Zimbabwe Equity Strategy

31 October 2019

Hanging on by a thread…

www.ihsecurities.com
 Zimbabwe Equity Strategy
31 October 2019

The Economy

2
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Global Economic Outlook 31 October 2019

Sluggish Global Growth

• The IMF anticipates that the global economy will grow by 3.0% in 2019 and 3.4% in 2020. • According to the World Bank, crude oil prices are expected to be valued at an average
of US$64/barrel in the second half of 2019 and US$65/barrel in 2020.
• Global growth remains subdued against a difficult backdrop that includes intensifying US-
China trade and technology tensions, as well as prolonged uncertainty on Brexit. • The marginal revision of oil price prediction is due to the lower than expected global
growth outlook and higher than expected US oil production.
• GDP releases, so far this year, together with generally softening inflation, point to weaker-
than-anticipated global activity. • Metal prices are expected to continue their recovery during the remainder of 2019,
and average 2% lower compared to 2018.
• Worsening trade relations between the USA and China severely buffeted emerging and
frontier markets, leading to a significant slump in most SSA markets. • Supported by higher expectations of an interest rate cut by the US Federal Reserve, a
breakdown in trade negotiations between the US and China, and strong demand from
• Investment and demand for consumer durables have been subdued across advanced
emerging market central banks, gold prices are forecast to increase by 3.2% in 2019,
and emerging market economies as firms and households continue to hold back on long-
ending the year above US$1,300/ounce.
term spending.
• The World Bank predicts agriculture commodity prices to decline 3% in 2019 and
• The projected growth pickup in 2020 is precarious, presuming stabilization in currently
increase 2% in 2020, on the back of lower production and higher fertiliser prices.
stressed emerging market and developing economies and progress toward resolving
trade policy differences.

4.6%
4.5%
3.9%
3.6% 3.4%
3.0%
2.3%
1.7% 1.7%

2018 2019 2020 2018 2019 2020 2018 2019 2020

Global Economy Growth Emerging Markets & Developing Advanced Economies Growth
Economies Growth
Source: IMF WEO 3
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
SSA Economic Outlook 31 October 2019

Zimbabwe’s Economy Lags Behind SSA Peers

Sub-Saharan Africa 12% 50%

Zim Agri, Mining and Manufacturing growth

10%
• Growth is expected at 3.2% in 2019, as strong growth in many non-resource intensive 40%
countries partially offsets the lacklustre performance of the region’s largest economies. 8%

Annual GDP Growth

6% 30%
• Higher and volatile oil prices affect the 2019 outlook for Angola, whose economy is
anticipated to contract 0.3%, Nigeria, which is anticipated to grow 2.3% and other oil- 4%
20%
exporting countries in the region. 2%
10%
• Growth in South Africa is expected at a more subdued pace of 0.7% in 2019, reflecting a 0%
2011 2012E 2013 2014E 2015 2016 2017 2018 2019P
larger than anticipated impact of strike activity, energy supply issues in mining and weak -2% 0%
agricultural production. -4%
-10%
• Malawi’s economy is forecasted to improve by 4.5% in 2019, boosted by improved -6%
agricultural production and rebuilding of infrastructure damaged by Cyclone Idai. -8% -20%
Zim Agriculture (RHS) Zim Mining (RHS)
Zimbabwe Zim Manufacturing (RHS) Emerging & developing economies
Sub-Saharan Africa Zimbabwe
• The IMF anticipates that the economy will contract 7.1% as the significant consolidation of
the impact of the drought and the cyclone drag down economic activity. The IMF’s forecast
is less optimistic than the Zimbabwean government predictions which estimates that the
economy will contract by 6.5% in 2019.
• Mining disruptions, including electricity outages and shortages of diesel to power 3.6%
3.5%
generators, are ongoing.
3.2% 3.2%
• While for agriculture, normal, but late, rains will at least partially offset the erratic weather -7.1% 2.7%
effects of the El Niño and input shortages in 2019.
• A rebound in economic activity is expected in 2020 and over the medium term, as
uncertainty declines, distortions from multiple exchange rates are removed, and relations 2018 2019 2020 2018 2019 2020
with external creditors normalize. SSA Growth Zimbabwe Growth

Source: IMF WEO & SMP 4

A MEMBER OF THE ZIMBABWE STOCK EXCHANGE

Economic Sector Overview
Agriculture Sector
• The government anticipates that the sector will contract 16.3% in 2019 attributed to
unfavourable weather conditions, exacerbated by the occurrence of Cyclone Idai
• Agriculture export volumes for 1H19, excluding tobacco and horticulture, declined
59.6%. Horticulture exports diminished 18.1%, whilst tobacco exports grew 38.0%.
• Tobacco volumes breached 2018’s record of 252mn kgs, resulting in a total
production of 258mn kgs in 2019.
• Depressed outlook for maize, livestock, cotton, groundnuts, wheat and sorghum, as
government anticipates a decline in production in 2019, on the back of production
challenges faced by the sector.
• The sector was allocated $4.4bn in the revised budget.
Manufacturing Sector
• The government estimates that the sector will contract -4.3% in 2019, attributed to a
depreciating local currency, foreign currency shortages and high costs of
production.
• Resuscitating the manufacturing sector is imperative to production, as productivity is
the cornerstone for growth.
• It is estimated that full revival of the sector requires approximately $2bn.
• Capacity utilisation estimated at 48% in 2018, is forecast to fall below 40% in 2019,
owing to the drought, power outages and foreign currency shortages.
• Exports for 1H19 improved 20.1% to $127.9mn from $106.5mn in 1H18.
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
Zimbabwe Equity Strategy
31 October 2019
Mining Sector
• The government predicts that the sector will contract 12.3% in 2019.
• Exports for 1H19 declined 14.3% to US$1.3bn from US$1.5bn in 1H18.
• Gold deliveries for 1H19 declined 40.6% to 12.3 tonnes. Government forecasts a
20% reduction in FY19 production to 28.0 tonnes from 35.1 tonnes.
• Diamond production is anticipated to increase from 3.3mn carats in 2018 to 4.1mn
carats in 2019.
• Chrome production is forecast at 2.0mn tonnes from 1.8mn tonnes in FY18.
• Mineral exports will play a significant role in reducing the 2019 trade deficit.
• The mining industry was allocated $25.0mn in the revised budget.
Tourism Sector
• This industry remains a low hanging fruit for exploration to generate the much-
needed foreign currency for the economy.
• Total annual tourist arrivals in 2018 were estimated at 2.6mn, however it is
expected to decline to 2.4mn in 2019, whilst a recovery to 2.5mn tourists is
anticipated in 2020.
• Economic unrest, access to local currency and diminishing disposable income is
anticipated to dampen both local and international tourism in 2019.
• In the revised budget, the environment, tourism and hospitality industry was
allocated $119.4mn.
5
 Zimbabwe Equity Strategy
Economic Sector Overview 31 October 2019

Agriculture Sector Overview

• The sector contributes circa 11% to annual GDP and supplies 60% of the raw materials required by the industrial sector.
Output (tonnes) 2017 2018 2019E (Gov)
• Cognisant of the drought and the need to revive the sector, government has extended support towards the sector whilst
encouraging the private sector to play a more pivotal role. In the 2019 Mid-Term Budget Review $1.7bn was set aside Tobacco 190,000 252,000 *258,000
3.3%
for support of strategic crops of grain, soyabean and cotton under their respective programmes., resulting in a total Maize 2,155,000 1,831,000 777,000
budget allocation of $4.4bn for 2019 for the sector. Beef 72,000 74,500 70,000
• Government is targeting 2.3mn hectares for the 2019/20 summer cropping season, while at least 1.6mn households will Cotton 75,000 144,000 85,000
benefit from the free Presidential Inputs Scheme. Banks supporting Command Agriculture programme will no longer
require collateral from farmers who intend to access loans, as the verification, vetting and contracting for production Sugar Cane 4,350,000 3,903,000 4,720,000
would be done by the Ministry of Lands, Agriculture, Water, Climate and Rural Resettlement. Horticulture 70,000 71,000 77,390
• The Ministry of Finance has stated that it will provide fiscal incentives to investors who participate in key and strategic Poultry 134,500 166,000 167,000
areas of the agricultural sector. The incentives will be accessed by investors involved in production of cash crops, Groundnuts 139,000 127,000 70,900
strategic crops, farm mechanisation, horticulture, upgrading of agricultural equipment, livestock and agro-processing,
Wheat 160,000 161,000 109,000
irrigation as well as contract farming.
• Tobacco volumes surpassed government expectation and last year’s record of 252mn kgs, resulting in total production Dairy (000s litres) 83,000 92,000 96,000
of 258mn kgs during 2018/19. Contrastingly, average prices dipped 46.0% to US$2.92/kg, the worst price in four years, Coffee 500 600 500
resulting in total sales declining to US$524mn from US$737mn in the prior season. Soyabeans 36,000 54,000 60,000
• Forecasts for this year’s maize harvest is 57.6% lower at 777k tonnes compared to 1.8mn tonnes achieved in 2018 and Tea 19,000 20,000 38,000
below national grain requirements of 1.8mn tonnes. Circa 800k tonnes of maize will need to be imported to ease
Paprika 8,000 8,000 8,000
famine, with Tanzania agreeing to supply 100k tonnes worth of maize to cover the deficit. In the 2019 Mid-Year Budget,
government has set aside $624mn for maize requirements up to the end of 2019. Pork 10,000 11,400 11,000
• Wheat production is anticipated to decline 32.3% to 109k tonnes from 161k tonnes in the prior year. Consequently, Wildlife 32,000 33,000 33,000
wheat will need to be imported to meet the national demand of circa 400k tonnes. Sorghum 182,000 70,100 41,400
• Beef slaughters for 1Q19 declined 13% to 57.6k attributed to uncertainty and volatility regarding prices, as well as Barley 15,000 33,400 40,000
increased cost of animal protein. Buying prices have been characterised by prices quoted in USD and paid via ZWL$ at
Sheep & Goats 8,700 9,200 12,000
the prevailing rate, a situation that has caused rising prices in ZWL$ terms.
• Milk production for 1Q19 increased 14% to 19.4mn litres, against an annual demand of 120mn litres. To boost Sunflower Seeds 10,300 3,700 8,000
production government has partnered with the private sector to attempt to grow the dairy herd to 30k by 2022, as it has Ostriches 19,000 19,000 19,000
fallen below 25k in recent years. * Actual tobacco volumes achieved during the 2018/19 season.

Source: Ministry of Finance and Economic Development 6

A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Economic Sector Overview 31 October 2019

Mining Sector Overview

• The mining industry remains a sector with great potential to anchor the economy, contributing between 12-15% to Output 2017 2018 2019E (Gov)
annual GDP. During the 1H19, the sector generated US$1.3bn, 68% of the US$1.9bn export receipts earned. Black Granite (000 tonnes) 177 213 184
• The re-introduction of the ZWL$ is likely to impact gold production, as historical trends indicate that gold is highly Chrome (000 tonnes) 1,674 1,756 2,000
3.3%
currency elastic and any currency weakening tendencies are met by a production decline. Gold production for the first Coal (000 tonnes) 3,074 3,348 2,000
nine months of 2019 declined 26.6% to 20.63 tonnes from 28.09 tonnes in 2018. The government predicts that gold Cobalt (000 tonnes) 445 402 520
production will decline to 28.0k kgs in 2019 from the 35.1k kgs achieved in 2018.
Copper (tonnes) 8,839 9,076 9,700
• Globally, platinum demand is expected to increase by 8% in 2019, owing to a strong increase in investment demand
Gold (kgs) 26,495 35,054 28,000
while supply is expected to rise by 4% this year. However, Zimplats, Zimbabwe’s largest platinum producer, recorded a
Graphite (000 tonnes) 1,577 1,577 5,800
36.1% slump in production volumes for the first 8 months, due to rising inflation, electricity outages and foreign currency
Nickel (tonnes) 16,617 17,810 16,000
shortages. Government estimates that platinum production will increase to 15k kgs from 14.7k kgs achieved in 2018.
Palladium (kgs) 11,822 12,094 12,000
• Diamond production is estimated to increase to 4.1k carats from 3.3k carats reported in the prior year. However, the US
Phosphate (tonnes) 60,094 51,393 61,000
government recently banned imports of rough diamonds from Zimbabwe over concerns that forced labour was being
Platinum (kgs) 14,257 14,703 15,000
used in the mines. It is our view that if the resource is explored and mined extensively, legally and under globally
accepted conditions, Zimbabwe has the potential to be a major player in global diamond production. Rhodium (kgs) 1,283 1,334 1,500
• Growth in the medium to long term hinges on the ability to attract investment into current and new projects, as well as Ruthenium (kgs) 1,102 1,155 1,200
infrastructure. Investment of $5-7bn is required to grow the sector as follows: platinum 40%, gold 33%, diamonds 11%, Diamonds (000 carats) 2,508 3,252 4,100
coal 8%, chrome 4% and nickel 4%.
• Russian diamond miner Alrosa has entered into a joint venture (JV) agreement with the Zimbabwe Consolidated Output Jan-19 Feb-19 Mar-19 Apr-19 May-19 Total
Diamond Company (ZCDC) to develop diamond deposits in Zimbabwe. Alrosa will hold a 70% controlling stake for the Gold (kgs) 1,927 2,274 2,764 2,280 2,323 11,568
development of greenfield projects, while ZCDC will own the balance. Additionally, London-listed Vast Resources is Platinum (kgs) 1,218 1,053 1,146 1,182 1,289 5,888
expected to sign a JV agreement with ZCDC to prospect and mine diamonds. These companies join the Chinese firm Paladium (kgs) 1,008 871 946 977 1,073 4,876
Anjin Investments, who was relicensed to extract gems. Additionally, the government has signed a Memorandum of Diamonds (carats) 67 59 63 66 73 329
Understand with Rwanda, that will see the two countries cooperating and exchanging experiences from the extractive Chrome (tonnes) 108,847 138,401 172,238 112,299 99,548 631,334
industries to develop their respective mining sectors.
Nickel (tonnes) 1,495 1,427 1,499 927 1,582 6,930
• Production in 2019 is anticipated to be hindered by the erratic power supply and consequently fuel shortages. Blanket
Copper (tonnes) 738 659 729 773 823 3,722
Mine failed to meet its 1Q19 intended production target due to unstable power supply, whilst small-scale miners’
operations have been reduced to margins between 70-80%, evidenced by the reduction in gold output. Coal (tonnes) 126,793 130,182 117,778 237,716 233,314 845,783
• Low retention ratios, is also a cause for concern in this challenging economic environment, as miners may either Phosphate (tonnes) 2,551 4,647 3,938 4,200 2,870 18,206
suspend operations or seek ways to sell their minerals outside Zimbabwe and without government involvement Lithium (tonnes) 4,821 4,853 6,163 5,526 5,703 27,066

Source: Ministry of Finance and Economic Development 7

A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Economic Sector Overview 31 October 2019

Consumer Sector Overview

Incomes lag behind skyrocketing basic commodities, eroding purchasing power of disposable incomes Zimbabwe Annual & Monthly Inflation Rates Jan 18 – Sep
▪ Inflation is at its highest post-dollarization although the economy is in a recessionary period. Official inflation stood at 300 45
17.72% in September 2019 implying a y-o-y figure of 353.33% vs 5.39% in September 2018. 40
250 3.3% 35
▪ Hard currency shortages and elevated parallel rate premiums, which seem to have found a new resistance level around
200 30
the 1:19-20 mark, have applied severe pressure to local corporates, typically net importers of raw materials, whose 25
access to forex on the interbank is restricted. 150 20

%
▪ Zimbabwe’s poverty datum line was $1,827 in August, having jumped 13% in July as the cost of living continues to rise. 15
100
▪ Inflation will increase further due to the recent 320% electricity tariff hike amidst acute power cuts, further exposing 10
industries to forever adjusting fuel prices. The IMF expects Zimbabwe’s inflation to average 162.9% in 2020 from 50 5
205.5% this year. 0
0 -5
▪ Salaries are still lagging costs which are pegged in real terms despite a 100% review of the tax-free threshold to $700

Jan-18

Jun-18
Jul-18

Jan-19

Jun-19
Jul-19
Apr-18

Oct-18

Apr-19
Aug-18
Sep-18

Nov-18
Dec-18

Aug-19
Sep-19
Feb-18
Mar-18

Feb-19
Mar-19
May-18

May-19
from $350.
▪ Government in August offered a 76% salary hike to its workers which they grudgingly accepted, but since the
introduction of the Zim dollar this year, that will see the lowest paid worker earning $1,023 up from $582. y-o-y inflation m-o-m inflation

Could austerity lead to long-term prosperity for corporates and households? Changes in Commodity Prices
▪ Monetary reforms to address the distortions created by past policies have created a dislocation of real incomes, capital Price $
and returns with living costs ballooning.
Commodity Quantity Jun-18 Oct-19 % change
▪ Although monetary and fiscal policy reforms are expected to yield results in the near to medium-term, the new policies
Maize meal 10kg 4.80 68.60 1329%
have led to a depreciation of the local ‘RTGS’ dollar and a contractionary effect on consumption.
▪ We expect a significant drop in sales volumes and a squeeze in margins as the cost of raw material fluctuates on the Bread 1 loaf 0.90 15.75 1650%
account of an unstable Zimbabwe dollar. Cooking oil 2L 3.20 49.99 1462%
▪ Food retail is the most significant component of the consumer sector, with more than 30% of total annual consumption Sugar 2kg 2.35 29.09 1138%
expenditure, compared to 19% in South Africa, or 10% in the UK, being spent on food and groceries, with staples
Milk 1L 1.35 14.89 1003%
(particularly maize meal, bread and sugar) being the most popular food items. The government sanctioned hikes for fuel
prices to curb demand and assuage its foreign currency obligation, despite at least 80% of the industrial sector being Jade soap 1tablet 0.99 15.39 1455%
depended ton fuel production amidst 16-hour long power cuts, particularly mining and agriculture. Betterbuy rice 2kg 2.55 39.89 1464%
▪ A decline in production in the mining and agriculture sectors will dampen demand for personal consumption. The Beef 1kg 6.70 100.00 1393%
economy is expected to contract by 18% in 2019 and 12.9% in 2020, according to the EIU. Salt 1kg 0.57 9.99 1653%

8
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Economic Sector Overview 31 October 2019

Financial Sector Overview

• The minimum capital requirements for banking institutions were revised upwards to ZWL$200mn, required by the end of Inflation & Weighted Corporate Lending Rates (%)
2020. This is in line with the RBZ’s mandate of maintaining stability within the financial sector. However, it is in our view, 200 7.8
that on the back of the upward trend in the interbank market rate, the minimum capital requirements will not be sufficient to
cover the banks’ risk profiles, and we anticipate that this figure may need to be reviewed upwards if the current economic 160 3.3% 7.6
dynamics persist, otherwise lending will continue to remain constrained.
120 7.4
• The RBZ has revised its overnight borrowing rate from 50% to 70% on the back of a depreciating currency and inflationary
environment. In response to the increase, the banking sector may be forced to further raise interest rates above the current 80 7.2
average of 30%. Naturally, this will create pressure on finance costs for corporates currently facing falling volumes against
lower disposable incomes and a more price sensitive consumer. We believe that the RBZ’s adjustment to the overnight 40 7
window in line with inflation trends will likely result in depressed demand for lines of credit and thus low production.
0 6.8
• Floating of the ZWL$ against the US$ has created a mismatch between foreign currency denominated assets and
liabilities on some bank balance sheets, due to the translation of foreign denominated assets at the interbank rate. Based
on most institutions 1H19 results, there was a major increase in core capital largely sustained by increase in property
revaluations and exchange gains. However, the nominal increase in capital through non-monetary increase in asset values y-o-y Weighted corporate lending rates
does not translate to an increase in liquidity or lending capacity.
• Banks have shifted their focus to growing non-funded income, as the mismatch between lending rates and inflation Commercial Bank’s Capitalisation Levels
continues to widen due to run-away inflation. Banks have started to leverage on technology to grow the non-funded 450
income contribution, shifting from traditional banking will initially result in significant capital outlays for the banks that are 400
yet to migrate to technology driven banking models. 350
• The increase in profits and returns due to fair value adjustments and exchange gains pose multiple risks to ROEs in the 300
short term whilst COE remains elevated. For the 1H19 results, there was an increase in ROEs, elevating valuations for 250
most listed banks, however, it is anticipated to normalise after the non-funded income regularises in the subsequent years. 200
150
• Issuance of new notes and coins will not have a significant impact on money supply in the medium to long term as the
100
central bank has already indicated that M1 money supply will range between 10%-15% of the total money supply. We 50
anticipate that the new notes would be drip fed into the system, whilst the RBZ collects and offsets old notes and coins 0
with the new ones. New notes will in the short-term bring money circulation into the formal market as both formal and
informal traders will have to resort to using for formal channels to access the new fiat money. Resultantly, money supply
does not materially change, however the velocity of money is expected to grow as the money circulating in the informal
sector makes its way back to the formal sector. FY18 1H19 2020 prescibed minimum

Source: RBZ 9
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
2019 Economic Growth Analysis 31 October 2019

Sector Bear Case Base Case Bull Case

Agriculture Growth -19.7%
Downside is the El Nino drought and Cyclone Idai
that was experienced during the 2018/19 farming
Underlying
season causing damage to majority of the
Assumptions
country’s crops and reserves. Currency retention
and exchange rates remain an issue.
Mining Growth -16.8%
Assuming a reduction in output in key minerals
Underlying owing to the challenging operating environment.
Assumptions Sector growth maintained by increased chrome
production.
Manufacturing Growth -7.3%
Deteriorating economy with rampant inflation
continues to hinder production. Sector to continue
Underlying
to be affected by liquidity challenges particularly
Assumptions
as companies continue to import raw materials.
Policy inconsistencies remain an issue.
-18.0%
Reduction in maize production due to the drought
and damage caused by the cyclone and fall
armyworm. Cotton production up due to
government support and its drought-tolerant
nature.
-14.9%
Sector expected to maintain upward trajectory with
growth backed by increased production in chrome,
gold, platinum and diamonds. We expect the
increase in forex retention limits to have a positive
impact on production as well.
-5.8%
Inflation rate to subside. Growth expected from
government’s protection however, downside risk
from forex challenges.
-16.3%
Sector supported by the successful
implementation of the TSP launched by the MoF
which will avail quick-win investment opportunities
for realisation of self-sufficiency and food
surpluses. The growth of the sector is also
premised on favourable weather conditions.
Assumes maize production up 12%, cotton
production up 54% and tobacco production up 2%.
-12.3%
Assumes strong performance across the industry.
Downside risk will be the expected fall in gold
prices.
-4.3%
Growth based on improved agro processing value
chains in foodstuffs, drinks and ginning, also aid
supportive import management measures.
Government is working on an incentive framework
to strengthen the backward and forward linkages
between manufacturing and other sectors.

Economic Growth -14.6% -12.9% -6.5%

10
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Fiscal Position 31 October 2019

Revenue Collections Surpass Targets

• Revenue collections maintained a robust positive trajectory with collections surpassing • Resultantly, the mid-year review projects revenue collections of $14.1bn (tax revenue
targets both on gross and net positions, regardless of the challenging operating accounting for 90.7%) against anticipated total expenditures of $18.6bn, creating a
environment. Collections on all the revenue heads except Carbon Tax grew during the 3.3%
fiscal deficit of $4.6bn, compared to the previous budget’s projections of total revenue
first half of 2019 as compared to the same period in 2018. amounting to $6.6bn, total expenditures of $8.2bn and a resultant deficit of $1.6bn.
• Gross collections for the 1H19 were $5.3bn against the targeted $4.3bn, surpassing • We anticipate that the total expenditure will outpace the forecasted expenditure as the
the set target by 22.8%. After deducting refunds of $211.5mn for 1H19, net collections inflationary pressures continue to plague the economy and pressures to adjust the civil
of $5.1bn surpassed the target of $4.3bn by 17.8%. Gross Collections grew by service wage bill continue to increase.
118.71% from $2.4bn collected during 1H18. Similarly, net collections recorded a
growth of 118.92% from $2.3bn that was collected in the same period in 2018.
Revenue Collection $mn
• Positive performance is attributed to the significant contributions from Excise Duty, 2%
IMT tax, Individuals Tax, Value Added Tax and Company Tax. This has been bolstered 1,400
by the Authority’s revenue enhancement initiatives and strategies aimed at promoting
1,200
compliance.
1,000
• We anticipate that the momentum is going to be maintained for the rest of the year
sustained by increase in VAT collections and Income Taxes as the economy 800
hyperinflates.
600
• Contrastingly, we anticipate a decline in growth from the 2% IMT tax as the
government has indicated that circa $2.5bn of notes and coins will be injected into the 400
economy prejudicing the taxman of potential IMT tax revenues. 200
• Through the 2019 Mid-Year Budget Review, the government updated and aligned the 0
macro-fiscal framework with the fiscal and monetary policy announcements made in Jan Feb Mar Apr May Jun
1H19.
2017 2018 2019

Source: IMF WEO, SMP, ZimStat & MFWG 11

A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
External Position 31 October 2019

Exports, Imports & the Trade Deficit Merchandise Trade Statistics (US$mn)
• Exports for 1H19 amounted to US$1.8bn a marginal 1.9% decline from 1H18, attributed to a decrease in export 700
earnings of key minerals. Imports for 1H19 declined to US$2.3bn from US$3.4bn in 1H18, fuelled by foreign 600
exchange shortages and the effects of the austerity measures being implemented. Resultantly, the trade deficit for 500 3.3%
1H19 narrowed 64.0% to US$550.1mn from US$1.5bn in 1H18. 400
• Government anticipates that the current account deficit will narrow further by the end of 2019, on account of 300
reduced imports, against an improvement in export earnings. 200
100
• However, it is our view that the 2019 trade deficit will widen owing to increased demand for diesel due to persisting
0
power outages and the need to import key grains to meet the national demand, coupled with reduced exports of
key minerals due to the challenging operating environment and low retention ratio policy, as well as the subdued -100
agriculture output attributed to the drought, cyclone and worsening economic situation. -200
-300
Exports Imports Trade Balance
Foreign Direct Investment
• FDI flows to SSA grew 13% to US$32bn in 2018, recovering after two successive contractions in the prior years. FDI Net Inflows (US$mn)
South African flows improved 165.8% to US$5.3bn, whilst Zambian FDI slumped 49% to US$569mn. 2400

• Zimbabwe experienced a 113.5% increase to US$745mn in FDI in 2018, owing to a small number of projects 2000
which resulted in fast-growing inflows. A key project includes Karo Resources investment worth US$3.4bn into a 1600
platinum mine, which was one of the largest announced greenfield projects in 2018.
1200
• Growing demand and corresponding rise in the prices of commodities of which Africa is a key producers, as well
800
as closer regional integration aided by the African Continental Free Trade Area Agreement, are expected to
improve FDI flows to the continent in 2019. 400

• However, Zimbabwe is not anticipated to benefit from the increased FDI inflows in 2019. FDI is anticipated to 0
contract based on the risk associated with the country and the low ease of doing business.
• Investments in the processing of natural resources may support the industrialisation process, such as Sinosteel
China’s investment in Zimbabwe’s metal production, which has potential for major expansion in the medium term. 2013 2014 2015 2016 2017 2018

Source: RBZ June Monthly Report, UN World Investment Report 2019 12

A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Monetary Position 31 October 2019

Burgeoning money supply playing chief catalyst to stagflation Official Interbank, Parallel Market & OMIR Exchange Rates to the
▪ Stagflation, a portmanteau of stagnation and inflation is an accurate characterization of Zimbabwe’s current economic USD
20.00
situation as inflation is at its highest post-dollarization although the economy is in a recessionary period.
18.00
▪ The chief catalyst to Zimbabwe’s stagflation trap is burgeoning broad money supply, which registered growth of 78% 16.00 3.3%
from $5.64bn in December 2016 to $10bn in December 2018; while money supply stood at $14.80bn as of June 2019, 14.00
up 48% YTD and 67% y/y. 12.00
▪ Aggregate expenditure was revised to $18.6bn, with treasury anticipating a $4.6bn fiscal deficit, posing further risk of 10.00
growing money supply amidst government’s target money supply growth of 10% y/y by December 2019. 8.00
6.00
▪ Government is in the process of issuing T-bills worth with plans afloat to establish a functional auction system for T-
4.00
bills before year end while TBs worth $2.2bn maturing this year would be rolled over. 2.00
▪ We believe that RBZ’s adjustment of the overnight window upwards in line with inflation trends will likely result in 0.00
depressed demand for lines of credit and thus low production.We expect further depreciation of the Zimbabwe dollar,
inflationary pressure and economic adversity to persist in the short to medium-term, until money supply and
government spending is curbed.
Parallel Interbank OMIR
▪ Consequentially, the equities market is expected to soften in real terms on burgeoning inflation and a currency * The drop in parallel rates to 0 in July 2019 is on account of the suspension in the publication
devaluation in the short to medium term as valuations remain demanding, hence we only recommend selective buying of parallel rates during that period.
into weakness at current levels. Aggregate money supply (M3) vs FCA balances vs Interest rates
Monetary reforms induce volatility and depreciate the Zimbabwe dollar 18000 70%
65%
16000
▪ The Zimbabwe dollar has officially depreciated by over 500% since its introduction in February through an established 60%
55%
14000
foreign exchange interbank market in which was commenced trading with an initial exchange rate of 1USD:2.5 ZWL. 50%
12000 45%
▪ Approximately US$799mn worth of foreign currency has been traded on the interbank market between February and 10000 40%

$mn
35%
August with forex receipts from exports and remittances providing FX liquidity on the interbank market. 8000 30%
▪ Zimbabwe’s total foreign currency receipts for 1H19 plunged 24% to US$2.58bn from $3.4bn in 1H18 with tobacco 6000 25%
20%
earnings only amounting to US$526mn and gold earnings at US$500mn in 1H19. 4000 15%
10%
▪ Continuous limited forex supply has exacerbated the demand for hard currencies and spurred cash premiums as the 2000
5%
0 0%
OMIR has reached its highest level of 1: 26, while the interbank rate has built resistance around 1:15.

Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Jan-19

Jun-19
Dec-19E
Feb-19
Mar-19
Apr-19
May-19
▪ It is imperative for government to improve the efficiency of the new FX interbank market to deepen the interbank FX
market’s function as the basis for market-determined exchange rate and to close the parallel market spread.
Aggregate broad money - M3 FCAs as % of M3 Interest rate
13
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
The Evolution of Currency Reforms 31 October 2019

October 2018 February 2019 February 2019 June 2019 June 2019
Separation of FCA Nostro and RTGS Interbank FX Market introduced by RBZ Re-introduction of the Zim dollar Multi-currency system abolished The 90-day vesting period placed on
dollar accounts (Monetary Policy 2019) (Monetary Policy 2019) (Statutory Instruments 33 & 142) fungible stocks and the procurement of
(Mid-term Monetary Policy 2018) While details on liquidity about the market This directive came as no surprise as ‘RTGS’ The Zimbabwe dollar was stipulated as the fuel by OMCs through the interbank.
The separation of FCA and RTGS accounts still remain clandestine, US$740mn has dollar balances had been previously sole legal tender for all transactions within (RBZ Exchange Control Directive)
was necessary as the singular system had been traded in the first 5 months. The regarded as ‘local currency’. This directive the country, with effect from the 24th of The directive, aimed at eliminating3.3% a
disadvantaged those with free funds. The average daily turnover is US$5mn. The formed part of reforms to formalise the June 2019. Furthermore, the RTGS and secondary reference exchange rate,
separation formed part of initial steps to exchange rate needs to shift a fully floated existing trade of ‘RTGS’ and USD balances Zimbabwe dollar are equivalent. exposed investors wishing to exit the ZSE to
officially de-dollarizing the economy, a regime, with limited interventions by the with a rate of 1:2.5 being an initial rate Resultantly, broad money supply has risen volatility of the Zimbabwe dollar. Although
process which had already began when RBZ to ensure convergence with other upon announcement FX retention ratios for to $14.78bn in June 2019 from $8.84bn in the liquidity of fungible stocks i.e., Old
industries applied a multi-tier pricing rates (parallel and Old Mutual Implied export producers were revised to create June 2018. Inflation also spiralled, reaching Mutual has subsided, demand still remains
model for goods and services where RTGS Rate) and narrow arbitrage opportunities. FX liquidity of RBZ’s new interbank. 175.7% y/y and 39.3% m/m on negative firm. Publishing parallel rates become
payments were rated. sentiment. illegal.

28.00

23.00

18.00

13.00

8.00

3.00

Jul-19
Jul-19
Jul-19
Jul-19
Nov-18
Dec-18
Dec-18
Dec-18
Dec-18
Dec-18
Jan-19
Jan-19
Jan-19
Jan-19

Jun-19
Jun-19
Jun-19
Jun-19
Jun-19
Aug-18
Aug-18
Aug-18
Aug-18
Sep-18
Sep-18
Sep-18
Sep-18
Sep-18
Oct-18
Oct-18
Oct-18
Oct-18
Nov-18
Nov-18
Nov-18

Apr-19
Apr-19
Apr-19
Apr-19

Aug-19
Aug-19
Aug-19
Aug-19
Sep-19
Sep-19
Sep-19
Feb-19
Feb-19
Feb-19
Feb-19
Mar-19
Mar-19
Mar-19
Mar-19
Mar-19

May-19
May-19
May-19
May-19
-2.00

Parallel Interbank OMIR

14
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
31 October 2019

The Equities Market

15
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Key Themes 31 October 2019

Valuations lag severely in real terms
• Rampant inflation and a depreciating local currency has created a dislocation
between fundamentals and market dynamics on the ZSE.
• Stocks valuations are cheaper in US dollar terms, proving to be both a currency and
inflationary hedge in the current volatile economic environment.
• The current Market Cap is ZWL$30.10bn (US$1.92bn using the interbank rate, and
US$1.11bn using an OMIR of 27.05 as at 30 October 2019), compared to an average
of US$8.83bn between January 2017 – October 2018, indicating that at current levels
the market and prices are lagging in US dollar terms.
• Whilst the operating environment has been challenging, there are business that have
remained defensive and seen some sustained volumes growth over the past 12
months. We have seen continued capital investment in select names, leading to
stocks trading at a market discount to their replacement values.
Discounted Market Cap vs Premium
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0 0%
Jul-17
Run-rates and margins to soften going forward
• Due to the dislocation of real incomes with costs of living, as salary increments lag y/y
inflation of 175.7% as at June 2019 (civil servants received an average increment of
76.0% as at August). Disposable incomes have been compromised amidst 3.3%
highly
inflationary policy reforms. We do anticipate downside risk to volumes, particularly in
discretionary goods going forward.
• Prior to the introduction of the interbank market, there are firms in high priority sectors
that were accessing foreign currency inputs at highly subsidised pricing, thereby
distorting gross margins. These subsidies have effectively been removed and we
believe there will be a knock-on effect on corporate earnings and pressure on margins
as raw materials and opex rebase faster than revenue lines.
• Attributed to the decline in production across all sectors, we anticipate that personal
consumption demand will be depressed, while further price corrections are anticipated
as the interbank remains inaccessible to most producers.
Impact of FX related uplifts on income statements
3000%
• Accounting for the abolishment of the parity between the Zimbabwe dollar and the US
2500% dollar, majority of the listed companies remained profitable due to fair value
2000% adjustments on investments and exchange gains.
1500% • Going forward we anticipate that the companies’ earnings will begin to moderate as
foreign exchange gains alleviate on account of a relatively stable exchange rate.
1000%
• However, for companies, such as Seed Co, Simbisa and Padenga with a foreign
500% currency earnings component generated from exporting or from regional operations,
we anticipate an uptick in their incomes, attributed to the translation of their foreign

Jul-18

Jul-19
Jan-17

Jun-17

Jan-18

Jun-18

Jan-19

Jun-19
Apr-17

Aug-17
Sep-17
Oct-17
Nov-17
Dec-17

Apr-18

Aug-18
Sep-18
Oct-18
Nov-18
Dec-18

Apr-19

Aug-19
Sep-19
Oct-19
Feb-17
Mar-17

May-17

Feb-18
Mar-18

May-18

Feb-19
Mar-19

May-19

currency earnings into Zimbabwean dollars at the prevailing interbank market rate.

Discounted ZSE Mkt Cap Implied OMIR Premium

16
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
2018/19 Equities Review 31 October 2019

Performance of the ZSE Market Cap & Indices in 12m to Oct 2019 Sector Performance 3Q19 Y-O-Y & YTD
600%
900
30.0

Industrial and Mining Index levels

800 500%
25.0 700 3.3%
Market Cap ($bn)

600 400%
20.0
500
15.0 300%
400
10.0 300
200%
200
5.0
100 100%
0.0 0
0%
Tourism Insurance Retail Banking Agriculture Property Beverages Telecom
Market Cap (LHS) Industrial Index Mining Index
Y-o-Y YTD

Market Cap Contribution

Top 10 Most Liquid Counters in 3Q19
Property Insurance
Tourism 1% 6%
3Q19 3Q18 Change
2% Retail
Tourism 4% Delta 1,369.13 446.93 206%
Other
Property 24% Econet 1,211.93 1,026.68 18%
Banking
Insurance 5% Old Mutual 925.05 572.71 62%
Retail
Innscor 726.74 105.70 588%
Banking
Conglomerate Cassava 428.73 - N/A
Conglomerate 7%
Agro African Sun 292.16 2.06 14083%
Telecom Simbisa 270.07 73.74 266%
Beverages Beverages OK Zimbabwe 214.24 99.81 115%
18%
Other Agro Padenga 204.57 53.66 281%
17%
SeedCo Limited 196.35 388.14 -49%
Telecom
16% 17
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
ZSE 2019 Sector Outlook 31 October 2019

Overweight
Retail
Even as the economy continues to tighten, food retail will remain defensive and will to
a large extent be able to pass on the inflation induced price hikes to the consumer for
most of the staple products which are highly inelastic. Retailers, such as Simbisa, with
regional operations will be able to generate foreign currency earnings, which will put
the company in good stead. However, we anticipate that volumes for discretionary
products will come under pressure.
Axia (BUY), OK Zimbabwe (BUY), Simbisa (BUY)
Neutral
Construction
The sector is anticipated to be weighed down by rising inflation, shortages of foreign
Neutral
currency and access to other inputs. Liquidity challenges pose a threat to contractors
despite the government increasing capital budget to circa $7.1bn. We anticipate that
funding will be impacted by budgetary constraints.
FMCG
We anticipate that consumers will start down trading to more basic and inelastic
goods, whilst the spend on discretionary goods to start to taper off.
Dairibord (SELL), Innscor (BUY), National Foods (BUY)
Tourism
It is our view that tourism will remain subdued in the medium-term due to diminishing
disposable income as well as the economic unrest associated with the country.
Overweight
Additionally, limited availability of cash in local currency, the sole legal tender, could
act as deterrence to international tourists as they may face difficulties in accessing the
Zimbabwean dollar to transact.
Underweight
Agriculture
The sector is a key economic driver of the economy; however, we believe that the
agriculture stocks have overrun. 3.3%
BAT (SELL), Seed Co (HOLD), Seed Co Int (SELL), TSL (HOLD)
Banking
We anticipate that banks will focus on scaling the contribution of non-funded income,
due to the lag in interest rate, whilst leveraging on technology in the banking models.
CBZ (HOLD), FBCH (SELL), FCB (SELL), NMB (SELL)
Beverages
Due to constraints in importing raw materials and some elasticity in certain product
lines, we anticipate that volumes will come under pressure as the consumer forgoes
the products for basic necessities.
Delta (HOLD)
Mining
Notwithstanding firm prices across the board, the sector is to be negatively affected by
the acute electricity outages and foreign currency shortages. We anticipate low output
across the mining sector.
Property
Depressed economic activity and higher voids mainly in the CBD have seen property
yields remaining weak. Elevated cost of building materials for property developments
will see property prices remaining relatively high when compared to regional peers.
Telecoms
The telecoms sector has effected several tariff reviews during the year, resulting in a
slight decline in traffic and usage. The decline is expected to be relatively low as
services, such as data, have become a necessity to society, therefore evolving into
some what a utility
Cassava SmarTech (HOLD), Econet (HOLD)

18
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
31 October 2019

IH Universe

19
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Valuation Table 31 October 2019

IH Universe Valuation Table 31-Oct-19

Curre nt P/E EV / EBITDA P / BK Div Y ie ld

Curre nt Ta rge t Upside /
P ric e Mkt Ca p ($ mn) Downside 2 0 19 (/ E) 2 0 2 0 E
3.3%
Compa ny Ra ting pric e 2 0 2 1E 2 0 19 (/ E) 2 0 2 0 E 2 0 2 1E 2 0 19 (/ E) 2020E 2 0 2 1E 2 0 19 E
Financials
CBZ Holdings HOLD 0.60 412.34 0.62 3.8% 0.9 1.9 1.8 0.3 0.3 0.2 2.4%
FBC Holdings SELL 0.62 413.25 0.31 -49.2% 5.1 4.0 3.6 1.6 1.2 0.9 1.6%
FCB Limited SELL 0.09 200.57 0.07 -21.8% 2.2 4.2 3.7 1.1 0.9 0.7 0.0%
NMBZ Limited SELL 0.35 392.95 0.20 -41.8% 1.4 2.8 2.6 0.7 0.6 0.5 0.0%

Non-Financials
Axia BUY 0.65 352.04 0.95 46.2% 5.8 3.8 3.3 5.0 2.2 1.4 2.5 1.4 0.9 2.2%
BAT Zimbabw e SELL 50.00 1,031.68 21.16 -57.7% 50.8 43.1 36.1 31.3 27.0 22.8 21.2 14.2 11.9 0.0%
Cassava HOLD 1.50 3,892.34 1.65 9.6% 38.4 20.7 17.1 23.0 13.9 11.7 20.7 11.5 7.5 0.0%
Dairibord Zimbabw e SELL 0.56 201.38 0.31 -44.2% 23.5 13.5 11.1 8.7 7.0 5.9 3.7 3.2 2.7 0.0%
Delta Corporation HOLD 3.72 4,737.89 3.63 -2.3% 33.1 13.4 8.8 21.8 8.3 5.5 6.1 5.4 4.7 3.7%
Econet Wireless HOLD 1.70 4,407.35 1.74 2.4% 40.5 91.5 20.4 9.5 7.2 6.1 3.0 2.9 2.7 1.1%
Innscor BUY 2.90 1,724.29 5.80 99.9% 9.8 5.9 4.8 6.9 3.3 2.4 2.3 1.8 1.4 3.4%
National Foods BUY 9.01 616.28 12.88 42.9% 10.9 6.5 5.2 8.1 4.4 3.6 2.4 1.9 1.5 3.1%
OK Zimbabw e SELL 0.67 814.97 0.52 -22.4% 16.6 18.3 26.4 10.2 10.0 12.5 4.9 4.2 3.8 2.6%
Padenga U/R 2.89 1,565.75 U/R U/R 9.3 5.6 6.0 5.7 2.7 2.2 1.5 1.2 1.0 2.7%
Seedco International SELL 2.78 691.97 2.04 -26.3% 36.6 26.7 20.3 15.3 13.0 11.1 1.7 1.3 1.2 0.2%
Seedco BUY 1.58 383.33 2.42 53.2% 17.8 5.5 4.7 14.9 5.4 4.4 4.0 2.4 1.6 1.5%
Simbisa BUY 1.38 770.37 5.69 311.5% 23.9 3.7 3.3 12.8 2.3 1.9 17.1 3.6 1.9 1.2%
TSL SELL 0.60 214.26 0.33 -45.0% 17.5 22.6 20.2 10.6 12.4 11.3 2.2 2.1 1.9 1.9%
Weighted Averages/Totals 23,199.41 28.29 28.80 13.35 14.43 8.30 6.83 7.60 4.96 3.84 1.77%

20
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE
 Zimbabwe Equity Strategy
Disclaimer 31 October 2019

Certification
The analyst(s) who prepared this research report hereby certifies that: (i) all of the views and opinions expressed in this research report accurately reflect the research
analyst’s(s) personal views about the subject investment(s) and issuer(s) and (ii) no part of the analyst’s(s) compensation was, is or will be directly or indirectly related to
the specific recommendations or views expressed by the analyst(s) in this research report. 3.3%

Ratings Definition
Buy - Expected 1 year return is at least 20%
Hold - Expected 1 year return of between -10% and 20%
Sell - Expected 1 year return of -10% and below

Disclaimer
This document has been prepared by IH Securities to provide background information about the securities and (or) markets mentioned herein, the forecasts, opinions and
expectations are entirely those of IH Securities. This document was prepared with the utmost due care and consideration for accuracy and factual information; the
forecasts, opinions and expectations are deemed to be fair and reasonable. However there can be no assurance that future results or events will be consistent with any
such forecasts, opinions and expectations. Therefore the authors will not incur any liability for any loss arising from any use of this document or its contents or otherwise
arising in connection therewith. Neither will the sources of information or any other related parties be held responsible for any form of action that is taken as a result of the
proliferation of this document.

21
A MEMBER OF THE ZIMBABWE STOCK EXCHANGE