionary company in Zimbabwe. In Malawi, it has a 60:40 JV in Dairibord Malawi Limited which produces 4.5m litres of milk per annum. FY 2012 Financial & Operational Review The limited supply of milk in Zimbabwe has resulted in a high cost of milk/litre of US 60c compared to regional comparative which are under US 43c/litre. Although national milk production increased by 6% from 51m litres in FY 11 to 54m litres in 2012 prices remained high as demand for milk outstrips supply. Dairibord‘s local milk intake rose at a rate of 8% from 19.5m litres to 21.2m litres, which was faster than the growth in national production. In Malawi, milk supply increased by 4% and Dairibord’s milk intake decreased by 10% due to forward integration by milk producers and spoilage at the farms due to power outages. Thus in a market where incomes are low, Dairibord’s competitiveness has been eroded since imports are cheaper than locally produced milk. Revenue less responsive to volume growth Volume contribution from the beverage division was maintained at 46% but revenue contribution on the line remained unchanged at 32%. Volumes at the Foods division contributed 18% compared to 16% in the prior period and the revenue contribution responded positively growing from 31% to 34%. Liquid milk volume contribution declined to 36% from 38% and the revenue contribution was 300 basis points less at 33%. Disposal of loss making units Dairibord was able to dispose of the 40% equity stake in Charhons Biscuits for USD 1m and as at the end of the year USD 0.2m had been received. The company that bought Charhons, namely Cairns, is under judicial management and we strongly believe Dairibord will not receive its money in full. In Malawi the company was able to dispose of Mulange Peak Foods but the transaction was concluded after the year end. Outlook Sales growth is expected to normalise in line with GDP forecast of around 5%-10% after three years of above

average growth. Margins can therefore be expanded through cost containment and efficiencies and we expect the operating margin to be maintained at the current levels of 11%. Margins are expected to expand in 2014 and beyond after the implementation of a rationalisation exercise. Once of restructuring cost are likely to impact 2013 numbers as well as increased finance charges. Staff rationalisation on course Dairibord has a staff complement of about 1,038 permanent employees, 600 contract and 1,100 independent vendors. The group has eleven processing plants, ten in Zimbabwe and one in Malawi. Management intends to implement an ambitious restructuring program by retrenching some production level employees in Mutare and Bulawayo and salvaging some of the production facilities to be relocated to a centralised production facility in Harare. This will result in a reduction in processing factories from 11 to 9, although the facilities will be retained for sales and distribution functions for the company. Staffing levels are targeted to be reduced by 12% to 913 for permanent employees. The company projected a net cost saving of USD 1m per annum after the restructuring exercise. Valuation and Recommendation Dairibord trades at a calculated forward PER of 13.8x and a forward EV/EBITDA of 7.1x, which compares well with our Sub-Saharan Africa peer average of 21x and 13.6x EV/EBITDA. However, comparatively low milk production and a high operating leverage for the company justify the discount in our view. Dairibord embarked on a rationalisation programmed at the beginning FY 2013 to reduce the operating leverage of the company but our view is that the company was late in implementing this strategy given that small, flexible operations were able to eat into its market share as management was trying to revive archaic equipment and systems. Alternatively if Dairibord had made its structure leaner soon after dollarisation the cost saving of USD 1m would have been enjoyed for the past two years. We thus believe management is being reactive to shrinking margins due to high operating leverage irrespective of volume increases. The shelf space occupied by Dairibord’s competitors such as Dendairy, Alpha and Omega and Kefalos across the product range should be a worrying development for the company. HOLD.

30

Financial Summary – Dairibord Zimbabwe Holdings

US$ Thousands 2009 2010 2011 2012 2013 E 2014 ERevenues 43,425 74,982 95,983 106,889 119,715 131,687

Y-o-Y % NA 72.7% 28.0% 11.4% 12.0% 10.0%

Gross Profit 13,894 23,910 31,141 34,679 39,506 46,090

Y-o-Y % NA 72.1% 30.2% 11.4% 13.9% 16.7%

EBITDA 4,638 8,464 10,475 14,013 14,999 19,121

Y-o-Y % NA 82.5% 23.8% 33.8% 7.0% 27.5%


Y-o-Y % NA 82.5% 23.8% -6.4% 11.4% 32.5%


Y-o-Y % NA 97.8% 12.7% 0.0% 6.1% 33.5%

Per Share data


Y-o-Y % NA -99.7% 10.4% 9741.6% 6.1% 33.5%


Y-o-Y % NA NA NA 180139% -29.0% 42.4%

NAV/Basic Share #DIV/0! 0.1 0.1 0.1 0.2 0.2

Y-o-Y % NA NA 20.0% 12.5% 12.3% 16.4%


Gross Margin 32.0% 31.9% 32.4% 32.4% 33.0% 35.0%

EBITDA margin % 10.7% 11.3% 10.9% 13.1% 12.5% 14.5%

EBIT margin% 10.7% 11.3% 10.9% 9.2% 9.1% 11.0%


RatiosROaA 20.5% 17.0% 17.6% 14.2% 13.2% 14.9%

ROaE 21.9% 19.7% 18.3% 15.5% 14.5% 16.9%



31

Equity Research Zimbabwe May 2013 Breweries/Beverages

Delta continues to post a strong operating performance propelled by sturdy margin recovery on improved mix and efficiencies as well as volume growth. Volume growth in the core beverages is expected to be at least in line with GDP growth and value growth is anticipated to remain above volume growth in the near to medium term. The slowing capex allows the divided cover to be reduced. • Dominant market share Delta enjoys a dominant position in Zimbabwe, commanding approximately 96% of the beer market and about 92% of the sparkling beverages market. Management estimates that imported lagers constitute approximately 5% of which Delta brings in 2%. The group aggressively markets its brands, and in so doing stimulates volume growth. Marketing costs are approximately 2% of revenues. • Sustainable margin expansion Operational efficiencies have been enhanced with investment in new equipment setting the scene for sustained growth. Margins are expected to further expand on improved efficiencies, reduced maintenance costs, supply chain savings and an enhanced product mix. • Pristine balance sheet and strong cash

generation Delta generates excellent cash flow, with approximately 60% of sales being for cash. As a consequence, the balance sheet continues to strengthen. • Valuation show upside potential In our view, Delta has a compelling story with its pristine balance sheet, strong cashflows and solid brands. Ratings are relatively undemanding at a PER EV/production of USD 325 for our comparative sample. Delta remains the ZSE’s bellwether stock. We maintain our LT Buy recommendation.

Bloomberg Code: DELTA:ZHRecommendation LT BUYCurrent Price (USc) 142.0


Upside (%) 16.2

Liquidity


Shares (m) 1,207

Free Float (%) 48.1

Ave. daily vol ('000) - 1 yr. 697

Price Performance


Change (%) 102.9


Change (%) 49.5

Financials (USD '000) 31 Mar F2013 2014F 2015F

Turnover 631,276 768,610 862,856

EBITDA 161,519 203,333 235,496



EPS (USc) 8.4 9.9 11.7

DPS (USc) 3.4 4.5 5.2


Valuatuion Ratios

RoaA (%) 26.2 29.1 30.1

RoaE (%) 33.3 31.9 31.3

EBITDA Margin (%) 25.6 26.5 27.3



PE (x) 16.5 14.0 11.9

PBV (x) 4.9 4.1 3.5

EV/EBITDA (x) 2.7 2.2 2.0

EV/Hectolitre 331.3 322.3 325.5

STRENGTHS WEAKNESSESDominant position Low disposable incomes

No exchange risk Weak macro economy

Resurging volumes Frequent energy disruptions

Strong parent company

Leading brands, volumes up

OPPORTUNITIES THREATSStabilising economy Increase in excise taxes

Recovery in public finances Commodity price shocks

Aid inflows Disruptions to utilities

Growth in local premium brands More aggressive competition

-

5,000

10,000

15,000

20,000

25,000

-

40

80

120

160


Delta - volume vs price


Source: IES

32

Nature of business Delta is the largest manufacturer, distributor and marketer of beverages in Zimbabwe. The operating divisions within the group are: beverages (comprising lager beer, sorghum (traditional) beer, sparkling beverages (SBs), alternative beverages (Maheu) and a related transport operation), a maltings business and Megapak (a 51-49 venture with South Africa’s Nampak. The group also has a 30% shareholding in Afdis (a manufacturer, importer, distributor and marketer of branded wines and spirits), and a 49% holding in Schweppes Zimbabwe. The lager business has two breweries (in Harare and Bulawayo), which have a market share of 96%. Lion and Castle account for 65% to 70% of its production, but it also has its own brands: Zambezi, Bohlinger’s and Pilsener. The unit has an installed brewing capacity of 3.0m hl. Due to years of under utilisation and limited maintenance, current available capacity is 2.0m hl pa. The traditional beer has 14 traditional sorghum breweries, which have a combined available capacity of 5.0m hl. Sparkling beverages (SBs) available capacity is 2.4m hl pa with the PET market estimated at 5% and is expected to grow as the economy recovers. FY 2013 Financial & Operational Review The brewing giant posted another punchy set of results showing a solid 39% growth in net income to USD 102.5m, beating our estimates of USD 96.0m. The robust performance was supported by an improved sales mix, price adjustment in sorghum, margin expansion, reduced finance costs as well as a stronger performance by associates. A final dividend of US 2.23c per share was declared, implying an annualised dividend cover of 2.5x. Overall beverage volumes were flat y-o-y at 6.9m hl on account of 4% growth in lager to 2.1m hl, a 9% increase in SBs to 1.6m hl, and a 42% jump in Maheu (alternative beverages) to 132,000hl, offset by an 8% decline in sorghum to 3.1m hl. Management highlighted that there was a slowdown in the last quarter across all beverages which was attributed to the general economic slowdown as well as adverse effects of the excise duty increase in December 2012 and the resultant retail disruption. Malting tonnages grew by 6% to 37,000t. Plastic tonnages rose 31% to 9,461t on improved performance by the beverages, particularly premiumisation in SBs. Sales value grew ahead of volume growth at 14% to USD 631.3m, anchored by an 8% growth in lager gross sales to USD 325m, a 14% jump in SBs gross sales to

USD 231m and a 15% increase in sorghum beer gross sales to USD 118m, while alternative beverages saw a 50% surge to USD 11m. EBIT margins (on net sales) improved to 24.7% from 20%, driving operating profit growth of 37%. This was on the back of an improved product mix, reduced maintenance and improved supply chain management. In our view, this underlines the operational gearing Delta has in the beverages division, with extra volume translating directly into added profitability. Interest of USD 0.6m was paid, some 122% below that of FY 12, due to increased treasury operations. Cash generation remained strong, with approximately 60% of sales on a cash basis. Net operating cash flow was USD 134m, representing a cash interest cover of 234x. The balance sheet strengthened through this very strong operating performance. Capital expenditure of USD 83.6m resulted in a significantly expanded balance sheet with negligible net gearing of 1%. Outlook Delta has maintained its dominant position, commanding approximately 96% of the beer market and about 92% of the sparkling beverages. Capex is expected to ebb as the company focuses on productivity as well as investing in its brands. Capex/EBITDA is anticipated to recede to between 30% and 50% in the medium to long term. Strong fundamentals to sustain sturdy operating performance Per capita consumption of circa 16 litres p.a. (for beer excluding sorghum beer) and 13 litres p.a. for sparkling beverages are low in Zimbabwe by developing world standards suggesting tremendous growth potential off a low base. Margin expansion We believe the company has solid opportunities to expand the operating margin as a result of the combination of a favorable shift in mix to high end products, improved efficiencies, competitive pricing, reduced maintenance costs and supply chain savings. Valuation and Recommendation In our view, Delta has a compelling story with its pristine balance sheet, strong cashflows and solid brands. There are high barriers to entry in this industry and Delta enjoys a dominant position with a solid distribution network. Although the price has rallied +45% YTD, we believe there is still upside for long-term investors. Ratings are relatively undemanding at a PER of 16x versus PER of 20x for our comparative sample. Delta remains the ZSE’s bellwether stock. We maintain our LT Buy recommendation.

33

Financial Summary – Delta Corporation

Production Summary 2010 2011 2012 2013 2014 E 2015 EBrewery Capacity -Lager 1,149 1,608 1,980 2,060 2,184 2,232

Brewery Capacity % -Lager 63.8% 80.4% 99.0% 85.8% 91.0% 93.0%

Bottling Capacity -SBs 768 1,175 1,482 1,615 1,920 2,160

Bottling Capacity % -SBs 54.9% 83.9% 74.1% 67.3% 80.0% 90.0%

Brewery Capacity -Sorghum 3,127 2,908 3,348 3,080 3,100 3,000

Brewery Capacity % -Sorghum 61.3% 57.0% 67.0% 61.6% 62.0% 60.0%

Income Statement Summary 2010 2011 2012 2013 2014 E 2015 EUSD Thousands

Revenues 324,468 408,001 554,767 631,276 768,610 862,856

Y-o-Y % NA 25.7% 36.0% 13.8% 21.8% 12.3%

Gross Profit 226,750 257,400 353,056 404,916 496,522 560,857

Y-o-Y % NA 13.5% 37.2% 14.7% 22.6% 13.0%

EBITDA 48,921 81,722 118,660 161,519 203,333 235,496

Y-o-Y % NA 67.0% 45.2% 36.1% 25.9% 15.8%


Y-o-Y % NA 76.8% 44.0% 37.3% 28.4% 17.2%

Net Income 39,683 51,219 73,276 104,123 122,668 143,961

Y-o-Y % NA 29.1% 43.1% 42.1% 17.8% 17.4%

Per Share Data


Y-o-Y % NA 45.5% 38.6% 39.6% 17.9% 17.4%

Dividend per share 0.0 1.5 2.1 3.4 4.5 5.2

Y-o-Y % NA NA 38.7% 63.5% 31.4% 17.4%

NAV per share 0.1 0.2 0.2 0.3 0.3 0.4

Y-o-Y % NA 28.2% 26.0% 25.8% 19.6% 19.2%

Margin Performance 2010 A 2011 A 2012 A 2013 A 2014 E 2015 EGross Margin 69.9% 63.1% 63.6% 64.1% 64.6% 65.0%

EBITDA margin % 15.1% 20.0% 21.4% 25.6% 26.5% 27.3%

EBIT margin% 11.9% 16.7% 17.7% 21.4% 22.6% 23.6%


RatiosROaA 17.7% 22.7% 24.1% 26.2% 29.1% 30.1%

ROaE 27.8% 3.3% 3.1% 33.3% 31.9% 31.3%



34

Equity Research Zimbabwe May 2013 Telecoms

Econet is the dominant player in the domestic telecoms market, commanding 72% of the mobile telecoms industry with a subscriber base of 7.0m. Econet has a head start over other players, in terms of penetration in data, which is expected to be the next growth avenue. To us, this secures high revenue visibility. In our view, the weak competition provides excellent growth prospects for Econet. • Strong cash generation Cash generation was solid with EBITDA/OCF of 97%. Given the high cash generation, Econet will fund most of its capex requirements from internal resources and increase dividend pay outs post peak capex funding. • Margins and ARPUs remain healthy Although EBITDA margins eased to 47% from 49%, negatively impacted by the increased cost of the network and fuel, they remain healthy and higher than regional peers of approximately 45%. ARPUs increased 6% to USD 10.33. Nonetheless, as the expansion unfolds we expect EBITDA margins to ease as ARPU’s decrease and costs increase. • High revenue growth potential from EcoCash Econet harbours significant growth potential from its broadband and EcoCash segment, more particularly in the latter. In its first year of operation, EcoCash managed to sign up 24.0% of ECONET’s mobile subscribers vs. 20.3% for Safaricom Kenya’s M-Pesa in its first year in 2008. EcoCash processed USD 300.0m worth of transactions in its first year of operation. • Still one of the best priced telecom stocks At current levels, Econet prices at a TTM PER of 5.0x, almost a 50% discount to its SSA ex. SA peers. We rate the counter LT BUY, after the recent rally (up 55% YTD).

Bloomberg Code: ECWH:ZHRecommendation LT BUYCurrent Price (USc) 70.0


Upside (%) 21.4

Liquidity


Shares (mn) 1,640.0

Free Float (%) 52.0


Price Performance


Change (%) 75.0


Change (%) 44.0

Financials (USD m) 31 Feb F2012 2013F 2014F


EBITDA 276 316 355



EPS (USc) 9.7 10.9 12.7

DPS (USc) 1.2 3.6 4.2

NAV/Share (USc) 22.1 29.6 38.1

Ratios

RoaA (%) 22.9 21.3 22.0

RoaE (%) 49.7 42.3 37.4

EBITDA Margin (%) 45.2 45.5 45.4


Subscribers' 000 5,960 6,736 7,302

PER (x) 7.2 6.4 5.5

PBV (x) 3.2 2.4 1.8

RoaA (%) 22.9 21.3 22.0

RoaE (%) 49.7 42.3 37.4

Earnings Yield (%) 13.8 15.6 18.1


EV/sub (USD) 218 193 178

EV/EBITDA 4.7 4.1 3.7

ARPU (USD) 8.5 8.6 9.0



Strong brands







Spar franchise

-

1,000

2,000

3,000

4,000

5,000

6,000

-

20

40

60

80

100


Econet - volume vs price


Source: IES

35

Nature of business Econet Wireless (Private) Limited is a communications and technology company. It is the largest GSM mobile operator in Zimbabwe with a market share of over 69% and more than 5.0m subscribers and 400 base stations. Econet offers a unique blend of branded subscriber and pre-paid mobile phone services. Econet also owns Data Control and Systems (51%) trading as Ecoweb, one of the largest ISPs in Zimbabwe. This is supported by Econet’s wireless infrastructure and earth station, which also provides direct international dial access to more than 244 countries and territories worldwide. The company also has a 51% stake in Transaction Processing Systems (Pvt) Ltd, a provider of financial transaction switching, point of sale and other value added services that look to exploit the convergence of banking, IT and telecoms. Econet also owns 69% of Mutare Bottling Company as well as 100% of TN Bank. FY 2013 Financial & Operational Review Mixed set of numbers Econet released a mixed set of H1 2013 financials, posting solid topline growth but a muted bottomline. Revenue grew 16.7% to USD 339.5m benefiting from the continued investment into the network which saw mobile subscribers grow by 24.4% to 7.0m. Broadband subscribers grew 75.3% to 2.44m whilst EcoCash users reached 1.68m. Data revenue increased by 50% after the roll out of 116 new 3G base stations. Healthy margins maintained EBITDA grew 16.4% to USD 152.8m registering an EBITDA margin of 44.8%, a reasonable 30 bps lower than that in H1 12. We view this as very encouraging, indicating Econet’s ability to preserve trading margins as voice ARPUs decline. Costs pressures emanated largely from fuel and network expansion cost. ARPUs declined 17% to USD 8.90 due to the dilutive effect of lower value subscribers and new services that are still to realise their full potential. Non-cash charges impacted on operating profit The depreciation charge surged 53.7% to USD 32.5m and the mobile operator achieved an operating profit of USD 120.3m (+9.3% y-o-y) for the period. The jump in depreciation related to a 63.5% increase in capital expenditure to USD 63.1m. Syndicated loan eased interest bill Finance cost declined by 16.9% after the group refinanced the network expansion by taking a syndicated loan amounting to USD 307.0m at a weighted average cost of approximately 6.0% and tenure from three to seven years. Short term debt reduced to USD 47.0m from USD 145.8m at year-end.

HEPS rose moderately to USD 0.46 in H1 13 from USD 0.44 in H1 12 The mobile operator concluded the interim period with earnings attributable to shareholders of USD 77.9m and EPS of USD 0.46. The slower growth in net income against PBT was as a result of the effective tax rate increasing by 260 bps to 30.5%, owing largely to the decline in capex allowances. This resulted in a 19.9% increase in the income tax expense to USD 34.6m. Outlook Expanded new revenue streams Management states that the future of the company lies in innovation and providing value added services to its subscribers. Data presents significant opportunities for the company. Econet has three data revenue streams: internet services, SMS (text messaging) and EcoCash. Econet has a head start over other players, in terms of penetration in data which is expected to be the next growth avenue. Margins likely to be squeezed We believe Econet’s margins are likely to ease and settle around 45%, in line with African peers. The reasons being the roll out of the retail units, increased competition and the high base the company is coming off from. Furthermore, the acquisition of the bank might results in reduced dividends as the group recapitalizes the banking unit to meet the new minimum regulatory requirements. Subscriber growth to decelerate Due to the near saturation of the addressable telephony market in Zimbabwe, with penetration at over 90%, we expect to see Econet’s subscriber base increase modestly beyond FY 2014 Improved free cashflows as capex has peaked The company is post its peak funding period having rolled out the network countrywide. We expect that capex to revenue will probably recede to between 15% and 20% by FY 2014 as the company focuses on sweating the existing assets. We expect Econet to generate higher cash flows from operations over the next few years. Over 99% of the company‘s customers are on the prepaid package, thus mitigating the company‘s receivables position. Once past its peak capex funding, we expect Econet to increase its dividend payout. Valuation and Recommendation At current levels, Econet prices at a TTM PER of 5.0x, at almost a 50% discount to its SSA ex. SA peers. We rate the counter LT BUY, after the recent rally (up 55% YTD).

36

Income Statement Summary 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Total Revenue 88 363 493 611 694 780

Y-o-Y Growth . 313% 36% 24% 14% 13%

EBITDA 27 179 243 276 316 355

Y-o-Y Growth NA 575% 35% 14% 14% 12%

Operating Expense (44) (112) (158) (177) (199) (225)

Y-o-Y Growth NA 154% 41% 12% 12% 13%

Depreciation and Amortization (18) (21) (40) (46) (51) (56)

Y-o-Y Growth NA 13% 93% 16% 9% 11%

Net Finance income (1) (4) (7) (8) (18) (11)

Y-o-Y Growth NA 395% 63% 12% 117% -35%

Profit Before Tax 3 148 195 239 250 290

Y-o-Y Growth NA 4725% 32% 22% 5% 16%

Net Income/Profit After Tax (2) 115 139 166 188 217

Y-o-Y Growth NA -5283% 21% 19% 13% 16%

Per Share Data 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Earning per Share (USc) (0) 7 8 10 11 13

Y-o-Y Growth NA -5283% 21% 19% 13% 16%

Dividend Per Share - 2 1 1 4 4

Y-o-Y Growth NA NA -47% -1% 209% 16%

Book Value Per Share 5 10 17 22 30 38

Y-o-Y Growth NA 101% 76% 33% 34% 29%

Key Ratios 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

EBITDA margin % 30.2% 49.4% 49.2% 45.2% 45.5% 45.4%

EBIT margin% 9.2% 43.6% 41.0% 37.6% 38.2% 38.2%

Net Income Margin % -2.5% 31.6% 28.2% 27.1% 27.1% 27.8%

ROaA -1.7% 40.3% 27.1% 22.9% 21.3% 22.0%

ROaE -3.1% 93.8% 61.9% 49.7% 42.3% 37.4%

Earning yield on current price -0.2% 9.5% 11.6% 13.8% 15.6% 18.1%


Key Statistics 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Market Share 60% 73% 69% 70% 68% 65%

Subscribers Base '000 927 2,376 4,531 5,960 6,736 7,302

Average Monthly Blended ARPU (USD) 8 13 9 9 9 9

Financial Summary – Econet Wireless

37


Hippo Valley has historically been a low cost sugar producer, whose advantages included irrigation facilities implying insulation against drought, climatic benefits with a 12 month cycle crop generating sufficient biomass and adequate heat for sugar cane plantation. Capacity yield levels are 2-3x higher than those of South Africa sugar producing companies. • Enhanced efficiencies Since dollarization, Hippo, undertook several projects including mill refurbishment, to re-establish cane supply and sugar milling capacity utilisation. We expect this to significantly improve its total sugar output and yield per hectare beyond 300,000t and 110t/ha, respectively. • Recapitalisation of out growers We expect cane deliveries to the mill from out growers to improve in the long-term on the back of the European Union national Sugar Adaptation Strategy (NSAS). The increased deliveries are likely to be coupled with improved quality due to availability and early application of all necessary chemicals. • Valuation In valuing Hippo we used relative comparison, by taking averages of EV/EBITDA and EV/Production ratios for regional sugar companies. We derived a target price of USD 1.47, implying 34% upside on current price. Accumulate.

Bloomberg Code: HIPPO:ZHRecommendation ACCUMULATECurrent Price (USc) 110.0


Upside (%) 33.9

Liquidity


Shares (m) 193.0

Free Float (%) 20.4

Ave. daily vol ('000)

Price Performance


Change (%) 10.0


Change (%) (6.4)

Financials (USD '000) 31 Mar Current 2013F 2014F

Turnover 144,078 160,760 179,672

EBITDA 31,563 38,582 42,223



EPS (USc) 12.1 11.6 12.2

DPS (USc) 0.0 1.7 2.4

NAV/Share (USc) 114.1 124.6 135.6

Ratios

RoaA (%) 10.0 8.6 8.4

RoaE (%) 11.2 9.7 9.4

EBITDA Margin (%) 21.9 24.0 23.5

Valuation Ratios

Earnings Yield (%) 11.0 10.5 11.1


PE (x) 10.1 10.6 10.0

PBV (x) 1.1 1.0 0.9

EV/EBITDA (x) 8.1 6.6 6.1

STRENGTHS WEAKNESSESEuropean Union support of the local sugar

industry

Dependent on favourable weather

patterns

High sugar recoveries

Susceptible to commodities price

movement

Historically a low cost producer Low quality sugar production

A return to pricing based on fundamentals Power disruptions

OPPORTUNITIES THREATSSuccessful relaunch of outgrower scheme

will boost prod

The land scenario still remains a

contentious issue

Improved quality of sugar to fetch higher

prices Slow economic growth

Increase in sugar production Low disposable incomes

Increased production of by-products

Lack of adequate liquidity in the

market

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100

200

300

400

500

600

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60

90

120

150


Hippo - volume vs price


Source: IES

38

Nature of business Hippo Valley grows sugar cane on 12,300ha of arable land and has a 50% stake in the 442ha Mkwasine Sugar Estates, which engages in the growing of sugar cane and other agricultural operations. Cane production normally totals in the region of 1.4m tonnes per annum at an average yield of 112t per hectare. Hippo also has a 33.3% stake in Sugar Industries Ltd, the sole packer and distributor of refined sugar in Botswana and a 49% stake in NCP Distillers, which is engaged in the conversion of molasses into alcohol. The distillery uses up to 17,000t of the 70,000t of molasses produced annually by the mill. Other interests include a 50% stake in Zimbabwe Sugar Sales Ltd, a sugar broking entity and Chiredzi Township Ltd that develops and sells township stands. H1 2013 Financial & Operational Review Hippo Valley Estate reported half year results that showed a 29.5% growth in revenue to USD 90.7m on the back of increased cane volumes from both private farmers and the company’s own estates. Operating income, however, decreased by 18% due to pressure on the selling prices of sugar on the international market. The situation was exacerbated by the weaker Euro/US dollar exchange rate which negatively impacted on export proceeds. Demand for sugar remained firm after increasing by 15% from 215,117t to 247,741t in the same period last year. The cane delivery numbers indicate a growth of 40.2% but the growth did not translate to an increase in revenue as inefficiencies from old equipment reduced conversion rates of cane to sugar. Hippo Valley H1 2013 Results


The water in the storage dams that supply the industry is very low and the company had to manage carefully

the dam levels to link up with the 2012/13 rainfall season and a drought would likely put the company in a very precarious position. The cash flow statement reflected an operating cash flow of USD 4.8m a decrease of 72% mainly due to investment in working capital that doubled from USD 11.2m to USD 25.6m. The USD 19.9m absorption of cash in working capital is consistent with the first half being the high point of the sugar season. Current assets increased 39% due to accumulation of sugar inventories and trade receivables also increased as collections are getting difficult in this environment. Outlook Increased sugar production The company expects to produce between 225,000t and 242,000t this season and this is in line with our earlier forecast that the company will produce circa to 230,000t. The company continues to provide inputs and extension services to third party can growers so as to enhance cane production and deliveries to the mill. Hippo valley aims to restore production levels to the installed capacity of 300,000t. Longer-term the completion of the Tokwe Mukosi dam will result in increased production of sugarcane, raw & refined sugar, and maximise beneficiation of by products. Firm domestic demand Although margins shrunk in the first half we still believe Hippo is in line to achieve our forecast numbers as local demand will carry the company. Per capita consumption is estimated at 24.6kg, with the consumption pattern influenced by availability rather than price. Valuation and Recommendation In valuing Hippo we used relative comparison, by taking averages of EV/EBITDA and EV/Production ratios for regional sugar companies. We derived a target price of USD 1.47, implying 34% upside on current price. Accumulate.

39


Y-o-Y % NA 1.4% 41.9% 8.9% 10.8%

Gross Profit 32,252 41,268 59,774 62,788 68,725

Y-o-Y % NA 28.0% 44.8% 5.0% 9.5%

EBITDA 18,411 13,130 31,563 41,597 44,367

Y-o-Y % NA -28.7% 140.4% 31.8% 6.7%

EBIT/Operating Profit, exlc exceptio 18,397 12,175 32,388 33,275 35,963

Y-o-Y % NA -33.8% 166.0% 2.7% 8.1%

Attributable Net Income/Profit After 23,646 8,794 20,946 15,857 17,279

Y-o-Y % NA -62.8% 138.2% -24.3% 9.0%

Per Share data


Y-o-Y % NA -62.8% 138.3% -24.3% 9.0%

Dividend Per share (DPS) - - - - -

Y-o-Y % NA NA NA NA NA

NAV/Basic Share 0.97 1.02 1.14 1.18 1.23

Y-o-Y % NA 5.4% 11.8% 3.6% 3.8%


Gross Margin 32.2% 40.6% 41.5% 40.0% 39.5%

EBITDA margin % 18.4% 12.9% 21.9% 26.5% 25.5%

EBIT margin% 18.4% 12.0% 22.5% 21.2% 20.7%


RatiosROaA 13.4% 4.2% 10.0% 9.9% 10.6%

ROaE 28.2% 5.1% 11.2% 7.9% 8.3%



Financial Summary – Hippo Valley Estates

40

Due to its orientation towards FMCGs, Innscor’s business is generally not very capital intensive. As a result, cash generation is strong and return on assets and capital employed high. Increased efficiencies and tight working capital management continue to drive profitability. In our view, the stable environment provides an opportunity for the group to unbundle and unlock value to shareholders. • Strong cash generation Innscor has unparalleled cash generation abilities in fast foods and retail, which provide capacity for growth, through organic expansion, acquisitions, adding new brands and entering new markets. • Earnings leverage from franchise system Fast Foods and retail outlets operate as franchise units, although the majority are owned by Innscor. Earnings leveraged on a strong franchise system can provide significant earnings momentum as franchise income outstrips the fixed nature of the franchise support system. • Valuation remains attractive In our view, Innscor’s valuation is attractive considering its impressive growth prospects and the defensive nature of its earnings. Innscor is dominant in its businesses and we expect the earnings growth rate to improve substantially with the improved economic climate. We downgrade our recommendation from Accumulate to Hold due to the recent strong rally.

Equity Research Zimbabwe May 2013 FMCG

Bloomberg Code: INAF:ZHRecommendation HOLDCurrent Price (USD) 93.0

Target Price (USD) 101.0

Upside (%) 8.6

Liquidity


Shares (m) 541.6

Free Float (%) 52.0


Price Performance


Change (%) 75.5


Change (%) 75.5


Turnover 627,077 683,514 786,042

EBITDA 68,528 81,521 101,285



EPS (USc) 7.1 7.5 9.5

DPS (USc) 1.8 2.5 3.2

NAV/Share (USc) 24.4 30.1 37.1

Ratios

RoaA (%) 15.5 13.8 15.0

RoaE (%) 31.5 30.7 30.9

EBITDA Margin (%) 10.9 11.9 12.9




PE (x) 13.0 12.4 9.8

PBV (x) 3.8 3.1 2.5

EV/EBITDA (x) 7.6 6.4 5.1



Strong brands







Spar franchise

-

500

1,000

1,500

2,000

-

30

60

90

120


Innscor - volume vs price


41

H1 2013 Financial & Operational Review Mixed set of interims Innscor posted a mixed set of numbers with a decent bottom line performance on account of a strong showing from associates (Natfoods and Irvine’s); however, the company reported muted performance at both EBITDA and top line mainly due to a poor performance from Colcom where EBITDA margins declined 870bps to 6%. Sales growth was constrained as a result of the 13% revenue decline at SPAR due to the store rationalisation. Headline earnings (excluding Natfoods disposal) grew by a solid 14% while adj. EBITDA margins declined slightly to 10.1% from 10.4% resulting in a slow growth in adj. EBITDA, up 3.3% y-o-y. An interim dividend of US 0.80c a share was declared, implying a dividend cover of 4.6x. Overall cash generation remained strong although cash generated from operations declined 8% as the debtors’ book at TV Sales and Home grew by USD 3.2m. Net cash inflow of USD 17.5m represented a cash/interest cover of 12.5x. The balance sheet remained manageable although net gearing worsened to 18.4% from 12.2%. Net finance charges declined 21% despite an increase in borrowings as borrowing costs reduced to approximately 7.5% p.a. Capex amounted to USD 26.9m and is set to result in improved efficiencies. BAKERIES & FAST FOODS Revenue grew 16% to USD 137.8m while EBITDA margins declined 90bps to 14.5% resulting in a 9% growth in EBITDA to USD 20.0m. Volumes for Bakeries increased by 30% y-o-y and efficiencies continued to improve. Fast Foods customer counts for Zimbabwe increased by 5% y-o-y following a slow start to the year. The increase in customer counts can be attributed to new product offering, enhanced pricing strategies and new counters. An additional seven counters were opened during the period (5 in Harare and 2 in Zvishavane). Regional customer counts grew 3% y-o-y. Eight counters were opened in Kenya and 2 in Zambia. DISTRIBUTION GROUP AFRICA Volumes grew by 16% y-o-y for the Zimbabwe business although average realizations decreased on account of the change in sales mix. Revenues declined 2.7% to USD 47.2m. Margins expanded on improved efficiencies as focus was on good margin higher volume products and, EBITDA margins improved to 9.2% from 7.1%. EBITDA thus grew 27% to USD 4.4m. Distribution Group Africa (Zambia operations) achieved 7% volume growth for the period and it gained market share. In Malawi

volumes declined by 28% as trading conditions remained tight as the local currency remained weak. A small loss was recorded in Malawi. SPAR Revenue declined 13.5% to USD 88.5m and EBITDA margins eased 100bps to 2% resulting in EBITDA decreasing by 41% to USD 1.8m. The rationalization of the SPAR Corporate Stores continued and a non-recurring cost of USD 0.5m was charged relating to asset impairment and restructuring costs. Nonetheless, the stores treaded profitably. SPAR Distribution Centre supported 44 store operating under SPAR, SPAR Express, SaveMor and TOPS brands. Although it remained profitable performance was negatively impacted by the closure of larger independent stores due to brand non-compliance. Zambia Corporate stores posted improved results with the network comprising 6 corporate stores and 6 franchised stores. COLCOM Colcom reported disappointing results as EBITDA margins shrunk to 6% from 15% in the prior period. Sales volumes grew 25% y-o-y underpinned by entry level products i.e. high volume and low margin products. Revenue grew 18% to USD 30.0m. Furthermore, production was negatively affected by frequent equipment failure especially towards the peak trading period. Provisions amounting to USD 1.3m were made relating to stock obsolescence and doubtful debts. HOUSEHOLD GOODS Revenue grew 14% y-o-y to USD 27.2m and EBITDA margins declined 80bps to 22.3% resulting, in a 10% growth in EBITDA to USD 6.1m. TV SALES & HOME - Volumes were almost static on the corresponding period although the sales mix improved on higher furniture sales enhancing revenue growth. The debtors’ book increased to USD 12.2m from USD 9.5m at year-end in June 2012. CAPRI - Volume growth remained strong growing by 42% y-o-y on improved manufacturing quality and increased range of products and finishes. ASSOCIATE AND OTHER BUSINESSES NATIONAL FOODS - Volumes grew 24% y-o-y to 241,000 metric tonnes translating to a 24% growth in topline to USD 143.8m. Realisations were maintained at USD 597 per tonne. Efficiencies improved on better

42

procurement, line automation and enhanced logistics. EBITDA margins expanded to 8.0% from 4.3% enhanced by income from asset disposal and stock holding. IRVINE’S - Irvine’s posted solid results anchored by a 10% volume growth in day-old chicks. Improved efficiencies resulted in enhanced margins. Cash generated was channelled to securing stockfeed. Outlook The group continues to invest in its brands Rationalisation, restructuring and upgrades of production facilities are part of the group’s strategy to become a low cost producer and to enhance competitiveness. For FY 2013 the group plans to spend approximately USD 47.0m on capex, of which USD 38.0m will be for expansion, mainly in the Fast Foods businesses. The capex will not only increase capacity, but also improve production facilities and reduce costs. Two additional lines each with capacity of 80,000 loaves per day were installed and commissioned in February 2013 bringing the total installed capacity to 560,000 loaves per day. Another two additional lines each with an 80,000 capacity are set for commissioning in early 2014. Innscor plans to automate most of the functions in the Fast Foods business to restructure operations so as to reduce costs. Long term profit drivers remain in place Innscor is well placed to benefit from a rise in disposable incomes. The Zimbabwean economy is expected to continue experiencing strong growth over the next few years with the possibility of accelerated growth on improved reforms.

The restructuring of the Corporate stores is expected to turn around the operations and return the unit to profitability. In our view, the key profit drivers for Natfoods are the growth in FMCG volumes, improving consumer spend and improving production efficiencies. We have lowered our FY 2013 and FY 2014 net income estimates by 6% and 9%, respectively. Valuation and Recommendation Innscor remains dominant in its businesses. Although the future of the group is aligned to the economy at large, the sectors in which the group is invested are currently exuding growth rates in excess of that of the broader economy. The group continues to focus on managing costs and driving volume growth. Cash generation remains strong and Innscor should continue to generate substantial free cash flow, which creates financial flexibility (for dividends, acquisitions, stock repurchase, among other applications). We believe that the restructuring of the corporate stores will yield positive results. Although Colcom is operating in a mature industry, improved efficiencies should enhance profitability. The share price has rallied strongly gaining 35% YTD, hence we see limited upside in the short term. The counter is likely to weaken on profit taking. Our SOP valuation ascribes a value of USD 547.0m i.e. US 101c per share. We downgrade our recommendation from Accumulate to Hold due to the recent strong rally.

43


Y-o-Y % NA 58.3% 27.9% 21.5% 9.0% 15.0%

Gross Profit 87,605 137,966 184,637 225,077 245,334 282,135

Y-o-Y % NA 57.5% 33.8% 21.9% 9.0% 15.0%

EBITDA 13,829 29,115 47,663 68,528 81,521 101,285

Y-o-Y % NA 110.5% 63.7% 43.8% 19.0% 24.2%


Y-o-Y % NA 177.7% 71.8% 47.1% 16.9% 26.5%


Y-o-Y % NA 73.8% 65.1% 48.3% 4.7% 27.0%

Per Share data


Y-o-Y % NA 73.8% 65.1% 48.3% 4.7% 27.0%

Dividend Per share (DPS) - 0.80 1.20 1.75 2.49 3.17

Y-o-Y % NA NA 50.1% 45.8% 42.6% 27.0%

NAV/Basic Share 18.71 20.99 18.78 24.45 30.06 37.08

Y-o-Y % NA 12.2% -10.5% 30.2% 22.9% 23.4%


Gross Margin 34.4% 34.2% 35.8% 35.9% 35.9% 35.9%

EBITDA margin % 5.4% 7.2% 9.2% 10.9% 11.9% 12.9%

EBIT margin% 3.2% 5.6% 7.5% 9.1% 9.7% 10.7%


RatiosROaA 8.0% 8.8% 12.2% 15.5% 13.8% 15.0%

ROaE 15.5% 15.1% 25.7% 31.5% 30.7% 30.9%



Financial Summary – Innscor Africa

44

NMBZH is a bank holding company comprising NMB Bank as the only operating unit. The bank’s divisions include retail banking, corporate banking, treasury and international banking. The retail unit has a total of 11 branches. The focus has been on re-engaging lines of credit, resulting in strong balance sheet growth and increased profitability.

• Increasing funded income contribution The contribution of NII to total income increased to 50% from 47%, whilst non-funded income declined to 50% from 53%. This represents an increased focus in the bank’s core business of financial intermediation and the opening up of new lines of credit. • Strong focus on technology NMB Bank is an efficient bank, given its heavy reliance on electronic delivery channels in servicing its clients’ needs and providing innovative alternative delivery channels. In terms of service offerings, NMB Bank remains miles ahead of the competition enhancing its ability to maintain a loyal customer base. Electronic delivery channels also allow the bank to provide improved (faster) services to customers, at lower cost.

• Well run entity with strong partners In our view, NMBZ Holdings is a well run entity and has made significant progress in cleaning the advances book. Furthermore, the bank has strong partners in African Century, FMO, Norfund and Africinvest. These can potentially increase the bank’s access to lines of credit. In our view, NMBZH is poised for significant profitability growth in FY 2013 and beyond. Ratings are undemanding at PER+1 of 4.2x and PBV of 1.0x. Spec Buy.

-

400

800

1,200

1,600

-

3

6

9

12

15


NMBZH - volume vs price


Bloomberg Code NMBZH:ZHRecommendation SPEC BUYCurrent Price (USc) 10.0


Upside (%) 31.0

Liquidity


Shares (m) 384.4

Free Float (%) 29.1

Ave. daily vol ('000) - 1 yr. 51.7

Price Performance


Change (%) 42.9


Change (%) 33.3


Loans & Adances 146,600 187,438 230,330

Net Interest Income (excl. Provisions 17,494 21,541 29,040



EPS (USc) 0.3 6.9 10.1

DPS (USc) - - -

NAV/Share (USc) 1.1 28.1 38.2

Ratios

RoaA (%) 3.8 4.2 5.5

RoaE (%) 27.9 27.9 30.3



Earnings Yeild (%) 2.7 68.9 100.8

Dividend Yeild (%) - - -

PE (x) 5.6 4.2 2.9

PBV (x) 1.4 1.0 0.8

STRENGTHS WEAKNESSESFocus on HNW and niche markets Adverse liquidity position

IT platform to reduce costs High cost/income ratio hist.

Strong partners

Reputable management

OPPORTUNITIES THREATSImproving macro env. For Zimbabwe Lack of lender of last resort

Recovery of public sector Short term deposits

Increased foreign lines of credit Increasing competition

Established presence in Inv. Banking

Foreign lines of credit


Source: IES

45

Nature of business NMBZH is a bank holding company comprising NMB Bank as the only operating unit. The bank’s divisions include retail banking, corporate banking, treasury and international banking. The retail unit has a total of 11 branches. The focus has been on re-engaging lines of credit, resulting in strong balance sheet growth and increased profitability. FY 2012 Financial & Operational Review NMBZH reported a strong set of financials showing a 67% increase in attributable earnings to USD 7.6m. The strong performance was anchored by a strong non-funded income growth as well as cost containment. Core banking business contribution increased Funded income grew 23% to USD 17.5m on the back of a 20% growth in advances. The 60% growth in non-interest income to USD 17.5m was supported by a 47% growth in forex earnings to USD 1.9m, a 33% increase in fee and commission income to USD 13.0m as well as a fair value gain of USD 2.5m. The contribution of NII to total income increased to 50% from 47%, whilst non-funded income declined to 50% from 53%. Efficiencies improved The cost to income ratio improved to 61% from 69% as opex growth was contained, increasing by 26% to USD 21.5m. The major increases in opex were staff costs which grew by 33% to USD 10.3m and depreciation, +89% to USD 1.4m. We estimate that adjusted PBT (excluding fair value adjustments) grew 20% to USD 7.5m, thus adjusted net income amounted to only USD 4.1m. Plausible asset quality The balance sheet grew 35% to USD 226.5m on the back of a 37% and 20% growth in deposits and advances, respectively. Gross NPLs to total advances deteriorated 15.7% from 8.6%. Impairments as a percentage of the total book also deteriorated to 2.7% from 1.9%. The group targets an NPL ratio of 5.0% for the short to medium term with a long term target of 3.0%. Post the balance sheet date, NMBZH raised USD 14.8m capital through a private placement and an additional USD 1.4m in Tier II capital. Capital raising Post balance sheet date, the bank raised fresh equity amounting to approximately USD 14.8m by placing 103,714,287 new ordinary shares with strategic foreign investors at a subscription price of USD 0.1430 per ordinary share. The strategic foreign investors were: Africinvest Capital Partners (Africinvest), a

member of the Tuninvest group which is a part of an investment and financial services group called Integra.

FMO, a Dutch development bank Norfund, a Norwegian development finance

institution In addition to the equity investment, Norfund provided an additional USD 1.4m in the form of a 7 –year, non-dilutive subordinated loan with an annual coupon of 3-month LIBOR plus 12%. The subordinated loan was approved by the RBZ as tier II capital The capital raising and asset disposals (of the Borrowdale land and the sale of the stake in the leasing business) should result in the group having capital of approximately USD 45.0m. Management aims to then comply with the regulatory minimum capital requirements of USD 50.0m by June 2013 through organic growth. The Tier II capital of USD 1.4m is expected to help accelerate organic growth that will result in the bank achieving compliance. Management is optimistic that with the high profile Foreign Investors on board, these can unlock lines of credit for the bank with an additional USD 50.0m likely by end 2013. The anticipated lines of credit are envisaged to result in the bank extending mortgage finance, lending into mining and agricultural sectors as well as enhancing tenure on loans. Management highlighted that issues that may result in the Foreign Investors electing for an early buy-back (breach of Share Subscription Agreement) include non-compliance with regulatory issues as well as poor performance by the NMBZH share price on the ZSE. Outlook The recent investment in IT should result in improved service delivery and efficiencies. New product launches including credit card will aid transactional volume and by extension fee income, which management anticipate will more than mitigate against the recent reduction in bank charges as part of the MoU with the Central Bank. At a recent results briefing management also indicated that the impact could be in the region of USD 3.0m. The company will continue to focus on increasing lines of credit given the firm demand for loans in the market. Management is targeting a CIR of below 70% in the medium term and below 60% in the long run, while the target NPL ratio is 5.0% for the short to medium term with a long term target of 3.0%. Valuation and Recommendation In our view, NMBZ Holdings is a well run entity and has made significant progress in cleaning the advances book. Furthermore, the bank has strong partners in African Century, FMO, Norfund and Africinvest. These can potentially increase the bank’s access to lines of credit. In our view, NMBZH is poised for significant profitability growth in FY 2013 and beyond. Ratings are undemanding at PER+1 of 4.2x and PBV of 1.0x. Spec Buy.

46

Financial Summary – NMBZ Holdings

Income Statement Summary 2009 A 2010 A 2011 A 2012 A 2013 E 2014 ENet Interest Income Before Loss Provision 803 6,871 14,260 17,494 21,541 29,040

Y-o-Y Growth NA 756% 108% 23% 23% 35%


Y-o-Y Growth NA 37% 7% 35% 14% 11%


Y-o-Y Growth NA 96% 41% 23% 19% 24%


Y-o-Y Growth NA 108% 11% 11% 11% 9%

Profit Before Tax 941 943 6,194 10,002 13,450 19,681

Y-o-Y Growth NA 0% 557% 61% 34% 46%

Attributable Net Income/Profit After Tax 2,278 692 4,538 7,571 10,037 14,687

Y-o-Y Growth NA -70% 556% 67% 33% 46%


Y-o-Y Growth NA 50% 76% 80% -49% -51%

Financial Assets held for Trading 7,135 17,300 0 0 0 0

Y-o-Y Growth NA 142% -100% NA NA NA

Loans & Advances,Net 13,004 60,315 122,261 146,600 187,438 230,330

Y-o-Y Growth NA 364% 103% 20% 28% 23%

Deposits 22,275 62,672 139,226 191,422 204,719 227,804

Y-o-Y Growth NA 181% 122% 37% 7% 11%




Y-o-Y Growth NA 120% 24% 32% 33% 36%


Y-o-Y Growth NA 39% -100% 69% 2452% 46%




Y-o-Y Growth NA 62% -1% 32% 2455% 36%


Y-o-Y Growth NA 62% -1% 32% 2455% 36%















47

Despite the fact that New dawn Mining is listed on the Toronto Stock Exchange (TSX) and has access to international capital markets, we think that capital raising initiatives are likely to remain thwarted given the issue of indigenisation in Zimbabwe (at least in the short to medium term). The company plans to reach annualised gold production of 100,000oz and group revenues to be approximately USD 150.0m. The ultimate objective is to become a mid-tier Zimbabwe gold producer (250,000oz per annum). This will require approximately USD 40.0m in capex. • A pure gold play We like New Dawn Mining given that it is the only counter that offers a pure direct exposure to the gold mining sector in Zimbabwe. In addition, it is listed in Canada (TSX) and has access to international capital markets. After the CAG acquisition, it still only has 45.6m shares outstanding. This places it on a good footing to raise more capital for expansion purposes through equity-based funding techniques. • Huge unexplored potential Zimbabwe possesses huge unexplored potential. Subtler and more complex geological features have not been considered as well as lower grade halos, often occurring adjacent to reefs. The company currently focuses on lower grade tonnage bulk exploration. New Dawn controls prime geologically favourable ground. • An EV/Resource oz of USD 62 points to under-

valuation New Dawn is currently trading at a significant discount to other African gold producers given an average EV/resource oz of USD 100. Expansion projects have been put on hold due to capital constraints on unclear indigenisation policy. SPEC BUY.

-

10

20

30

40

50

-

20

40

60

80

100

120


New Dawn Mining - volume vs price

Volume ('000) RHS Price (CADc) LHS

Bloomberg Code ND:CNRecommendation SPEC BUYCurrent Price (USc) 72.7

Current Price (CADc) 75.0


Upside (%) 120.0

Liquidity


Shares (m) 45.6

Free Float (%) 15.0


Price Performance


Change (%) 1,019.1


Change (%) 546.6

Financials (USD '000) 31 Sep Current 2013F 2014F

Turnover 61,947 58,410 61,798

EBITDA 7,371 2,903 4,989


Attributable Earnings 2,305 396 2,406

EPS (USc) 5.5 0.9 5.3

DPS (USc) - - -

NAV/Share (USc) 96.9 97.2 96.4

Ratios

RoaA (%) 3.6 0.5 3.1

RoaE (%) 5.9 0.9 5.5





PE (x) 13.3 80.7 13.8

PBV (x) 0.8 0.7 0.8

EV/EBITDA (x) 5.1 13.0 7.5

EV/Oz produced (USD) 999.3 998.3 868.1

STRENGTHS WEAKNESSESBalance sheet has negligible debt (Net Gearing of 5.5%) Over reliance on gold- Limited diversification.

Fully funded capex Power constraints and mining labour wages

20+ years mine life at max output leading to higher production costs thereby

Significant gold assets around the country through increasing cash costs.

its three gold camps ( Kadoma, Bulawayo & Kwekwe)

TSX Listing enables group to access international

capital markets

OPPORTUNITIES THREATSFirst mover advantages in Zimbabwe Production disruption due to ZESA power outages

Exploration upside- There is scope to expand Turk mine Indigenisation regulations may threaten capital

(SRK discovery of an additional 1.5-2.0m oz of resources) raising initiatives especially on foreign

Potential for Bulk mining at the Gweru and Kadoma Camp markets such as the TSX.

Potential of 1.2m tonnes per annum tailings Lack of skilled labour due to brain drain

retreatment plant


Source: IES

Source: IES

48

Nature of business New Dawn is a gold mining, exploration and development company with five producing mines and one non-operational mine property. In addition, New Dawn holds a large portfolio of exploration properties located in the greenstone belt that runs in a north-east – southwest direction across the centre of Zimbabwe. It operates three mining camps all within a 300km radius, namely Bulawayo, Gweru and Kadoma. The Bulawayo gold camp comprises Turk- Angelus and Old Nic, while Gweru houses Campredown and Golden Quarry. Kadoma gold camp consists of Dalny and Venice. The proven reserves for the group are 869,600t at a grade of 3.83g/t while the inferred resources are 3,525,393t at 4.91g/t. The milling capacity is 2,000 tonnes per day. Q2 2013 Financial & Operational Review Gold production for the quarter increased by 2% q-o-q to 9,253oz, however production was below levels attained in Q3 and Q4 2012 due to disturbances witnessed at some of its mines from September to December 2012. Revenue declined 9.8% q-o-q to USD 15.0m (up 0.9% y-o-y) negatively impacted by the decline in world international gold prices. The average revenue per ounce received decreased to USD 1,608 from USD 1,712 for the preceding quarter. The average cash costs for all mines increased by 13% y-o-y to USD 1,306/oz (down 7% q-o-q) as the positive operational results for Turk and Angelus were insufficient to outweigh the reduction in revenue and high costs at Dalny Mine, Golden quarry and Camperdown Mine complex. Adjusted EBITDA for the quarter was USD 0.4m, 78% q-o-q, while EBITDA for the half year declined by 99% to USD 98,382. The company posted a loss for the quarter of USD 14,727 versus a profit of USD 140,631 for the corresponding period. The net loss for the six months was USD 0.8m against a profit of USD 2.2m for the prior period. Outlook Ramp-up curtailed due to funding constraints Although most of the operating mines have been profitable, the planned increase in production to c100,000oz by 2014 has been curtailed due to funding constraints on an unclear indigenisation policy. The short-term focus is on stabilising production with the currently installed plant and infrastructure. Dawn Mining is still to be cleared by the Minister of Youth, Indigenisation and Empowerment with regards

the company’s indigenisation plans. With regards to these indigenisation plans, the company reports that it has signed non-binding term sheets with several indigenous investor groups that are intended to provide the requisite indigenous element at the New Dawn level. The company has also engaged NIEEB with regards to equity participation by NIEEF at the New Dawn level through an equity instrument analogous to a warrant, as well as the process, structure and timeframes required to implement the CSOT and ESOS components. Secondary listing on ZSE New Dawn made an offer to the minorities of Falgold through a scheme of Arrangement, which has since been sanctioned by both the minority interests and the High Court of Zimbabwe. The final significant condition precedent to completing the Scheme of Arrangement is regulatory approval by the Government of Zimbabwe. New dawn offered USD 0.20 cash for each Falgold share held or one New Dawn share for every five Falgold shares held. A maximum of 2,899,888 common shares of New Dawn are issuable in respect of this transaction Once all regulatory approvals are granted New Dawn plans to have a secondary listing on the ZSE. Weak gold price The gold price has retreated from highs of USD 1,600/oz to the current levels of USD 1,350/oz. If the weakness in the gold price is sustained this can negatively impact on the cash costs of the company and its planned expansion projects. Valuation and Recommendation New Dawn is currently trading at a significant discount to other African gold producers given an average EV/resource oz of cUSD 100. In addition, we consider our theoretical valuation for New Dawn of USD 1.60 per share based on the DCF method as a base case valuation as we think there is significant potential to discover further gold resources. SPEC BUY.

49

Financial Summary – New Dawn Mining


Total Revenue 9,023 7,481 5,645 16,381 38,294 61,947 58,410 61,798

Y-o-Y Growth -17% . 190% 134% 62% -6% 6%

EBITDA 755 64 (408) 2,373 6,394 7,371 2,903 4,989

Y-o-Y Growth -92% -742% -681% 169% 15% -61% 72%

Operating Expense (9,305) (8,538) (6,737) (14,954) (33,377) (56,909) (58,040) (59,468)

Y-o-Y Growth -8% -21% 122% 123% 71% 2% 2%

Depreciation and Amortization (1,037) (1,120) (684) (947) (1,477) (2,333) (2,532) (2,658)

Y-o-Y Growth 8% -39% 38% 56% 58% 9% 5%

Net Finance income 272 102 14 27 (385) (704) (300) (60)

Y-o-Y Growth -63% -86% 86% -1536% 83% -57% -80%

Profit Before Tax 1,950 (2,426) (3,637) 1,304 5,138 3,777 475 2,721

Y-o-Y Growth -224% 50% -136% 294% -26% -87% 473%

Net Income/Profit After Tax 1,265 (2,471) (3,738) (786) 4,298 2,305 396 2,406

Y-o-Y Growth -295% 51% -79% -647% -46% -83% 507%


Earning per Share (USc) 4 (9) (13) (2) 10 5 1 5

Y-o-Y Growth -295% 51% -81% -513% -46% -84% 485%




Y-o-Y Growth 19% -21% 72% 9% 10% 0% -1%


EBITDA margin % 8.4% 0.8% -7.2% 14.5% 16.7% 11.9% 5.0% 8.1%

EBIT margin% -3% -14% -19% 9% 13% 8% 1% 4%

Net Income Margin % 14.0% -33.0% -66.2% -4.8% 11.2% 3.7% 0.7% 3.9%

ROaA 7.3% -12.4% -18.4% -2.5% 8.2% 3.6% 0.5% 3.1%

ROaE 9.3% -15.6% -24.3% -4.0% 13.7% 5.9% 0.9% 5.5%

Earning yield on current price 6.0% -11.7% -17.7% -3.4% 14.1% 7.5% 1.2% 7.3%


Key Statistics 2007 A 2008 A 2009 A 2010 A 2011 A 2012 A 2013 E 2014 E

Gold Produced (oz) - 8,651 6,967 14,018 26,689 37,623 37,662 43,311

Gold Sold (oz) - 8,651 6,029 14,089 25,166 37,415 37,285 42,878

Cash Costs/oz (USD) - 641 610 631 940 1,178 1,260 1,197

Revenue/oz (USD) - 865 936 1,163 1,656 1,780 1,567 1,441

50

OK Zimbabwe has been swift to turnaround its operations as a result of management’s extensive experience, aggressive strategy and successful utilisation of recapitalisation funds. The group is now clawing back its market share from local and regional players, who had cropped up due to the crippling economic environment.

• Highly developed IT system OK Zimbabwe has a fully developed IT system which covers full store computerisation including ordering, across the operational chain to the point of sale interface. The company wants to further harness its IT backbone by integrating a comprehensive financial product through the OK Mart card cardholders to link the card to bank accounts making it possible for them to withdraw and deposit cash as well as make purchases from OK stores. Management views this as a complementary product to the current offerings and insists the company will not be venturing into the banking business. • Central distribution centres vital for growth The high level of imports have made the central warehousing and distribution centre a key component of the supply chain and OK is working on upgrading the facilities at two warehouses in Harare and are in the process of acquiring a third warehouse.

• Enjoying a first mover advantage Using a 50:50 blend of EV/EBITDA valuation matrix and the DCF method we value OK at US 23.7c. The share price has rallied strongly, up +93% YTD. Given the improved performance and strong cash generation, we believe that the company can substantially increase its dividend payout. Given the defensive nature and consistent growth prospects of OK Zimbabwe, we believe downside risk to the share is limited. HOLD.

Equity Research Zimbabwe May 2013 Retail

Bloomberg Code OKZIM:ZHRecommendation HOLDCurrent Price (USc) 29.0


Upside (%) (18.4)

Liquidity

Market Cap (USD'm) 327.9

Shares (m) 1,130.8

Free Float (%) 44.9


Price Performance


Change (%) 190.0


Change (%) 107.0


Turnover 412,563 528,081 565,046

EBITDA 19,212 25,348 26,557




EPS (USc) 1.00 1.44 1.50

DPS (USc) 0.36 0.50 0.53

NAV/Share (USc) 4.62 5.71 6.71

Ratios

RoaA (%) 18.9 21.1 19.1

RoaE (%) 24.0 27.9 24.2





PE (x) 28.9 20.1 19.3

PBV (x) 6.3 5.1 4.3

EV/EBITDA (x) 15.2 11.5 11.0

STRENGTHS WEAKNESSESDefensive food/FMCG business Weak consumer incomes

Expansive retail network No credit available for white goods

Key locations with high traffic Weak banking sector results in self

Strong cash generator financing

OPPORTUNITIES THREATSIncreasing disposable incomes Competition from locals

Resurgence of public sector spend Entry of regional players

Recovery in local income Protracted economic recovery

Franchising

-

7,500

15,000

22,500

30,000

-

5

10

15

20

25


OK Zim - volume vs price


Source: IES

51

Nature of business OK Zimbabwe is the longest established retail chain in the country, with 53 outlets dotted around Zimbabwean towns and cities with a high concentration of the outlets in Harare with 30 outlets. The group operates under four brands namely Bon Marché, OK Stores, OK Express and OK Mart. Forty-four of the stores are branded as OK Stores. The OK Stores vary between 750m² and 2,000m² while OK Express stores are smaller outlets (typically 500m²). Seven outlets are branded Bon Marché and cater for the upper income market and two are branded OK Mart. The company's business covers three major categories: groceries, basic clothing and textiles, and house ware products. The groceries category includes butchery, delicatessen, takeaway, bakery, and fruit and vegetable sections. Total retail space is approximately 68,000m². Aside from offering local and imported goods, the company has developed its own brands through the OK Pot ‘O’ Gold, OK Value and Bon Marché Premier Choice labels. H1 2013 Financial & Operational Review Sales growth ahead of GDP growth and inflation OK Zimbabwe released a set of results that defy the current depressed economic environment sales grew at an astounding figure of 24.6%. These surprising numbers were underlined by improved facilities and offering, improvement in customer count and basket size, customers coming back from the informal market and the new OK Mart brand. Overhead expenses were up 21.7%, slightly less than sales growth but nonetheless the growth was significant, driven by high cost of utilities, increased usage of generator power and cost of security. Sales per square metre rose by 22.84% from US$ 4 702 to USD 5,776 mainly due to the opening of new stores; however management could not provide same store sales figures which are a better indicator of growth. Margins resilient Gross margins were maintained at 17% as pressure from competition intensified as well as a higher propensity to consume low margin basic items. This was achieved on the back of negotiating better terms with suppliers and also bypassing middlemen through direct sourcing. Earnings per share grew by 21.1% to 0.46cents and an interim dividend of 0.2 cents, a 33% growth. Although management has invested heavily in

security shrinkage was 10 basis points higher y-o-y from 0.7% to 0.8% representing a dollar figure of USD 1.2m compared to us$1 m same period last year. Outlook Growth to come from opening new stores OK Zimbabwe is currently and a new outlet was opened in Victoria Falls. Management is in negotiation to open an outlet in Hwange and refurbishments are earmarked for Chinhoyi, Kadoma and Lobengula. Management guideline has indicated that post refurbishment revenue increases by between 35-40% and we expect a significant jump in revenue in the second half. The company will seek grow gross margins by increasing the proportion of high valued merchandise in sales as most customers were spending on low margin items. The risk to this strategy however is the weak fundamentals in the Zimbabwe economy. Fundamentals such as low disposable income, high dependence levels, low wage growth, diminished alternative sources of income and reduced diaspora remittances will limit the scope for upward price adjustment as well as high quality products offering. Traditionally the first half of Ok contribute 40% to revenue and we expect the second half to be much better given the timely completion of refurbishments at Ok Fife Avenue, Bon Marche Avondale and OK Marimba. We are therefore targeting revenue of close to USD 530m and a gross margin of 17% and net profit margin of 2.75% giving a net attributable profit of close to USD 14m. Valuation and Recommendation The company has strong brand equity, a fully developed IT system, an extensive branch network and ideal store location. Using a 50:50 blend of EV/EBITDA valuation matrix and the DCF method we value OK at US 23.7c. The share price has rallied strongly, up +93% YTD. Given the improved performance and strong cash generation, we believe that the company can substantially increase its dividend payout. Given the defensive nature and consistent growth prospects of OK Zimbabwe, we believe downside risk to the share is limited. HOLD.

52


Y-o-Y % NA 37.3% 60.3% 28.0% 7.0%

Gross Profit 30,252 43,512 70,162 89,774 96,058

Y-o-Y % NA 43.8% 61.2% 28.0% 7.0%

EBITDA 4,898 8,136 19,212 25,348 26,557

Y-o-Y % NA 66.1% 136.1% 31.9% 4.8%

EBIT/Operating Profit 2,561 5,422 15,451 22,013 22,983

Y-o-Y % NA 111.7% 185.0% 42.5% 4.4%

Attributable Net Income/Profit After Tax 1,225 4,286 10,306 14,802 15,433Y-o-Y % NA 249.8% 140.5% 43.6% 4.3%

Per Share data


Y-o-Y % NA 153.7% 133.4% 43.6% 4.3%

Dividend Per share (DPS) 0.00 0.00 0.36 0.50 0.53

Y-o-Y % NA NA NA 41.3% 4.3%

NAV/Basic Share 2.3 3.8 4.6 5.7 6.7

Y-o-Y % NA 66.8% 20.1% 23.4% 17.5%


Gross Margin 16.1% 16.9% 17.0% 17.0% 17.0%

EBITDA margin % 2.6% 3.2% 4.7% 4.8% 4.7%

EBIT margin% 1.4% 2.1% 3.7% 4.2% 4.1%


RatiosROaA 7.6% 10.0% 18.9% 21.1% 19.1%

ROaE 7.9% 15.6% 24.0% 27.9% 24.2%



Financial Summary - OK Zimbabwe

53

Padenga Holdings operates, three farms, located on the shores of Lake Kariba in Zimbabwe. The company produces crocodile skins and meat for export to Europe and Asia. Padenga is one of the largest Nile crocodile farming operations in Africa, supplying about 33% of the world’s demand. • Luxury goods market demand to double Growth in the luxury branded goods market is expected to double in the next decade led by demand from emerging markets. Padenga is thus prioritising value addition to the skins where possible in a manner that will not compete with existing customers. • Diversified skin production The company acquired a 50% stake in Lone Star Alligator Farms, USA for a consideration of USD m. • Better quality skins on fewer animals Padenga’s emphasis is on producing large crocodile skins for the premium markets. In 2009, the company decided to reduce the number of its skins produced from 60,000 skins a year to 42,000 skins. This strategy has paid off, as they are now producing better quality skins enhancing the average skin price. • Valuation We have valued Padenga using a combination of the EV/EBITDA and NAV valuation techniques, deriving a target of US 7.9c. Forward ratings are undemanding at PER+1 of 6.8x and PBV of 0.7x. We maintain our BUY recommendation.

Bloomberg PADENGA:ZHBloomberg BUYCurrent Price (Usc) 4.9


Upside (%) 62.9

Liquidity

Market Cap (USD 000) 26.3

Shares (000) 541.6

Free Float (%) 51.4


Price Performance


Change (%) (13.4)


Change (%) 7.8


Turnover 17,941 20,632 25,377

EBITDA 5,372 5,158 6,344




EPS (USc) 0.6 0.7 1.0

DPS (USc) 0.2 0.1 0.1


Ratios

RoaA (%) 9.8 10.4 11.8

RoaE (%) 10.7 11.4 13.3

EBITDA Margin (%) 29.9 25.0 25.0


Earnings Yield (%) 12.6% 14.7% 19.0%

Dividend Yield (%) 3.2% 2.9% 2.9%

PE (x) 7.9 6.8 5.3

PBV (x) 0.8 0.7 0.7

EV/EBITDA (x) 5.3 5.6 4.5

STRENGTHS WEAKNESSESGroup synergies Strong competitive environment

Branded products Conglomerate feel

Strong marketing Advances to farmers at a cost to Diversified operations the company

OPPORTUNITIES THREATSFranchise expansion Cheap imports

Growth in disposable incomes Prolonged time to recovery

New product development Drought

-

500

1,000

1,500

2,000

2,500

-

2

4

6

8


Padenga - volume vs price



Source: IES

54

Nature of business Padenga Holdings is a wholly owned Zimbabwe holding company for businesses engaged in the rearing, slaughter and processing of crocodiles with the end products being meat and skins. Padenga supplies approximately 33% of the world’s demand for large, high quality skins making it one of the largest single exporters of crocodile skins in the world. Between eight and nine kilogrammes of exportable meat is produced per animal, based on a slaughter size of 2.1 metres. The group currently operates three farms on Lake Kariba, producing the Nile crocodile Crocodylus Niloticus, and also has an abattoir which slaughters the animals on behalf of the farms. The production of crocodiles incorporates both ranched stock raised from wild eggs collected on permit and incubated on-farm, and stock produced from captive domestic breeders. H1 2013 Results & Operational Review Padenga’s interim results include Lone Star Alligator Farms which Padenga acquired in July 2012. The group recorded turnover of USD 3.9m and an operating loss before tax of USD 1.7m. The loss attributed to shareholders for the period amounted to USD 1.7m. The results are in line with expectations because of the seasonality of the business. Padenga received a quality bonus of USD 2.1m from their customers against skins delivered. The operation recorded an operating loss before tax of USD 2.7m. The results are better than anticipated by management as expenses were 3% lower than forecast. Padenga is still expected to meet full year budgeted profit. Culling and sales in Zimbabwe are scheduled to start in the fourth quarter of the year as normal. Operations at Lone Star Alligator Farms were very impressive, the subsidiary recorded a turnover of USD 1.7m, an operating profit of USD 1.1m and a profit before tax of USD 1.0m from the sale of 7,882 alligator skins. The results were commendable and above expectations. For the Zimbabwe operation, focus was on egg collection and incubation as well as refurbishment of pen floors and construction of breeder pens at Ume Crocodile Farm. The annual egg collection and incubation was consistent with the group’s production requirements yielding 58,899 hatchlings. This brought the total grower stock to 168,737 animals, with an additional 4,995 breeders in pens across the three farms. At Lone Star Alligator Farm the skin quality attained was praiseworthy as the quality grade attained was better than anticipated consequently the

price achieved per skin was higher than budgeted. The annual hatchling procurement programme conducted in August and September 2012 yielded 9,623 animals inducted into pens and these will be culled in October 2013. The group has managed to double the pens capacity, pens that held 10,000 animals will accommodate 20,000 animals this is in anticipation of volume growth in 2013/14. Padenga H1 2013 Results


Outlook It is the intention of management to align the financial year with production cycle. Regulatory approvals are being sought from the relevant authorities. Once obtained shareholders will be requested to approve the change of the company’s financial period to run for eighteen months up to December 2013. The demand for luxury products which use crocodilian skins remain burly. The group expects the local operation to cull and sell 43,000 skins in the culling season starting in April 2013. Management will remain focused on stringent cost control and are confident that the group will record a profit by year end. Significant volume growth is expected in Lone Star Alligator Farms as a result of a strategy to acquire additional hatchlings during the 2013 season for realisation in 2014. Valuation and Recommendation We have valued Padenga using a combination of the EV/EBITDA and NAV valuation techniques, deriving a target of US 7.9c. Forward ratings are undemanding at PER+1 of 6.8x and PBV of 0.7x. We maintain our BUY recommendation.

55

US$ Thousands 2011 2012 2013 E 2014 ERevenues 19,655 17,941 20,632 25,377

Y-o-Y % NA -8.7% 15.0% 23.0%

Gross Profit 12,934 13,509 15,474 19,033

Y-o-Y % NA 4.4% 14.5% 23.0%

EBITDA 6,315 5,372 5,158 6,344

Y-o-Y % NA -14.9% -4.0% 23.0%

EBIT/Operating Profit 5,151 4,016 4,525 5,693

Y-o-Y % NA -22.0% 12.7% 25.8%

Attributable Net Income/Profit After Tax 3,702 3,413 3,988 5,156

Y-o-Y % NA -7.8% 16.9% 29.3%

Per Share data

Attributable Diluted EPS 0.68 0.63 0.74 0.95

Y-o-Y % NA -7.8% 16.9% 29.3%

Dividend Per share (DPS) 0.00 0.16 0.15 0.14

Y-o-Y % NA NA -9.3% -3.0%

NAV/Basic Share 5.7 6.1 6.7 7.5

Y-o-Y % NA 8.3% 9.6% 12.0%

Margin Performance2011 2012 2013 E 2014 E

Gross Margin 65.8% 75.3% 75.0% 75.0%

EBITDA margin % 32.1% 29.9% 25.0% 25.0%

EBIT margin% 26.2% 22.4% 21.9% 22.4%

Net Income Margin % 18.8% 19.0% 19.3% 20.3%

RatiosROaA 26.2% 9.8% 10.4% 11.8%

ROaE 24.1% 10.7% 11.4% 13.3%

Earning yield on current price 14.1% 13.0% 15.2% 19.6%

Dividend yield current price 0.0% 3.3% 3.0% 2.9%

Financial Summary – Padenga Holdings

56

The property market has been characterised by limited demand for CBD offices and suburban retail space, yet despite this Pearl Properties expects to grow its rental income and occupancy levels through improving the quality of its lettable space. New property developments are also expected to attract higher quality tenants and thus improve on rental income and yields. • Good yields from office parks Office parks remain the highest in terms of rental growth and higher occupancy levels, however there is limited upside for continued rental growth. Consequently the group is targeting to grow its lettable area and holds a land bank worth 10% of the total portfolio. • Entry into residential sector is expected to yield

high return of 25% We are excited about the group’s prospective property developments in the lucrative sector. The country has a massive housing backlog, estimated at 1.2m units, which in the short to medium term should support high rentals. Uopward movement on prices for residential properties could however be constrained by limited liquidity and the lack of mortgage finance. • Valuations show upside Using relative comparison, we derive a value of US 4.1c, implying an upside of 26%. Pearl has a significant property portfolio and planned property developments are likely to make the company derive significant growth going forward. We rate the counter a LT BUY.

Bloomberg Code:Pearl:ZW PEARL:ZWRecommendation LT BUYCurrent Price (USc) 3.3


Upside (%) 26.2

Liquidity


Shares (m) 1,238.2

Free Float (%) 42.7


Price Performance


Change (%) 16.1


Change (%) 32.7


Turnover 8,830 10,155 11,475

EBITDA 4,015 5,077 5,164

Net Finance Income 450 113 153


EPS (USc) 0.73 0.59 0.46

DPS (USc) 0.07 0.04 0.04

NAV/Share (Usc) 9.23 6.76 5.51

Ratios

RoaA (%) 3.3 3.9 3.8

RoaE (%) 8.2 9.2 8.6

EBITDA Margin (%) 45.5 50.0 45.0


Earnings Yield (%) 26.7 21.8 16.8


PE (x) 3.7 3.0 3.0

PBV (x) 0.3 0.3 0.2

EV/EBITDA (x) 7.8 6.1 6.0

-

2,500

5,000

7,500

10,000

12,500

-

1

2

3

4


Pearl - volume vs price


Equity Research Zimbabwe May 2013 Property

Source: IES

STRENGTHS WEAKNESSESFocused and experienced management Limited free cashflow for new projects

Sizeable land bank

Diversified property portfolio

Manageable arrears level

OPPORTUNITIES THREATSImproving economic fundamentals Increasing debtors

Operating cots stabilising

Increased use of project finance

57

FY 2012 Results & Operational Review Pearl reported rental income growth of 9.4% to USD 8.8m, which management attributed to new lettings, rent reviews and the reopening of a suburban shopping mall that was under refurbishment. Consequently the average rental per square metre increased by 11.6% to USD 8.16 (2011: USD 7.33). Rental yield eased to 8.6% (2011: 9.8%) mainly due to the slower growth in rentals relative to investment property values. Net property income was up 4.2% to USD 7.2m (2011: USD 6.91m) and after accounting for administration expenses it was up by 2.9% to USD 4.0m. Operating profit before tax and fair value adjustment declined by 13.2% to USD 4.7m due to investment income falling radically from USD 1.0m in the prior period to USD 0.2m. The decline in investment income was because the group continued to focus on core operations by disposing equity investments to fund planned property refurbishments. On the balance sheet, investment properties grew by 10% from USD 109.7m in the prior period to USD 120.2m attributed to the completion of the refurbishment of the George Square Shopping Mall. Superb debt management strategies improved cash collection and resulted in tenant arrears falling by 20.4% to 9.0%. Efforts to reduce arrears to sustainable levels continue with payment plans being negotiated with defaulting tenants. Demand for office parks and industrial warehousing space remains sturdy with office park rentals per square meter at USD12.19 against USD 10.93 and Industrial space at USD 3.46 against USD 3.03. New lettings in the CBD however remain a challenge as tenants prefer to rent office parks outside the CBD. Outlook The local property sector remains largely a buyers market mainly due to the liquidity strained environment. New developments for commercial and retail properties in the country have, however, been limited with properties such as the 22 storey Joina Centre in the CBD still having some vacant space due to businesses rightsizing and moving out of the core CBD space. The group expects growth in rental income to come from improved yields from the refurbished space as well as growth in rental income from additional new space. Cost management strategies such as making payment plans for defaulting tenants and re-letting to quality tenants to reduce on debtors’ write-offs should benefit the group. Pearl has a significant property

portfolio and planned property developments are likely to make the company derive significant growth going forward. In a trading update management reported that, rental income for the two months to end February 2013 was USD 1.5m, up 6.4% on budget whilst net property income was also up 23% on budget at USD 812,948. Property expenses and administration expenses were both 24% and 21% ahead of budget, respectively. Valuation and Recommendation Using relative comparison, we derive a value of US 4.1c, implying an upside of 26%. Pearl has a significant property portfolio and planned property developments are likely to make the company derive significant growth going forward. We rate the counter a LT BUY.

0

4

8

12

16

0

0.5

1

Industrial CBD Office

Office Parks

Retail Surbaban

Retail CBD

USD/m2

Property Portfolio Review

Average rental per m2 ($) Occupancy rate (%)

Rental Yields (%)

Industrial31%

CBD Office33%

Office Parks20%

Retail Suburban

7%

Retail CBD9%

Pearl Properties Gross Lettable Area Split

Source: Company & IES

58

Financial Summary – Pearl Properties


Y-o-Y % NA 66.7% 14.5% 9.4% 15.0% 13.0%

Gross Profit 4,229 6,055 6,913 7,202 8,631 9,754

Y-o-Y % NA 43.2% 14.2% 4.2% 19.8% 13.0%

EBITDA 2,061 3,286 3,902 4,015 5,077 5,164

Y-o-Y % NA 59.4% 18.7% 2.9% 26.5% 1.7%


Y-o-Y % NA 59.4% 18.7% 2.9% 26.5% 1.7%


Y-o-Y % NA 576.5% 14.5% -51.1% 21.6% 2.5%

Per Share data


Y-o-Y % NA 576.5% 14.5% -51.1% -18.5% -22.9%


Y-o-Y % NA NA NA 14.7% -48.1% 2.5%

NAV/Basic Share 6.1 7.2 8.6 9.2 6.8 5.5

Y-o-Y % NA 18.5% 19.8% 7.3% -26.8% -18.6%


Gross Margin 100.0% 85.9% 85.6% 81.6% 85.0% 85.0%

EBITDA margin % 48.7% 46.6% 48.3% 45.5% 50.0% 45.0%

EBIT margin% 48.7% 46.6% 48.3% 45.5% 50.0% 45.0%


RatiosROaA 5.1% 3.8% 3.7% 3.3% 3.9% 3.8%

ROaE 6.3% 19.6% 18.9% 8.2% 9.2% 8.6%



59

Seed Co’s FY 2013 net income declined by 34% after a largely disappointing rainy season as well as the tight liquidity conditions. Taking advantage of the normalisation in input product prices in the first two years of dollarisation, management took a strategic decision to ramp up production and shore up carryover stocks. The result of this was that for the first time in five years, the group had enough seed stock to ensure that it can take advantage of any increase in demand. However the increase was largely financed at relatively high cost. Coupled with nonperforming debtors the strain on capital resources impacted the performance of the company. • Zimbabwe, eye of the storm The crippling liquidity constraints in the local economy impacted Seed Co significantly through reduced credit to retailers. The company faced significant challenges getting payments from government and some local retailers hence it made a deliberate strategy to hold back seed from problem clients and concentrated distribution to performing retailers. • Solid regional operations Regional operations continued to grow with Zambia recording a good season and earnings responded positively. Zambia remains a tax haven in the group given that the corporate tax rate in Zambia for agricultural entities is a maximum 10%. Volumes in Malawi were slightly up and the company is in the process of installing a new plant with a target for completion of 12 months. In Kenya the highland varieties are starting to gain a strong foothold.

• Valuation The reduction in the average cost of borrowings will significantly improve pre-tax margin and gross margins are expected improve on price adjustments. Ratings are undemanding at an EV/EBITDA of 7.7x and PER of 10.9x compared to peers that are trading at an average EV/EBITDA of 11.3x and PER of 21x. BUY.

Bloomberg Code SEEDCO:ZHRecommendation BUYCurrent Price (USc) 71.0


Upside (%) 27.2

Liquidity


Shares (m) 194.2

Free Float (%) 40.1


Price Performance


Change (%) (16.5)


Change (%) (21.1)

Financials (USD 000) 31 March Current 2013F 2014F

Turnover 110,642 125,006 140,632

EBITDA 23,578 28,301 33,158



EPS (USc) 6.5 10.6 12.7

DPS (USc) - - -

NAV/Share (USc) 43.3 44.7 49.1

Ratios

RoaA (%) 7.9 12.5 14.4

RoaE (%) 15.1 24.0 27.0

EBITDA Margin (%) 21.3 22.6 23.6




PE (x) 10.9 6.7 5.6

PBV (x) 1.6 1.6 1.4

EV/EBITDA (x) 7.7 6.5 5.5

STRENGTHS WEAKNESSESSignificant market share Dependence on reg governments

Strong brands & Syngenta r/ship Aggressive competition

Growing presence in SSA and imported varities

Strong research and dev. unit Over reliance on maize

Hybrids protected by patents

OPPORTUNITIES THREATSQuintessential recovery play on Drought

Zimbabwe agric sector Lower aid inflows and less public

Growth in Angola, Malawi & Tanzania spend on small holder farmer

Gvt opening up to GMO varieties input schemes

Fertiliser and fuel price shocks

-150 300 450 600 750 900

-20 40 60 80

100 120


SeedCo - volume vs price


Source: IES


60

Nature of business SeedCo is a developer and marketer of certified seed, concentrating mainly on maize hybrids but with varieties for wheat, barley, cotton, soya, sorghum and groundnuts. The company has a dominant market share in the hybrid maize seed market controlling around 80% of the Zimbabwean market. SeedCo has a research collaboration agreement with Syngenta, a European based global agribusiness involved in seed and crop protection. Quton, is the only cotton seed producer in Zimbabwe with a production base of about 10,000t a year and about 20 seed varieties. Seed production is equally split between Zimbabwe and the region. Annual regional production amounts to 50,000t, and the group’s total capacity is about 70,000t. FY 2013 Results & Operational Review As advised in the company’s 3rd quarter trading update, Seed Co’s net profit for FY 2013 was lower than FY 2012 decreasing by 34% to USD 12.6m. Overall sales volumes declined by 10% while winter cereal sales volumes shrunk by 41%. In Zimbabwe the whole market’s aggregate volumes dropped by close to 40%, negatively impacted by the reduced Government input programmes, a late start to the rainy season as well as the tight liquidity conditions. Regional operations contributed 67% (approximately USD 74.1m) to group turnover and approximately 70% to net profit (USD 8.8m). Gross profit margins increased to 46% from 45% on price adjustments in most markets although it was lower than the target of 49% on account of the devaluation of the Malawi kwacha. Operating margins decreased to 21% from 25%, resulting in operating profits declining by 15%. Opex grew 5% mainly driven by once off retrenchment costs of USD 2.0m, as the group right sized to increase efficiency and agility. Excluding the retrenchment cost we estimate that opex declined by 2%. Cost savings of approximately USD 1.2m p.a. are anticipated post the rightsizing. Finance charges were high due to borrowings to finance carryover stock as well as the slower receipts from government and related institutions. Cashflows were strained on increased borrowings repayments as well as capex. Net cash generated from operations improved significantly due to reduced working capital requirements as seed production was reduced. Net cash from operations of USD 11.6m (up 3.6x), represented a cash interest cover of 1.6x. Gearing remained static at 54%. The average cost of borrowings reduced to 11.65% p.a. from approximately 19% at the interim stage. The Government of Zimbabwe reduced its arrears to USD 4.7m from about USD 13.7m at H1 2013 while quasi government institutions owed the group approximately USD 11.2m.

The Zambian government owed approximately USD 8.0m while the Malawi government owed USD 2.0m. Outlook R&D remained strong as the company released 16 new varieties and approximately USD 4.5m was spent on R&D. Seed production has been reduced especially in Zimbabwe were there was significant carryover stock and SeedCo hopes to end FY 14 with a stock carryover of approximately 16,000t. The regional expansion has benefited the group as Tanzania and Kenya contributed approximately USD 2.0m to the bottom line. The floating of the Malawi kwacha will have a positive impact on the business going forward. The introduction of e-voucher system is also likely to aid SeedCo’s volumes as farmers will have the choice on which seed brand to buy. Management is upbeat about the prospects of the business as the demand for seed in the region remains firm. Valuation and Recommendation SeedCo maintained its dominant market share in the hybrid maize seed category with its strong brands. In our view, the group is well positioned to harness value with its wide spread geographical presence. Strategic relations with global players such as Monsanto will continue to improve seed varieties for SeedCo’s hybrid offering. The reduction in the average cost of borrowings will significantly improve pre-tax margin and gross margins are expected to improve on price adjustments. Ratings are undemanding at EV/EBITDA of 7.7x and PER of 10.9x compared to peers that are trading at an average EV/EBITDA of 11.3x and PER of 21x. BUY.

61

USD Thousands 2009 2010 2011 2012 2013 2014 E 2015 ERevenues 53,850 76,990 97,826 117,708 110,642 125,006 140,632

Y-o-Y % NA 43.0% 27.1% 20.3% -6.0% 13.0% 12.5%

Gross Profit 27,610 33,367 49,737 53,036 50,873 61,253 70,316

Y-o-Y % NA 20.9% 49.1% 6.6% -4.1% 20.4% 14.8%

EBITDA 12,060 16,438 21,748 23,691 23,578 28,301 33,158

Y-o-Y % NA 36.3% 32.3% 8.9% -0.5% 20.0% 17.2%

EBIT/Operating Profit, exlc exceptionals 17,362 18,425 25,426 26,854 24,735 29,151 34,252

Y-o-Y % NA 6.1% 38.0% 5.6% -7.9% 17.9% 17.5%

Attributable Net Income/Profit After Tax 12,938 12,823 17,435 19,159 12,610 20,501 24,601

Y-o-Y % NA -0.9% 36.0% 9.9% -34.2% 62.6% 20.0%

Per Share data

Attributable Diluted EPS 6.77 6.69 9.07 9.93 6.49 10.56 12.67

Y-o-Y % NA -1.2% 35.6% 9.5% -34.6% 62.7% 20.0%

Dividend Per share (DPS) - - - - - - -

Y-o-Y % NA NA NA NA NA NA NA

NAV/Basic Share 30.97 37.78 42.66 42.44 43.33 44.66 49.09

Y-o-Y % NA 22.0% 12.9% -0.5% 2.1% 3.1% 9.9%

Margin Performance2009 2010 2011 2012 2013 2014 E 2015 E

Gross Margin 51.3% 43.3% 50.8% 45.1% 46.0% 49.0% 50.0%

EBITDA margin % 22.4% 21.4% 22.2% 20.1% 21.3% 22.6% 23.6%

EBIT margin% 32.2% 23.9% 26.0% 22.8% 22.4% 23.3% 24.4%

Net Income Margin % 24.0% 16.7% 17.8% 16.3% 11.4% 16.4% 17.5%

RatiosROaA 19.9% 17.4% 18.2% 16.9% 7.9% 12.5% 14.4%

ROaE 23.3% 19.5% 22.6% 23.4% 15.1% 24.0% 27.0%

Earning yield on current price 9.5% 9.4% 12.8% 14.0% 9.1% 1487.2% 1784.6%

Dividend yield current price 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Financial Summary – Seed Co

62

Equity Research Zimbabwe May 2013 Industrial Holdings

The group benefits from an increased tobacco crop through many of its divisions, with the revised crop estimate now standing at approximately 155 million kg’s, down from the initial 170 million kg’s predicted at the beginning of the season. We believe the tobacco sector will continue to recover in Zimbabwe and TSL is well placed to benefit from any growth. • Strong balance sheet The group’s cash flow statement reflects good cash generation with operating cash flow of USD m.The balance sheet remained in good shape, with net gearing of negative 1.0%. Debtors increased by 1.9x due to the tobacco out-grower scheme.

• Agric recovery With the majority of the group’s divisions focused on agriculture, any increase in agricultural activity will benefit TSL, in particular growth in the tobacco sector, which we believe will propel growth in going forward.

• Valuation shows upside Although the economic outlook is expected to remain challenging, we believe that TSL can weather the storm (given the strong balance sheet) and that it offers sustainable profitability. The restructuring of the group has gone on well and we expect margins to improve on improved efficiencies and increased capacity utilisation. Although the counter has gained strongly gaining 72% YTD we believe that profitability is set to improve significantly. Ratings are undemanding at a forward PER of 6.0x and a PBV of 0.6x. Our sum of parts valuation indicate a fair value of USD 85m. We maintain our LT Buy recommendation.

Bloomberg Code TSL:ZHRecommendation LT BUYCurrent Price (USc) 18.5


Upside (%) 16.2

Liquidity


Shares (m) 347.3

Free Float (%) 15.8


Price Performance


Change (%) 184.6


Change (%) 64.4


Turnover 31,958 38,829 43,294

EBITDA 7,123 8,976 10,446



EPS (USc) 1.6 1.9 2.2

DPS (USc) 0.4 0.5 0.6

NAV/Share (USc) 16.3 17.8 19.4

Ratios

RoaA (%) 6.7 7.7 8.0

RoaE (%) 10.9 11.7 12.2

EBITDA Margin (%) 22.3 23.1 24.1




PE (x) 11.5 9.5 8.4

PBV (x) 1.1 1.0 1.0

EV/EBITDA (x) 8.9 7.1 6.1

-

5,000

10,000

15,000

20,000

25,000

30,000

-

5

10

15

20

25


TSL - volume vs price


STRENGTHS WEAKNESSESStrong management Increased competition

Solid asset base Poor perfromnace by some business units

Strong agricultural recovery reducing profitability

Conglomerate - uncorrelated businesses

OPPORTUNITIES THREATSManufacturing sector recovery Competition

Good tobacco crop Liquidity constraints

Economic recovery Inconsistent utilities supply

Source: IES

63

Nature of business TSL Limited is the holding company of a group of entities with main operations in the inputs to agriculture, storage and distribution, auctioning of tobacco, car hire, printing and packaging, horticulture and property. The group also owns 40% of ZSE listed Hunyani which is involved in the manufacture, corrugated cardboard and printing. The TSL group has a number of industrial properties some of which are rented out while others are owner occupied. The group also hold 30% shareholding in Cut Rag Processors, which manufactures cigarettes on a toll basis. Cut Rag process about 400 to 600 tonnes of cigarettes per month, both for own brands and contract. The auction facility income is based on the value of tobacco that goes under the hammer and TSF gets 3% of the auctioned value. FY 2012 Results and Operational Review Net profit surged 126% y-o-y For FY 2012, TSL posted a strong set of results showing attributable earnings of US$ 5.1m, up 126% y-o-y. The strong performance was driven by significant volume growth at Bak Logistics, cost control in the tobacco operations as well as restructuring benefits, which included discontinuing loss making units. Margins expanded EBITDA margins expanded to 22.4% from 10.6% driven by cost containment and improved efficiencies, resulting in operating profits increasing five folds. A final dividend of 0.43 US cents a share was declared, implying a dividend cover of 4.0x and yield of 3.7%. The LDR is Friday 15 February 2013. Cashflows were constrained on increased working capital requirements mainly to finance the tobacco out-grower scheme. The company expects to receive approximately 2.5m kg of tobacco from the out-grower scheme. The balance sheet remained in good shape, with net gearing of negative 1.0%. Debtors increased by 1.9x due to the tobacco out-grower scheme. The disposal of TS Timber was completed during the year. The property holding company commenced operations in the second half of FY 2012 and operated for only four months. Bak Logistics is expected to contribute significantly to group profits as it continues to expand its revenue streams. Outlook At the AGM, management advised that the group is in good shape and is on track to achieve FY 2013 targets. TSL Classic expects to receive approximately 2.5m kg of tobacco leaf from its out-grower scheme. The tobacco national crop is expected to be bigger than

that achieved in 2012 with estimates indicating for a crop size of between 160mkg and 170m kg. The logistics business is expected to grow its warehouse space by approximately 15% and should have a good outturn on the back of the strong tobacco season. The de-listing of Chemco is on-going. Cut Rag (associate) completed its relocation and is expected to make a strong contribution. Efficiencies at Tobacco Sales Floor are expected to be improved. The average prices are slightly ahead of prior year with an average price of approximately USD 3.69/kg having being achieved. Valuation and Recommendation Strong balance sheet and a good asset play Although the economic outlook is expected to remain challenging, we believe that TSL can weather the storm (given the strong balance sheet) and that it offers sustainable profitability. The restructuring of the group has gone on well and we expect margins to improve on improved efficiencies and increased capacity utilisation. Although the counter has gained strongly gaining 72% YTD we believe that profitability is set to improve significantly. Ratings are undemanding at a forward PER of 6.0x and a PBV of 0.6x. Our sum of parts valuation indicates a fair value of USD 85m. We maintain our LT Buy recommendation.

64


Y-o-Y % NA 59.3% -21.1% 8.5% 21.5% 11.5%

Gross Profit 14,766 23,520 18,575 20,338 24,710 27,552

Y-o-Y % NA 59.3% -21.0% 9.5% 21.5% 11.5%

EBITDA 3,867 3,469 3,528 7,123 8,976 10,446

Y-o-Y % NA -10.3% 1.7% 101.9% 26.0% 16.4%


Y-o-Y % NA -27.7% -55.0% 437.2% 33.3% 19.7%


Y-o-Y % NA -4.0% 0.6% 129.0% 20.7% 13.7%

Per Share data


Y-o-Y % NA -4.0% 0.6% 129.0% 20.7% 13.7%

Dividend Per share (DPS) - - 0.40 0.43 0.52 0.59

Y-o-Y % NA NA NA 7.5% 20.7% 13.7%

NAV/Basic Share 12.90 13.19 14.05 16.35 17.76 19.37

Y-o-Y % NA 2.3% 6.5% 16.3% 8.7% 9.1%


Gross Margin 63.1% 63.1% 63.1% 63.6% 63.6% 63.6%

EBITDA margin % 16.5% 9.3% 12.0% 22.3% 23.1% 24.1%

EBIT margin% 13.5% 6.1% 3.5% 17.3% 19.0% 20.4%


RatiosROaA 0.0% 2.6% 1.3% 6.7% 7.7% 8.0%

ROaE 0.0% 5.3% 5.1% 10.9% 11.7% 12.2%



Financial Summary – TSL Holdings

65


In recent years, we have witnessed Implats going full steam ahead with its expansion at Zimplats in the face of unclear indigenisation demands. The company submitted proposal for its indigenization plan, which were granted by the Minister of Youth, Indigenisation and Empowerment. Recently, Zimplats lost a significant portion (27,948ha) of its land – when the government gazetted a section that it deemed excess to the company’s requirements.

• Share price has suffered Clearly, Zimplats has been tainted by the country’s political problems. Of course, political actors and the media can be held accountable here. The share price has de-rated to about AUD 10.00 from historic highs of AUD 13.00. • Interest expense and penalties to negatively

impact FY 2013 profitability Zimplats incurred a USD 16.6m in interest expense and penalties for H1 2013 which will reduce net income for the year.

• Remains fundamentally undervalued We have valued Zimplats using a DCF approach which yielded a target price of USD 13.50, indicating 55% potential upside, however the operating environment remains very fluid which might warrant more caution. On the other hand, our comparative analysis shows that Zimplats is trading on undemanding ratings of PER+1 6.0x. We are still convinced that Zimplats has the potential to create material additional value for shareholders in the long term. SPEC BUY.

Bloomberg Code ZIM:AURecommendation SPEC BUYCurrent Price (USc) 868.9

Current Price (AUDc) 900.0


Upside (%) 55.4

Liquidity


Shares (m) 107.6

Free Float (%) 11.0


Price Performance


Change (%) (6.6)


Change (%) 6.6

Financials (USD m) 30 June Current 2013F 2013F


EBITDA 190 109 194



EPS (USc) 113.7 35.6 97.4

DPS (USc) - 1.0 2.0

NAV/Share (USc) 800.6 915.5 951.1

Ratios

RoaA (%) 11.5 3.1 7.3

RoaE (%) 15.3 4.1 10.4

EBITDA Margin (%) 32.7 18.2 28.3




PE (x) 7.6 24.4 8.9

PBV (x) 1.1 0.9 0.9

EV/EBITDA (x) 5.3 9.2 5.2

EV/4E Oz (USD) 2,719.6 2,831.7 2,135.3

-

20

40

60

80

100

120

-2 4 6 8

10 12 14


Zimplats - volume vs price

Volume ('000) RHS Price (AUD) LHS

STRENGTHS WEAKNESSESLow gearing enables the group to fund Weak PGM prices directly impact revenues- Eurozone

future expansion projects through debt. Crisis presents a stumbling block.

Defensive - PGMs core business Low grade ore (3.4g/ tonne of ore)

Technical & strategic support from parent company, Royalties in Zimbabwe have increased significantly

Impala Platinum eg Refining through Impala Refineries (10.0% for Platinum and 7.0% for Gold)

Shallow depth of ore (100-500m max-depth)

The underground mines are operating at full capacity

OPPORTUNITIES THREATSNgezi Phase II and III Expansion Projects Slump in PGM prices as a result of slow global economic

Increased emerging markets demand for automobiles recovery

may drive PGM prices up. Indigenisation issues leading to weak share price.

Regulatory environment i.e. APT

Mining rights ownership risks

High electricity tariffs could squeeze margins

Skills flight to neighbouring countries.

Source: IES

66

Nature of business Zimplats Holdings Limited is a mining group which explores for and produces platinum group metals (PGMs) in Zimbabwe. The company’s exploration projects include Ngezi South and North, Hartley Platinum and Selous. Zimplats is 87% owned by Impala Platinum Holdongs of South Africa. The company operates two main sites (Ngezi and Selous) and employs underground mining techniques (board and pillar method) to extract PGMs. Six metals (platinum, palladium, gold, rhodium, nickel and lithium) contributed approximately 99% to revenue. Lower grades but shallow depth The platinum mined at Zimplats is generally a low grade type (3.4g/t of ore). However, Zimplats’ main strength lies in the depth of the ore, which is relatively shallow (100 metres deep) compared with South Africa platinum mines which could be as deep at 2,000 metres. Zimplats has a vision to be the leading platinum company in Zimbabwe, producing 1.0m platinum oz per annum. In line with its vision the company has embarked on a phased expansion drive to ramp up production levels. Zimplats currently has three underground mines It is worth noting that Zimpats has shifted away from open pit mining and now employs underground mining through its three mines (Ngwarati, Rukodzi and Bimha Mine). Ngwarati and Rukodzi Mine have a combined capacity in the region of 2.2mtpa whereas the new Bimha Mine has a capacity of around 2.0mtpa. This implies that the group currently has an estimated capacity of 4.2m tones of ore per annum. However, the Phase II expansion project is expected to add another 2.0mtpa through the Mupfuti Mine (Portal 3). Zimplats also operates two concentrators at Ngezi and the Selous Metallurgical Complex (SMC) with a combined capacity of 4.2mtpa. The concentrators are currently operating at full capacity. Furthermore, Zimplats also has a smelter at the SMC with the capacity to process 6.2mtpa of concentrate. Refining is done through the parent company’s Impala Refinery Services (IRS). Of the 4.2m tonnes of ore that is mined, c3.0% (127,000 tonnes) is the concentrate. This gives about 7,500 tonnes of white matte that is then exported to South Africa to a Base Metal Refinery (IRS). Zimplats receives approximately 90% of the value of PGMs and 80% of the value of base metals from IRS. Management has indicated that the group is currently evaluating the possibility of commissioning a refinery.

Q2 2013 Results and Operational Review Total ore mined was 2% ahead of Q2 2012 and was down 4% on Q1 2013 production due to low equipment availability and bad ground conditions. However, milled tonnage was ahead of expectations at 1,126,00t (Q2 2012: 1,110,000t) on improved running time and head grade. Q1 2013 performance was negatively impacted by concentrator maintenance shutdowns. The 4E metal in converter matte production and sales declined by 66% and 75%, respectively, from the previous quarter. This was due to the fire which affected the furnance as well as a run-out. Revenue declined by 11% q-o-q to USD 83.0m and was down 15% y-o-y. Opex eased 9% due to lowers sales volumes. All this resulted in a 19% decrease in operating profits. The cash cost of production per 4E ounce declined 10% y-o-y to USD 857 (down 6% q-o-q). Overall, the group posted an operating profit of USD 17.6m, indicating a 19% decrease q-o-q (-8% y-o-y). Outlook Despite the noise on indigenisation issues, strong organic growth is likely to continue beyond the near-term Zimplats boasts a +200moz (4E) minerals inventory and is capable of growing to at least 1.0moz Pt pa in the longer-term. The group is in the midst of its Phase II expansion project that will see production move from at least 180koz Pt p.a. to at least 270k oz p.a.. Nonetheless, we believe that continued investment in this type of infrastructure requires a resolution of issues such as indigenisation and assurance of stability thereafter. Clarity regarding security of tenure is also a pre-requisite in our view, to any form of material mining investment, in any jurisdiction. Phase II is expected to increase production volumes to 6.2m tonnes of ore and 270,000oz of platinum. Management has also hinted that Phase III feasibility studies are currently underway. Valuation and recommendation We have valued Zimplats using a DCF approach which yielded a target price of USD 13.50, indicating 55% potential upside, however the operating environment remains very fluid which might warrant more caution. On the other hand, our comparative analysis shows that Zimplats is trading on undemanding ratings of PER+1 6.0x. We are still convinced that Zimplats has the potential to create material additional value for shareholders in the long term. SPEC BUY.

67


Total Revenue 236 294 120 404 527 473 388 524

Y-o-Y Growth 25% . 236% 31% -10% -18% 35%

EBITDA 135 170 (4) 196 278 190 109 194

Y-o-Y Growth 25% -102% -5615% 42% -32% -42% 77%

Operating Expense (24) (30) (33) (51) (66) (91) (96) (105)

Y-o-Y Growth 26% 7% 58% 29% 38% 5% 9%

Depreciation and Amortization (21) (24) (21) (23) (34) (35) (39) (45)

Y-o-Y Growth 18% -12% 9% 45% 5% 11% 16%

Net Finance income 3 0 (1) (6) (9) (3) (18) (4)

Y-o-Y Growth -95% -1006% 461% 34% -59% 409% -78%

Profit Before Tax 117 146 (26) 167 236 152 53 145

Y-o-Y Growth 24% -118% -740% 42% -36% -65% 174%

Net Income/Profit After Tax 100 124 (25) 122 200 122 38 105

Y-o-Y Growth 25% -120% -588% 64% -39% -69% 174%


Earning per Share (USc) 93 116 (23) 113 186 114 36 97

Y-o-Y Growth 25% -120% -588% 64% -39% -69% 174%




Y-o-Y Growth 34% -6% 30% 37% 17% 14% 4%


EBITDA margin % 57.3% 57.6% -3.0% 48.6% 52.8% 40.2% 28.2% 36.9%

EBIT margin% 48.6% 49.4% -20.7% 42.8% 46.4% 32.7% 18.2% 28.3%

Net Income Margin % 42.2% 42.3% -20.8% 30.2% 38.0% 25.9% 9.9% 20.0%

ROaA 28.4% 24.8% -4.0% 16.7% 22.4% 11.5% 3.1% 7.3%

ROaE 35.6% 32.2% -5.8% 25.6% 31.4% 15.3% 4.1% 10.4%

Earning yield on current price 10.6% 13.3% -2.7% 13.1% 21.4% 13.1% 4.1% 11.2%


Financial Summary – Zimplats Holdings

68

69

70

Contacts

General

Thedias Kasaira

Managing Director

Direct +263 4 792 064

Moblie +263 772 600 562


Dealing

Sales Trading

Tino Kambasha

Director

Direct +263 4 791 593

Mobile +263 772 572 110


Analysts

Tel +263 4 700 000/

+263 4 790 403



Tonderai Maneswa +263 772 895024


Sebastian Gumbo Derrick Ncube

Dealer Dealer

Direct +263 4 792 064 Direct +263 4 792 064

Mobile +263 772 600 562 Mobile +263 772 913 443


Tatenda Mutonga Shelton Sibanda

Dealer Dealer

Direct +263 4 792 064 Direct +263 9 74 554

Mobile +263 772 568 610 Mobile +263 772 984 828


71









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This research report is not an offer to sell or the solicitation of an offer to buy or subscribe for any securities. The securities referred to in this report may not be eligible for sale in some jurisdictions. The information contained in this report has been compiled by Imara Edwards Securities (Pvt.) Ltd. (“Imara”) from sources that it believes to be reliable, but no representation or warranty is made or guarantee given by Imara or any other person as to its accuracy or completeness. All opinions and estimates expressed in this report are (unless otherwise indicated) entirely those of Imara as of the date of this report only and are subject to change without notice. Neither Imara nor any other member of the Imara group of companies including their respective associated companies (together “Group Companies”), nor any other person, accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each recipient of this report shall be solely responsible for making its own independent investigation of the business, financial condition and prospects of companies referred to in this report. Group Companies and their respective affiliates, officers, directors and employees, including persons involved in the preparation or issuance of this report may, from time to time (i) have positions in, and buy or sell, the securities of companies referred to in this report (or in related investments); (ii) have a consulting, investment banking or broking relationship with a company referred to in this report; and (iii) to the extent permitted under applicable law, have acted upon or used the information contained or referred to in this report including effecting transactions for their own account in an investment (or related investment) in respect of any company referred to in this report, prior to or immediately following its publication. This report may not have been distributed to all recipients at the same time. This report is issued only for the information of and may only be distributed to professional investors (or, in the case of the United States, major US institutional investors as defined in Rule 15a-6 of the US Securities Exchange Act of 1934) and dealers in securities and must not be copied, published or reproduced or redistributed (in whole or in part) by any recipient for any purpose. © Imara Edwards Securities 2013

72

Documents

Zimbabwe Booklet May 2013