EXECUTIVE SUMMARY

Recent results released by leading hoteliers point towards improving occupancies, RevPARs and ADRS locally. We expect this positive earnings outlook to continue, given the positive outlook for the tourism sector. Our range of scenarios for RevPAR growth is xx, given the limited supply growth until 2013. With occupancies recovering towards peak levels we could see room supply coming at a premium. Prospects for discount business with corporate transient customers. Tight supply environment an important tailwind for African Sun An increase in local salaries should boost local consumer spent while investment interest in the country should boost foreign business visitors An improvement in the global economy will also support the tourism industry. Better earnings visibility for Cresta Hospitality and Meikles, because of their simpler more defensive business model. Business travel and tourism is less fickle than leisure travel so the groups profits are likely to show defensive qualities. We also like African Sun because it has already expanded regionally, and is more diversified. Operating cost inflation, and subdued consumer and corporate profits.The lack of incremental costs on new management contracts should buoy results for African Sun Not cash generative because of capex projects. Prospects for hotels have strong longer term drivers, Economic growth and varied and unique tourist offering.

Macroeconomic Report 2013 Review and 2014 Outlook-From the zenith of hyperinflation to the
nadir of deflation two worlds rolled into one: Zimbabwe

Analyst: Tonderai. J .Maneswa Email: tonderai.maneswa@imara.com Tel: +263 4 700 000 +263 772 895 024

Addmore .T. Chakurira addmore.chakurira@imara.com +263 4 700 000 +263 772 265 454

Zimbabwe Review and Outlook 2014

Equity Research Zimbabwe January 2014 Macroeconomic

Indices performance since dollarisation 250 200 150 100 50 0 350 300 250 200 150 100 50 0

After a largely indifferent year in 2012 the ZSE industrial index reported a sterling performance in 2013 gaining a sturdy 32.6% compared to 4.3% in 2012. This was on the back of a better economic environment in 2012 and early 2013 when corporates reported improved profitability. The overall performance of the industrial index was so strong that in June 2013, before the harmonised election, the return on the index was close to 50%. Speculation on the reintroduction of the Zimbabwe dollar immediately after the election and unclear economic policies then dampened investor enthusiasm resulting in the market losing momentum during the third quarter. Reassurances from the Ministry of Finance (MoF) and the Reserve Bank of Zimbabwe (RBZ) on the continuation of the multicurrency system instilled confidence back into the market by the beginning of the fourth quarter. The Mining Index for a third straight year receded to close the year with a negative return of 29.7% compared to -35% y-o-y in 2012 and a loss of 49.8% in 2011. The industrial indexs gains were bolstered by respectable performances from the blue chips, Delta, Econet, BATZ, Old Mutual, TSL and Padenga, while the mining index suffered due to unexciting performances from all four listed counters namely Falgold, Bindura, Hwange and RioZim. The solid performance of the industrial index was anchored on the back of predominantly foreign trades owing to the trickle down effects of quantitative easing (QE) in developed economies. Furthermore, investors were attracted to the ZSE irrespective of the election due to the multiple currency regime which entails that foreign investors had minimum exchange risk especially coming from a USD denominated home country. On market capitalisation, the bourse closed the year at USD 5.6bn compared to USD 3.9bn in the prior year. This was mainly on the back of the upward price movement in heavily capitalised stocks such as Delta which closed the year at USD 1.7bn (2012: USD 1.3bn). Other heavy weight companies that recorded solid gains include Econet up 33.3%, BATZ +228%, TSL +264%, Innscor +14.3%, Old Mutual +66% and Seed Co +16.9%. Total turnover at USD 485.7m was 8.4% higher than 2012 and foreign participation dominated across the board. Going forward, we expect a largely mixed year ahead due to the tapering in the US economy that was initiated towards the end of 2013. According to World Bank estimates close to USD 64bn was withdrawn from developing-country mutual funds between June and August 2013. We expect the tapering to also negatively impact portfolio allocation in frontier markets as investors return to traditional markets where portfolio alphas are looking positive. On the other hand an improvement in developed economies will improve demand for commodities from developing countries but the outlook remain mixed overall.

A sweet spot for the ZSE in 2013

Industrial Index(LHS)

Mining(RHS)

TOP TEN MOVERS TSL BATZ AFRICAN SUN MASIMBA AFDIS FMHL FBCH LAFARGE PADENGA OLD MUTUAL BOTTOM TEN MOVERS FALGOLD HWANGE ZIMPLOW TA HOLDING ARISTON CAFCA RIO ZIM AICO ART ZDR NTS

31-12-2012 31-12-2013 Move(Usc)%Change 11 365 0.9 2.93 14 5.2 7.5 65 4.75 152 16.5 19.5 6.5 11 1.3 45 52 9 0.45 3 40 1200 2.7 6.5 30 10 13.5 110 8 253 4.5 7 3.5 6 0.8 28 33 6 0.3 2 29 3 217 0.7 2.2 46 0.5 5 17 30 -12 -12.5 -3 -5 -0.5 -17 -19 -3 -0.15 -1 264% 229% 200% 122% 114% 92% 80% 69% 68% 66% -73% -64% -46% -45% -38% -38% -37% -33% -33% -33%

31-12-2012 31-12-2013 Move(Usc)%Change

Strategy Note
Macroeconomic environment overview The possibility of Deflation looms large In a classical case of a taste of two worlds the local economy is currently undergoing a slow and painful period of price adjustment. Having experienced downward hyperinflation in the not so distant past the possibility of the economy deflating looms large due to a consistent decline in the prices of goods and services. As illustrated by the charts on consumer price index and Y-o-Y Inflation and M3 growth rates on the right, there has been a consistent decline in money supply growth since September 2011 from above 30% to below 5% indicating that liquidity in the local economy has been gradually drying up. This reflects that some banks are fully loaned out and there is no money in the system to loan out to productive sectors. A high concentration of nonperforming loans on the balance sheet of banks is worsening the liquidity problem. Furthermore, as a net importer of manufactured goods the economy is utilising the little hard currency to support consumption (see graph on BOP on the bottom right), thus the growth in money supply has progressively declined and turned negative in November 2013. The continued decline in inflation during the same period indicates a combination of a decline in money supply and the weakening of the South African rand. Although the Minister of Finance Mr. Patrick Chinamasa imposed duty on some imported products the scope for the rand to devalue remains high. In our view, inflation is likely to continue on a downward spiral owing to the weakening of the ZAR against a basket of hard currencies. The weakness on the ZAR as a currency due to domestic and international concerns will put downward strain on the ZAR against other hard currencies and we do not expect a quick recovery on the ZAR. On the other hand the weakening of the ZAR will make South Africa a cost effective production centre compared to Zimbabwe thus companies will have an incentive to continue producing from South Africa than Zimbabwe making the country a net importer of manufactured goods. The unbalanced trade equation between the two countries will be difficult to equalise as long as Zimbabwe is using a currency which is stronger than South Africa where it imports most of its consumables from and the Zimbabwean government does not have the ability to print money to control its currency. Estimates from the IMF indicate that the USD is 15% overvalued in Zimbabwe. Furthermore, the continued absence of foreign direct investment implies that the balance of payment will remain negative at USD 4.0bn by close of fiscal year 2013. Imported inflation remained very low after the ZAR lost ground against major hard currencies, in particular to the United States dollar. According to an Article IV report on Zimbabwe by the IMF, the CPI inflation rate in
102 100 98 96 94 92 90 -5.0% -8.0% 4.0% 1.0% -2.0%

Consumer Price Index

CPI (LHS)

M-o-M (RHS)

y-oy

Source: ZimStats

S o ur ce : I ES ; R BZ ; M in ist r y o f F i na nc e

Source: IES; RBZ; Ministry of Finance

Balance of Payments Accounts 10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000
Exports in USD m Imports in USD m Current Account Balances (USDm)

2009A

2010 A

2011 A

2012 A 2013 Est. 2014 Prj. 2015 Prj.

Source: IES; RBZ; Ministry of Finance

Zimbabwe is highly associated with both the CPI and PPI inflation rates in South Africa with a lag of approximately five months, mostly due to the high share of imports from South Africa. Regression results indicate that a 1percenatge 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. Weak GDP growth forecast for 2014 The economy is estimated to have grown by 3.4% in 2013 from 10.6% realised in 2012 as reflected by the macroeconomic framework table and the nominal GDP and Real GDP growth rates graph. On the other hand the World Bank estimate that the economy grew by 2.2% in 2013 and its expected to grow at 3.3% in 2014. This estimate is dwarfed by the MoF estimate which projects a GDP growth of 6.1% anchored by a sturdy growth in agriculture (+9.0%) and an improved performance in mining (+11.4%) and construction (+11.0%) sectors. Our view is that the World Bank estimates are achievable given the current operating environment and the possibility of deflation. The 2014 Budget will be based on revenues of approximately USD 4.1bn which is about 29.3% of projected nominal GDP (USD 14.0bn). Tax revenues are expected to constitute USD 3.8bn while non-tax revenue will contribute USD 296.0m. The major drive of growth in the agriculture subsector will be tobacco which is expected to grow by 2.6% to 170,000 tonnes after a 15% growth in 2013 as reflected by the GDP growth rates table. This growth is mainly on account of increased planted area of about 90,000ha from the 88,600ha planted in 2013. The number of registered growers increased from 70,904 in the 2012/13 season to 91,278 farmers and indications are that 1,024,000 grammes of tobacco seedlings were sold compared to 802,000 grammes in the prior year. Maize production for the year 2013 stood at 0.8m tonnes versus a target of 1.1m tonnes and the authorities are targeting an ambitious tonnage of 1.3m in 2014. Cotton is targeted to grow by 27.8% to close the year at 178,900 tonnes from a revised output of 140,000 tonnes. The mining sector is expected to grow by 11.4% up from 6.5% recorded in 2013 on the back of a very ambitious beneficiation drive to process minerals locally. Metal prices however are expected to remain stagnate at the current levels. Gold production is projected to grow by 7.1% to 15,000 kgs while platinum is forecast to grow by 8% to 14,000 kgs in 2014. Diamonds production is expected to increase from 11m carats to 12m carats in 2014 and other metals that are expected to record growth include palladium from 9,800kgs to 11,200kgs while Nickel is forecast to grow to 15,020 tonnes in 2014.

Macro-economic framework 2009A 2010 A Nominal GDP level in USDm Real GDP growth (%) World Bank GDP at Mkt Prices(%pa) World Bank Current Acc Bal/GDP(%) Annual inflation (average %) Revenue (Tax and non-tax) Expenditure & Net Lending Revenue as a% of GDP Expenditure as a % of GDP Balance of Payments Accounts Exports in USD m Imports in USD m 1,796.0 3,662.0 3,541.0 5,834.0 4,771.0 8,491.0 4,355.0 7,456.0 4,430.0 5,024.0 7,682.0 8,321.0 5,524.0 8,690.0 8,157.0 5.4 (5.9) (12.2) (7.7) 933.6 966.0 11.4% 11.8% 11.4 9.6 (10.3) 3.0 2,198.2 2,228.0 23.2% 23.6% 2011 A 11.9 9.4 (23.0) 3.5 2,770.4 3,102.0 25.3% 28.3% 2012 A 10.6 4.4 (19.7) 3.8 3,451.8 3,746.0 27.7% 30.0% 2013 Est. 2014 Prj. 2015 Prj. 15,228.0 6.4 3.4 (14.7) 2 4,340.5 4,340.0 28.5% 28.5% 3.4 2.2 (21.9) 1.7 6.1 3.3 (17.6) 1.5 9,457.0 10,956.0 12,472.0 13,099.0 14,065.0

3,722.2 4,120.0 4,057.0 4,120.0 28.4% 31.0% 29.3% 29.3%

Source: IES; RBZ; Ministry of Finance, World Bank

Nominal GDP & Real GDP growth Rate 12 10 8 6 4 2 0 -2 -4 -6 -8

Nominal GDP level in USDm(RHS) Real GDP growth MoF(%pa)

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

World Bank GDP at Mkt Prices(%pa)

2009A

2010 A

2011 A

2012 A

2013 Est. 2014 Prj. 2015 Prj.

S o ur ce : I ES ; R BZ ; M in ist r y o f F i na nc e

GDP Growth Rates 2009 Agric, Hunting and Fishing Mining and quarrying Manufacturing Electricity and water Construction Finance and insurance Real Estate Distr, hotels and Restaurants Transport and Comm GDP at mkt prices 38% 18.90% 17% 1.90% 2.10% 4.50% 2.00% 6.50% 2.20% 5.40% 2010 7.20% 2011 1.40% 2012 2013 EST 2014 Proj 2015 Proj 7.80% 8.00% 5.30% 0.30% -1.30% 6.50% 1.50% 4.30% 2.60% 3.40% 3.40% 3.40% 9.0% 11.4% 3.2% 4.5% 11.0% 6.3% 11.0% 5.1% 4.0% 6.1% 5.1% 9.2% 6.5% 7.0% 13.5% 6.2% 13.5% 5.0% 5.5% 6.4%

37.40% 24.40% 2.00% 13.80% 19.50% 8.30% 8.80% 4.70% 6.40%

14.10% 65.10% 23.50% 10.00% 8.30% 28.00% 4.30% 0.00% 4.30% 6.70% 4.90% 48.90% 59.00% 10.00%

11.40% 11.90% 10.60%

Source: IES; RBZ; Ministry of Finance

Manufacturing sector capacity utilisation remained subdued at approximately 39.6% in 2013 from 44.9% in 2012 and a figure of 40% - 45% is expected in 2014. The sector is projected to grow modestly at 3.2% in 2014 from 1.5% in 2012 driven by growth in foodstuffs, tobacco, drinks and beverages. The manufacturing sector capacity utilisation has stalled due to archaic equipment and obsolete systems which continue to make the subsector uncompetitive compared to imports. This is exacerbated by an acute shortage of long term funding at competitive rates. The proposed Macro-Economic and Budget Framework faces a number of risks inter alia; a poor rainfall season, budget pressures particularly from employment costs, low Foreign Direct Investment due to slow investor response, little progress on the debt resolution and the re-engagement process, lack of clarity on key policies, the Indigenisation and Economic particularly Empowerment programme and slow progress on implementation of key policies. The debt overhang inhibiting borrowing capacity The country has accumulated huge stocks of both external and internal debt with international financial institutions and bilateral creditors. Most of this debt is in arrears and this has negatively impacted the creditworthiness and the ability of the country to access fresh capital. The government in 2010 approved the Zimbabwe Accelerated Arrears Clearance Debt and Development Strategy (ZAADDS) in order to pave the way for negotiating the clearance of arrears and debt relief for the country. One of the key mandates of ZAADDS was to undertake a validation and reconciliation exercise of Zimbabwes public and publicly guaranteed external debt with all creditors as shown in the Multilateral Creditors pie chart on the right. Total external public and publicly guaranteed debt (excluding Reserve Bank and Private sector external debt) as at 31 December 2012, stood at USD 6.1bn (49% of GDP). Of that total external debt, penalty charges accounted for USD 1.03bn (17% of total external debt). As reflected in the table on the Stock of external debt the Debt to GDP ratio is at 49% and Debt to Revenue is at 173% while Debt to exports is at 149%. Although these ratios are high in absolute terms compared with other countries they indicate that the country is not over geared. The major difference with other countries is on arrears where Zimbabwe lags significantly and this is the area where the sovereign credibility is weak. Engagement with both multilateral and bilateral institutions remains paramount to the complete clearance of this economic burden.

Stock of External debt 2011 Total Arrears stock USDm 2,431 92 2,523 565 905 121 255 74 1,921 2012 Total Arrears stock USDm 2,650 102 2,751 582 937 125 268 45 1,960

Paris Club Non-Paris Club Bilateral Creditors AFDB World Bank IMF EIB Others Multilateral Creditors Nominal Debt Indicators (%) Debt/GDP Debt/Revenue Debt/Exports Arrears/Export Arrears/GDP

Debt Inc Total Arrears USDm 2,858 491 3,349 622 1,335 121 293 110 2,481

Debt Inc Total Arrears USDm 3,017 572 3,591 636 1,348 125 302 75 2,487

35 200 130 93 44

49 173 149 10 38

Source: IES; Ministry of Finance

Multilateral Creditors
E.I.B 12% IMF 5% Others 4% AFDB 25%

World Bank 54%

Source: IES; Ministry of Finance

The staff monitored programme extended by another six months to remains the biggest hope of comprehensive engagement with community.

by the IMF was June 2014 and this a complete and the international

Banking sector developments A highly segmented banking sector The banking sector exhibited a two-tiered scenario with those banks that are well capitalised and prudent on lending on the one side and those not well capitalised and more cavalier on lending on the other side. This was given further credence by the absence of a lender of last resort as well as a nonexistent interbank market. To some extent the absence of the lender of last resort did help the banking industry to thrive in a very tight liquidity environment as systemic risk was completely eliminated amongst banks. If the interbank market was active contagion could have easily spread from the affected institutions to other healthier banks. The fortuitous quarantine meant that for the three closed banks exposure to other unrelated financial institutions was virtually zero. Furthermore, the other struggling banks remain in limbo and funding can only be provided by shareholders. The major reasons for these bank failures are persistent vulnerabilities in the financial sector steaming from low level of capital, insufficient liquidity, poor asset quality and related-party exposures, persistent losses and weak corporate governance and internal control deficiencies. However, the reserve bank successfully transferred non-core assets and liabilities to a special purpose debt resolution entity, managed by the Ministry of Finance, in an effort to build capacity to perform its mandate of monetary policy administration effectively. Figures released by the RBZ in November 2013 indicated that banking deposits were estimated at USD 3.8bn an annual decline of 0.46% as shown in the banking sector deposit graph. The nature of deposits remains predominately short-term as reflected by the pie chart: Banking Deposits in November. The report indicated that on a m-o-m basis, broad money declined by USD 144.6m (3.66%) to USD 3.8bn from USD 4.0bn in October 2013. The decline was largely on the back of panic withdrawals experienced in the banking sector. After ZANU PF won the election speculation was rife that the Zim dollar would return and that is why a run on the banks was experienced. Unconfirmed sources speculate that there is a considerable amount of money that left the system during and immediately after the elections estimated at approximately USD 800.0m. Outstanding credit to the private sector amounted to USD 3.5bn, constituting 91% of total deposits as reflected in the credit to private sector November 2013 pie chart.
Banking Sector Deposits, Loans and Advances
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13
Deposits(USD)(LHS) Total loans and advances(USD)(LHS) Loan to Deposit Ratio(LHS)

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Source: IES; RBZ; Ministry of Finance

Banking Sectors Deposits November 2013(%)

10.4 12.7

52.9

24

Savings

Long term

Under 30-days

Demand

Source: IES; RBZ; Ministry of Finance

Source: IES; RBZ; Ministry of Finance

As of November 2013 the major recipients of the loans were agriculture 17.7% (2012:21.7%), distribution 17.6% (2012:20%), manufacturing 15.6% (2012:19.5%) and households 16.1% (2012:13.2%). Although the mining sector is expected to anchor the economy, lending to that sector has remained very limited due to the short term nature of deposits. Credit to the private sector was mainly utilised for asset purchases (44.8%) as well as inventory build-up (33.9%). Loans and advances utilised for fixed investments activity have remained low with the procurement of plant and equipment accounting for 3.31% and pre and post shipment financing at 1.61% of total loans and advances. Level of nonperforming loans at 16% The period under review saw a spike in the level of nonperforming loans from 12.3% to above 16%. According to the IMF the NPL problem is in the worst case one of resolving troubled institutions, and in others, one of addressing underlying weaknesses to allow viable banks to gradually reduce NPL ratios through write-offs, work-outs and growth. Sorting out the NPL situation would improve the capacity of the banks to ensure sustainable growth in private sector credit and enhance financial sector stability. Recent reports from the Bankers Association of Zimbabwe estimates that more than 16% of loans mainly concentrated in six banks are not performing. Although loan origination from weak banks has subsided most banks continue to be haunted by the legacy of imprudent lending at the onset of dollarisation. Indications from the banking sector are that NPLs are actually higher than the reported figure of 16% and are estimated at 20% which is miles ahead of the prudential regional benchmark of 5%. The NPLs are extremely high when compared to the prudential 3% promulgated in the Basel III requirements. In our view, NPLS could rise further given the tight liquidity environment and the huge possibility that the economy can go into deflation. With some banks engaged in the poor practice of continuously rolling over poorly performing assets as a way of hiding NPLs we believe vulnerabilities in the sector remain elevated. 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 they continue to be rolled over. The planned re-introduction of the interbank market as well as the recapitalisation of the Central Bank are welcome developments as these are expected to ease the liquidity constraints. Nonetheless, we are still to see the modalities of the proposed USD 100.0m interbank market to be guaranteed by Afreximbank. Our initial view is that an injection of new money is unlikely under the programme in which case the liquidity woes are unlikely to subside. Furthermore, the 5 year TBs at 5% p.a. to be issued for the RBZ debt are expected to ease the liquidity crunch depending on acceptance. Government finances According to the 2014 MoF budget, revenue was estimated at USD 3.4bn in November and was expected to have reached USD 3.72bn by December 2013, slightly below the original budget estimate of UISD 3.86bn. The budget experienced a number of shocks from unbudgeted but inescapable programmes such as the referendum and the election against very low revenue inflow especially in the second half of the year. Unlike the previous year the revenue target of USD 3.9bn was not revised significantly indicating that the economy largely performed to expectations. Tax and non-tax revenue were expected to close the year at USD 3.6bn and USD 0.2m respectively. The negative variance of 1% on the budget could have been higher had it not been offset by the once-off unbudgeted non-tax collections from the renewal of licence fees from mobile telecommunication companies, whose business licences generated USD 145.5m (Econet alone paid USD 137m). Of the USD 61.0m target revenue from diamonds nothing was received from this sector compared to USD 84.2m received in 2012. Tax revenues which are directly linked to the performance of the economy performed below the target for most of the period under review, reflecting the overall economic slowdown. Tax revenue of USD 3.01bn were collected against a target of USD 3.21bn. For the period to November 2013, recurrent expenditure was estimated at USD 2.43bn from an initial estimate of USD 2.28bn representing 68.9% of the budget a slight improvement on 2012s 70% and 80% in 2011. The expenditure composition remains skewed towards recurrent expenditure at 69% contrary to best practice of allocating 30% of total revenue to recurrent expenditure. The overrun in recurrent expenditure is a result of the planned cost of living review affected in January 2013. The cash budget continued to reflect a cash deficit during the year which increased domestic arrears accumulation and the position was worsened by an increase in employee allowances and unbudgeted recruitment. Fiscal stress was aggravated by underperforming diamond revenues during the year.

Unsustainable reserve levels of 0.3 months In a hard currency economy, reserves are not only insurance against external shocks, but also a key tool for managing domestic financial instability. Thus an import cover of only 0.3 months indicates that the country is vulnerable to vacillations in import price movements especially in the event of a currency shortage. With low liquid assets of its own, the RBZ can provide only limited short-term liquidity to banks, and cannot be the ultimate guarantor of the stability of the financial and payments systems in the event of a systemic bank run. Political Outlook in 2014 After a prolonged period of haggling the principles to Zimbabwes Global Political Agreement (GPA)-ZANU PF, MDC-T and MDC agreed on a new constitution on 17 January 2013. The final draft of the constitution was tabled in Parliament on 6 February 2013. A constitutional referendum was subsequently held on 16 March, with an overwhelming majority of the votes supporting adoption of the new constitution. After the referendum the draft constitution went back to Parliament as the Constitutional Bill and was passed by the House of Assembly on 14 May and by the Senate on 15 May. This paved the way for the holding of harmonised elections in July 2013. The cost of the constitution was close to USD 53m, while the elections cost USD 125.4m. The funding for the elections was mainly from internal resources including an increase in excise duty on fuel by USD 0.05/litre for a period of 10 months, USD 40.0m in one year treasury bills to domestic non-bank financial institution as well as revenue from mobile phone operating licence fees. After a largely credible and peaceful harmonised election in July 2013 ZANU PF won a clear mandate to govern for the next five years. The party won clear majorities in parliament and the senate with more than two thirds majorities, giving the party the power to effect legislation in the country. Furthermore, the party also won the presidential race and its candidate Robert Mugabe was sworn-in in August 2013 for the next five years with a possibility of re-election in 2018 in accordance with the new constitution. The message from government has largely been positive and courteous. The IMF staff monitored programme is ongoing and avenues to engage with the international community are being explored. Concerns however remain on the political will to rein in fiscal indiscipline, tolerance of dissenting voices, freedom of expression and association as well as respect for property rights.
2013 Contribution to revenue
Excise Duties 7% Other Taxes 3% Non-tax Revenue 6%

Individualls 15%

Customs Duty 26% VAT 39%

Companies 4%

Source: IES; IMF Article IV

International Resrves (months of prospective imports)

Botswana

15.9

Lesotho

4.8

South Africa

4.7

Zimbabwe 0

0.3 5 10 15 20

Source: IES; IMF Article IV

International Reserves
400 350 300 250 200 150 100 50 0 2009 2010 2011 2012 2013 2014
Usable International reserves(USDm)(LHS) Months of imports (RHS)

1.40 1.20 1.20 1.00 0.80 0.60 0.50 0.40 0.30 0.20 0.40 0.40 0.20 0.00

Source: IES; IMF Article IV

Equities market developments The industrial index recorded a remarkable gain of 32.6% during the 2013 period to close the year at 202.12 points. This solid performance was anchored on significant foreign trading as evidence by a total of USD 291m shares bought and USD 195m shares sold. Total turnover for the entire bourse came in at USD 486m for the year. Foreign participation was solid because of two fundamentally important issues, firstly the local bourse and the economy is hard currency denominated (USD mainly) and this eliminated exchange losses associated with investing in frontier markets and secondly quantitative easing (QE) in the United States had a positive effect on frontier market including the ZSE. The effect of QE can be substantiated by the fact that all bourses in Africa, barring South Africa, were positive in real terms during 2013 a clear indication that a large chunk of the cash injected into these developed economies found its way onto global equity markets as portfolio investment. Sectors that performed relatively better in 2013 include the FMCG, food retail, Agro-Industrials, telecoms and beverages. A total of 10 companies were delisted from the bourse and two were suspended during 2013. 2014 Equity Outlook Going forward we expect the bourse to be largely defensive in 2013 owing to the ongoing tapering in the USA. This will impact the Zimbabwean economy in two ways. Firstly there is the inescapable fact that there will be reduced portfolio inflows on the ZSE and secondly the reduction in QE will make the USD appreciate against any other currency which will further erode our manufacturing competitiveness. Assuming a deflationary environment in 2014 companies that are expected to do well are those with strong cash generating capacity, low gearing and most importantly a skilled management team. With demand expected to weaken, liquidity to tighten, currency to appreciate and international interest rates to rise it will be heinous to invest in a highly leveraged company because the prospect of financial distress are high. Telecoms, brewers, agro-based manufactures and selected defensive FMCG will do admirably well in a defensive strategy geared towards value preservation compared to growth. We urge investors to stay clear of the banks, manufacturing and mining counters due to high capital demands in these sectors as well as deep rooted concerns of technological obsolescence in the current state of operations. Indications on the ground are pointing towards a very difficult year from both the fiscal performance and private sector participation. Unfortunately we expect more companies to file for judicial management and some will be liquidated as the inescapable effects of deflation bite.

2013 in Chartes
ZSE 2013 Volume Traded 350 300 250
Millions

200 150 100 50 0 31-Dec-12 28-Feb-13 30-Apr-13 30-Jun-13 31-Aug-13 31-Oct-13 31-Dec-13

Source: IES; ZSE

ZSE Value Traded USD
16.00 14.00 12.00 10.00
Millions($)

8.00 6.00 4.00 2.00 0.00 31-Dec-12 28-Feb-13 30-Apr-13 30-Jun-13 31-Aug-13 31-Oct-13 31-Dec-

Source: IES; ZSE

10.00 8.00 6.00 4.00 2.00 0.00

Net Foreign Value Traded USD

Millions

31-Dec-12

02-Dec-13

06-May-13

27-May-13

-2.00 -4.00

Source: IES; ZSE

ZSE Market Cap USD 7.00 6.00 5.00 4.00
Billions

3.00 2.00 1.00 0.00

Source: IES; ZSE

11-Nov-13

23-Dec-13

21-Jan-13

15-Apr-13

17-Jun-13

04-Mar-13

11-Feb-13

25-Mar-13

19-Aug-13

30-Sep-13

09-Sep-13

08-Jul-13

29-Jul-13

21-Oct-13

2014 Picks
Buy Recommendations PER Hist. Afdis 37.7 +1 15.6 PBV Hist. 5.6 +1 4.1 Market Cap IES Fair (USDm) Value (USDm) 31.12.13 28.6 Updated recommendation

44.5 Dominant market share in the spirits mass market which has high growth potential. Increasing volumes and efficiencies keeping competitive pricing especially after rights issue

BATZ

47.3

16.0

43.8

13.8

247.6

309.0 Dominant generation.

market

share.

Strong

cash policy.

Generous

dividend

Impressive RoaE and RoaA. Delta 15.6 12.5 5.3 4.4 1,731.1 2,098.6 Pristine balance sheet, strong cashflows and solid brands. Virtually a monopoly. Volume traction likely to be maintained. Econet 7.7 4.1 2.0 1.5 984.0 1,124.8 Undemanding ratings. Dominant market share and significant growth potential in the sector. Head start over other players in terms of penetration data. issues are a concern. Innscor 11.1 10.6 2.9 2.4 433.3 547.0 Perenial perfomer. Defensive businesses with attractive medium to long-term prospects. Strong cash generation. Mash Holdings 14.9 12.8 0.6 0.6 60.4 62.5 Diversified property portfolio. Improving average rentals per square metre and rental yields.Trading at a discount to property value National Foods 10.2 8.7 2.4 2.0 141.9 and replacement cost. company with dominant brands across FMCG 164.5 defensive food products like mealie meal and flour. OK Zimbabwe 18.7 13.0 3.3 2.7 230.9 Strong management and strategic partners from parent companies. 259.2 Defensive food business and extensive branch network. Improving disposable incomes expected to support earnings growth Padenga 8.0 7.5 0.8 0.8 43.3 69.7 Renowned for large premium quality skins production. Seed Co 20.2 10.7 2.1 2.0 175.4 Opportunities to extend into production of alligators and saltwater 237.3 Dominant market share (80%) of the local hybrid seed maize. Huge demand for seed in the region. We are confident on future performance and believe shareholders will be richly rewarded.Exposure can be get through AICO after the consummation of the impending transctions TSL 25.0 18.4 1.4 1.3 138.9 154.6 Strong balance sheet. Good asset play. Volumes improving at Bak Logistics. Energetic and skilled management Nonetheless, governance

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Ones to watch PER Hist. CBZH 2.4 +1 2.0 PBV Hist. 0.6 +1 0.5 Market Cap 31.12.13 102.7 123.1 Well capitalised. Largest banking group in Zimbabwe by all metrices. Receding asset quality pressures quality given the increasing tenure. Colcom 28.8 16.0 14.9 0.1 39.8 51.2 Strong brand equity that is supporterd by a track record of product excellence. Product reengineering and reposition was done in 2013. Rolling out of new products underway Dairibord 42.0 na 1.7 1.0 56.4 64.4 A victim of intense competition from the region. Management has failed to retool the company in time however there is basis for a recovery given the right skills at the top. FBCH 6.2 5.4 0.7 0.6 89.7 96.8 A well run financial instituation, very liquid and very minimum NPLs. A highly conservative and prudent management with vast experience in the local banking industry. Hippo 14.5 12.5 0.9 0.9 173.8 222.0 High Hulett. Lafarge 14.9 12.5 2.6 2.1 88.0 93.6 Demand for cement remains strong. Improving efficiencies to result in improved margins. Meikles 15.6 12.7 3.0 2.7 45.8 65.9 Unbundling of retail operations and the cash generative abilities, sound IES USD Fair Updated recommendation (USDm) Value (USDm)

management. Technical support from Tongaat

agricultural concern could unlock value for shareholders. Supermarkets are recovering well and hotels are profitable. Group has strong defensive characteristics and solid market position. Truworths 13.6 11.0 2.3 2.0 16.1 19.8 Truworths entered into an agreement with CABS whereby the bank wil buy recievables from Truwothrs at discount. This has made Truworths a very liquid reatiler and prospects for growing retain sales is high. However the company is very prudent on credit extension. Turnall 350.2 18.9 1.4 0.8 25.9 35.2 Turnall dominates the local low cost housing market holding 80% of the local roofing market and processes 60% to 70% of Zimbabwes roofing and piping products

11

Sell /Take Profit Recommendations PER Hist G/Beltings na +1 na PBV Hist 0.0 +1 0.0 Market Cap IES USD Fair (USDm) Value (USDm) 31.12.11 0.4 Updated recommendation

na Weak financial position will adversely affect group future prospects.

Pelhams

0.0

0.0

0.3

0.2

1.0

na Low

disposable

incomes.

Limited

credit

facilities for high ticket goods. TA Holdings 4.4 2.4 0.3 0.3 9.9 na Agro-chemicval Substantial technology. Zeco na na 0.0 0.0 0.1 na Undercapitalised businesses. Company unlikely to see much growth with troughs outweighing peaks. investments continue for to new

haemorrage the group on oudated technology. investment required

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NOTES

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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 2014

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