Zimbabwe Equity Strategy-2011 020311

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Equity Research02 March 2011

Zimbabwe

Zimbabwe Equity Strategy 2011

Bullish macro story amidst potentially turbulent waters

Zimbabwe StrategyEquity Research

02 March 2011


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Zimbabwe Equity Strategy 2011

Bullish macro story amidst potentially turbulent waters

Agriculture and mining sector propel growthZimbabwe achieved economic growth of 8.1% in 2010 to $6.1bn (nominal GDP) on the back of significant growth in theagriculture and mining sectors. Mining, which grew by 47% in 2010, is forecasted to register 44% growth in 2011, as gold,platinum and coal are forecasted to grow 70%, 72% and 50% respectively. Mining receipts are also expected to increase onthe back of a firm outlook on resource prices in 2011.The agriculture sector, expected to grow 19.3%, will also help to bolsterthe economy, with tobacco, cotton and sugar production output expected to increase 63%, 15% and 29% respectively.Increasing growth in agriculture output will also benefit select manufacturing subsectors, including foodstuffs, drink, tobaccoand beverages subsectors. Consequently we expect GDP growth in excess of 9.3% in 2011 owing to the above factors. A

key macro-economic challenge yet to be addressed is the countrys external debt, which now stands at $6.3bn (>100% ofGDP). While political uncertainties linger, particularly as regards the timing of the next election, we believe growth will remainrobust in 2011.

Resilient Foreign Portfolio investment amidst weak FDIAs a result of political and regulatory uncertainties, foreign investors continue to shy away from Foreign Direct Investment intothe country, with the country seeing lower growth in FDI than Sub-Saharan peers experiencing lower economic growth tanZimbabwe. The countrys FDI fell 19% in 2010, compared to a 0% change in FDI into sub-Saharan peers. The lack of FDI, webelieve, is limiting economic growth as most industries in the country are in need of recapitalization and domestic financingremains minimal, short term and expensive. Portfolio investment, however, has remained resilient, with the country seeing42% growth in foreign net portfolio investments in 2010 compared to 25% growth in Sub-Saharan Africa, despite uncertaintyover the indigenization policy. We believe this trend will continue this year as foreign investors become more resilient tocertain factors of political risk and instead prioritize the search for value in this market, especially if negative politicaldevelopments are avoided.

Lacklustre equities performance in 2010The ZSE began 2010 with a total market capitalization of $4,2bn compared to an estimated $1bn in February 2009, when thebourse officially reopened after a 3 month closure from November 2008. Despite estimated GDP growth of 8.1% in 2010driven by significant growth in the real sector, total market capitalization only grew by 1.9% to close the year 2010 at $4,3bnThe Industrial Index declined 0.5% y-o-y from 152 (FY09) to 151.3 (FY10). The Mining Index, however, did record growth of8% y-o-y from 185.5 (FY09) to 200.4 (FY10). This poor performance in both the indices and total market capitalization can beattributed to the official gazetting of the Indigenisation Regulations in March 2010. Total market turnover fell from a recorded$414mn in 2009 to $392mn in 2010 down 5%, due to the loss of momentum created by the IEEA. The ZSE only began torecover from the negative sentiment that dominated the greater part of the year in the last quarter of 2010, as the marketbecame oversold and foreign funds returned to cherry pick bargains in selected stocks. From its lowest recorded point of$3,6bn in July 2010, the market recovered by 19% to close the year at $4,3bn.

Our base-case target market capitalization for 2011 is $5.1bn, implying 18% upsideWe are forecasting a target market capitalisation of $5.1bn for FY11 implying upside of 18%. The downside risk to our viewremains largely beholden to political developments. We expect the market to largely trade sideways in 1H11 as investorssearch for political certainty. We are, however, bullish on the second half, and expect the market to rise on the back ofimproved corporate earnings. Our forecast is based on a weighted valuation of 12 counters representing 67% of the ZSEstotal market capitalisation and 62% of daily liquidity in 2010. We have assumed that their weightings in terms of marketcapitalisation remain similar in 2011.We initiate coverage on a further 11 stocks. Our recommendations are as follows:AICO (BUY, TP $0.22), CBZ (BUY, TP $0.26), DZLH (BUY, TP $0.40), Delta (BUY, TP $0.87), Innscor (BUY, TP $0.77),Lafarge (BUY, TP $1.26), Meikles (HOLD, TP $0.48), NMB (HOLD, TP $0.013), OK Zimbabwe (HOLD, TP $0.087), PearlProperties (BUY, TP $0.049), Seedco (HOLD, TP $1.45).

Research Team

Dzika Danha

+263(772) 573 [email protected] Mhongo+263(774) 171 [email protected] Mlotshwa+263(772) 936 [email protected]

Contact Details

IH Securities (Pvt) Ltd

4 Fleetwood RoadAlexander ParkHarareZimbabweTel +263 (4)745133/139Fax +263 (4) 745879

DisclaimerThis document has been prepared by IH Securities to provide background information

about the securities and (or) markets mentioned herein, the forecasts, opinions andexpectations are entirely those of IH Securities. This document was prepared with theutmost due care and consideration for accuracy and factual information; the forecasts,opinions and expectations are deemed to be fair and reasonable. However there can beno 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 lossarising from any use of this document or its contents or otherwise arising in connectiontherewith. Neither will the sources of information or any other related parties be heldresponsible for any form of action that is taken as a result of the proliferation of thisdocument.

Zimbabwe StrategyEquity Research

02 March 2011
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Executive Summary 1

Valuation Table 2Macro-economic Overview 3Emerging economies to underpin global economic growth 3Zimbabwe outperforming its Sub-Saharan Africa peers 3

Zimbabwe Economic Outlook 5Economic growth underpinned by the mining and agricultural sectors 5Manufacturing Sector continues to face power and liquidity challenges 5

Financial intermediation continues to improve. 6

Benign inflationary pressures expected, upside risks exist 7

Portfolio inflows limiting overall negative BoP 8

The elephant in the room remains politics

Equity Strategy 10Equities perform in a subdued fashion in 2010 10

Sectoral Performance: Retail stocks outperforms market 11Key Themes in 2011 13Sectoral Outlook for 2011 15IH Base-case Target Market Capitalisation 16

Companies 17AICO Limited 18CBZ Holdings 19Dairibord Limited 20Econet Wireless 21Innscor Africa 22Lafarge Cement 23

NMBZ 24OK Zimbabwe 25Pearl Properties 26Seedco Limited 27Meikles Africa 28Econet Wireless 29

Contents


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Table 1: IH Universe Valuation Table

MktCap

($mn)

IndicativeTargetprice

Upside/Downside

P/E EV/EBITDA PBV

Company Rating2010E 2011E 2012E 2010E 2011E 2012E 2010E 2011E 2012E

Financials CBZ Holdings BUY 127 0.26 41% 15.0x 7.0x 5.2x 1.6x 1.4x 1.1x

NMBZ Limited HOLD 31 0.01 18% 68.6x 13.2x 5.2x 1.4x 1.3x 1.1x

Non-Finanicals AICO BUY 98 0.22 22% n/a n/a 52.0x 6.0x 4.3x 2.8x 1.2x 1.2x 1.2x

Dairibord Zimbabwe BUY 60 0.40 122% 9.5x 5.7x 4.0x 5.9x 3.9x 2.8x 1.7x 1.4x 1.1x

Delta Corporation BUY 864 0.87 21% 26.8x 16.0x 11.1x 17.2x 8.2x 6.1x 5.2x 4.2x 3.3x

OK Zimbabwe HOLD 75 0.09 14% 60.2x 26.0x 14.2x 15.8x 9.6x 6.1x 4.4x 2.2x 1.9x

Lafarge BUY 72 1.26 40% 11.3x 8.4x 6.5x 8.3x 6.1x 4.6x 3.0x 2.3x 1.8x

Innscor BUY 340 0.77 22% 22.7x 17.0x 13.3x 11.7x 8.3x 6.6x 2.9x 2.6x 2.3x

Pearl Properties BUY 37 0.04 35% 8.6x 3.6x 3.6x 8.3x 7.6x 6.6x 0.5x 0.4x 0.4xSeedco HOLD 241 1.45 16% 18.8x 16.8x 10.4x 12.2x 10.3x 6.7x 4.1x 3.4x 2.7x

Meikles HOLD 122 0.48 -4% n/a n/a 32.7x n/a 42.7x 7.9x 0.9x 0.9x 0.9x

Econet Wireless BUY 857 6.91 38% 7.6x 6.1x 5.0x 5.5x 4.0x 3.2x 5.3x 3.0x 2.0x

WeightedAverages/Totals

2,925

15.9x 11.4x 11.2x 9.1x 7.9x 4.9x 4.2x 3.0x 2.3x

Valuation


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Emerging economies to underpin global economic growthAfter expanding 5% in 2010, the global economy is expected to grow by 4.4% in 2011. Advanced economiesare expected to post growth of 2.5% in 2011 whilst emerging and developing economies, which registeredgrowth of 7.1% in 2010 and are expected to grow 6.5% in 2011, continue to underpin the global recovery.Developing Asia continues to see the most rapid growth in emerging markets, having grown 9.3% in 2010 andexpected to grow by a further 8.4% in 2011. Upward pressure on commodities experienced in 2010 is expectedto continue in 2011 as demand, being pushed by emerging markets remains robust and responses in supplyhave been sluggish. As a result, the IMF forecasts a 13.4% increase in oil prices, whilst non-oil commodityprices are forecasted to rise 11% in 2011, with significant risks on the upside for most commodities. Oil hassince reached 2 year highs, as instability in the Middle East and North Africa poses a threat to supplies forthe rest of the year. Higher than expected inflation could therefore be seen across the world, as oil prices risehigher than expected this year.

Zimbabwe outperforming its Sub-Saharan Africa peersSub-Saharan Africa is expected to see robust growth, of 5.5% in 2011, ahead of global economic growth of4.4%. Oil exporting countries in Sub-Saharan Africa, which grew by 6.5% in 2010, are expected to register

strong growth of 6.3% in 2011 as global demand for the commodity remains robust and supplies come underthreat. Low income countries on the continent will register marginally higher growth, at 6.5% in 2011 as a resultof strong domestic demand, along with growing commodity trade with rapidly expanding Asia. Middle incomeeconomies in Sub-Saharan Africa are expected to continue to register the slowest growth on the continent;growing only 3.5% in 2011 as high unemployment and subdued confidence have weighed down on economicgrowth.

Fig 1: GDP growth: Zimbabwe v. SSA & Economies 2008 to 2012E

Source: IMF and Ministry of Finance

The continuing growth in Sub-Saharan Africa is expected to spur growing capital inflows in 2011 as investorssearch for higher returns outside of developed economies. Private financing inflows into Sub-Saharan Africa,

which were estimated at $50bn in 2010, are expected to grow by at least 10% in 2011, to over $55bn in 2011.There are, however, significant downside risks to the level of portfolio investment, as well as Foreign DirectInvestment to be received in the region as investors become increasingly risk averse as a result of the politicalinstability currently being seen in the Middle East and North Africa.

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Macro-economic Overview


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Figure 2: Private Financing Inflows in SSA from 2007 to 2011E

Source: IMF

Zimbabwe, whose economy continues to recover from a low base has outperformed growth in both Sub-Saharan Africa and the average in emerging and developing economies since dollarization of the economy in2009. With economic growth forecasted at 9.3% in 2011, Zimbabwe is also expected to outperform growth inboth low income African countries and oil producing African countries. Zimbabwe, which is currently registeringhigher economic growth than the region is also benefiting from inflows into Sub-Saharan Africa, particulalry inthe form of portfolio investment into the country, which grew 42% in 2010, compared to 25% in Sub-SaharanAfrica.Figure 3: Zimbabwe y-o-y inflation v. SSA 2009 to 2012E

Source: IMF, Ministry of Finance and IH Estimates

Whilst Inflation in Sub-Saharan Africa is currently well contained in most countries, increasing commodity pricesand a weak dollar may see inflation increasing in the region. Zimbabwe, whose economy is highly dependent onimports will face the same inflationary pressures, brought into the country via imports from other Africancountries and the rise in the cost of transporting those goods into the country. We expect inflation in Zimbabweto trend towards 4.5% to the end of 2011 v. an SSA average of 6% to 2011.

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Economic growth underpinned by the mining and agricultural sectorAfter the country achieved economic stability and positive growth in 2009, Zimbabwe continued to consolidatethese gains in 2010, achieving economic growth of 8.1% in 2010 to $6.1bn on the back of growth in mostsectors in the economy. The most significant growth was registered in the agriculture and mining sectors whichregistered growth of 33.9% and 47% respectively in 2010. The tourism sector was one of the worst performingsectors in the economy, registering marginal growth of 0.5% for 2010, as a result of subdued recovery oftourism arrivals in the country, along with capital limitations delaying refurbishment programs and the growth ofADRs. Tourism arrivals are estimated to have grown by 10% to 2.2mn in 2010. As a result, bed occupancylevels, rose only 2% in 2010 to 37%, whilst room occupancy levels are estimated to have improved to 55% from45% in 2009. The manufacturing sector continued to suffer from a lack of medium term and long term capital,unreliable utilities, and competition from imports and as a result achieved marginal growth of 2.7% in 2010.Most subsectors in manufacturing, as a result continued to operate at capacity utilization levels below 40%.

Figure 4: GDP growth by sector 2008 to 2011E Figure 5: Composition of GDP, 2010

Source: Ministry of Finance

We expect the Zimbabwean economy to continue to register significant growth in 2011, with the Ministry ofFinance forecasting economic expansion of 9.3% in 2011. The growth expected in 2011 will result from abuoyant mining sector, expected to register growth of 44% in 2011 through recapitalization and expansionprograms in mining companies that are increasing output from the mines, despite limitations from erratic powersupplies. Gold production is expected to rise 70% to 13000kgs in 2011, whilst platinum production is expectedto register 72% growth to 12,500 kgs and coal is expected to see a 50% increase in production to 3mn tons.

Strengthening commodity prices will also see increasing revenues in the mining sector. Gold, currently tradingat $1,414/oz is expected to cross the $1,500 mark by the end of the year, bolstered by quantitative easing in theUnited States. Platinum, currently trading at $1792/oz is expected to remain firm at current levels. TheAgricultural sector, expected to grow 19.3% will also help to bolster the economy. Tobacco output is expectedto increase 63% in 2011 to 175mn kgs on the back of a 54% increase in hectares planted and increasing yields.Cotton output is expected to rise 15% to 300k tons as the industry responds to record prices in world markets.Sugar production is expected to rise 29% to 450k with growth driven by Triangle and Hippo Valley Estates.

Manufacturing Sector continues to face power and liquidity challengesWhilst we expect the manufacturing sector as a whole to remain subdued in 2011, we believe that certainsubsectors in the manufacturing sector are set to see improving capacity utilization and growth. These includethe food-stuffs subsector, the Drinks, Tobacco and Beverages subsector, along with the Wood and Furnituresubsector. We believe that these sectors will be boosted by growing consumer spending in 2011, which will seegreater demand for the goods produced by these subsectors. In addition, we also believe that the Food-stuffsand the Drinks, Tobacco and Beverages subsectors will also see outputs increasing on the back of increasingoutput from the agriculture sector.

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Minining

Agriculture

Manufacturing

Tourism

Production$Bn

2008 2009 2010 2011E

19%

14%

14%

10%5%

6%

32%

Agriculture

Transport &Communication

Manufacturing

Tourism

Electricity andWater

Minining

other

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Fig 6: Capacity utilization in Manufacturing Sector


Erratic supply of utilities such as electricity and water will continue to constrain the growth of the economy,especially limiting the manufacturing and mining sectors. The country is estimated to require electricity supply of2200MW, but has an installed capacity of 1960MW and is currently generating 1400MW. Whilst governmenthas approved $6.6bn worth of private power projects, with a total estimated power generating capacity of4400MW, the projects are not expected to reach such levels of production in the short term. Electricity willtherefore remain a significant limiting factor in the growth of the economy, with capacity utilization remaininglow, particularly in the manufacturing sector.

Financial intermediation continues to improve.The economy is seeing improving financial intermediation, with total deposits growing from $1.4bn in January2010 to over $2.5bn in December 2010. The loan to deposit ratio, which opened the year at 52.2% hadimproved to an average of 65.01% by December 2010. Short term deposits; however, continue to dominatedeposits, with call money estimated at 90% of total deposits in the system. Loans have therefore taken a shortterm nature and interest rates have as a result remained restrictive, with annual rates ranging between 12% and18% annually.Although increasing depth is being seen in the financial sector of the economy, we expect financing to remain akey constraint to economic growth in 2011. The Reserve Bank of Zimbabwe, which resumed its function as thelender of last resort in February 2011, only has access to $7mn, worth less than 1% of total deposits in thebanking sector. We therefore believe the RBZ is not adequately capitalized for the resumption of its duties tosignificantly improve confidence in the banking sector, and hence liquidity. We expect deposits to remain largelyshort term, with interest rates remaining higher than regional levels. Financial intermediation will thereforecontinue to see subdued improvement in 2011 and much needed recapitalization of most sectors of theeconomy will see further delays.

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Food Stuffs Drinks,Tobacco andBeverages

Wood &Furniture

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Paper,Printing &Publishing

Textiles &Ginning

Overall

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Figure 7: Loan, Deposit growth in $, & Loan deposit ratios 2009 to 2010

Source: Ministry of Finance, Reserve Bank of Zimbabwe

Benign inflationary pressures expected, upside risks existFigure 8: Annual and Monthly inflation


As shown in Figure 8, inflation remained stable in 2010, with month-on-month inflation averaging 0.28% amonth and ended the year at 3.2%. Alcoholic beverages, along with non-tradable goods in the inflation basket,such as housing, health, education and electricity drove inflation in 2010. Tradable goods, however, are likely toadd significantly to inflation pressures this year, on the back of rising oil and food prices in the country, with theMinistry of Finance forecasting inflation to close the year between 4% and 5%. However, there are risks on theupside resulting from international pressures on commodities such as food and fuel. In 2010, the countryimported a total of $3.6bn worth of goods, equivalent to 59.2% of GDP. The country is therefore particularlyvulnerable to international inflationary pressures. We also believe that the country will see significant cost pushinflation in 2011, as indicated by the 25 of 47 industrial councils that are currently in wage disputes. Whilst

there does appear to be some upside risk on inflation, we believe there is sufficient support for disposableincomes to offset the effects of inflation in 2011. Disposable incomes will be supported by the growth in GDPper capita in the economy, along with hike in civil servant remuneration. The Ministry of Finance announced in

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the 2011 National Budget, that the civil service wage bill would rise to $1.4bn in 2011, from $1bn in 2010. The40% increase in civil servant wages far outweighs the 11% to 14% increase in commodity prices expected to

cause inflationary pressures internationally, and should see a rise in real wages in the country.

Portfolio inflows limiting overall negative BoPTotal exports improved to $2.2bn in 2010 compared to $1.36bn in 2009, representing an increase of 62.6%.This positive performance was largely attributable to a significant increase in mineral exports. Mineral exportscontributed 64.5% to forex receipts, led by a surge in diamonds and improved gold exports after theliberalization of gold trading and firming international metal prices. Diamond exports improved to $361mn in2010, up 866% from $37.4mn in 2009. Gold exports improved to $334mn up 153% on the [prior year, whileagricultural exports (general agriculture, horticulture and tobacco) amounted to $582.6mn compared to$467.7mn in 2009, representing an increase of 24.6%. Total external debt stock stood at $6.93bn on 31December 2010, representing 103% of GDP, 36% of the countrys total debt is owed to multilateral creditors.Bilateral creditors are owed 33% whilst commercial creditors are owed 31%. The central government is thelargest debtor at 57%, whilst the parastatals and the private sector owe 35% and 8% respectively. At this stagethe government does not have debt reduction strategy in place.

We do not foresee significant foreign investment increasing access to long term capital in the country in 2011.Zimbabwe, whichregistered a decline of 19% in FDI in 2010, is only expected to see a 6% increase in FDI in2011, to $90mn worth of net direct investment. This is lower than the 9% increase expected for Sub-SaharanAfrica as a whole this year. The lower growth in FDI in Zimbabwe is despite growth ahead of its Sub-Saharanpeers, experienced since dollarization. Zimbabwe has therefore failed to attract significant FDI despite the muchhigher growth in the economy than its peers. We attribute the low growth in FDI in the country to political andregulatory uncertainties which have significantly increased the countrys perceived risk. The country is alsofacing structural problems that are limiting investment, including higher wages than Sub-Saharan peers, whichmake the country a less competitive place in which to operate.Figure 9: Zimbabwe Private Financing Inflows


The elephant in the room remains politicsThe Government of National Unity (GNU) formed in 2008 can be credited with stabilizing the local economy,after officially dollarizing in 4Q2008 and effectively ending the hyperinflation regime. However, as the tenure ofthe GNU comes to an end in February 2011, one of the key threats to Zimbabwes growth trajectory will be thedissolution of the GNU and the subsequent holding of national elections. Historically national elections inZimbabwe have been accompanied by economic upheavals, as such, the timing of a national election will becritical to the investment community. It has been agreed by the principals of the GNU that a new nationalconstitution must first be instituted before elections can take place. Indications from COPAC (ConstitutionParliamentCommittee) are that the constitution is unlikely to be in place before September 2011, this would

imply that national elections are more likely to be held in 1Q2012. Local consultations with business leadershave shown that this would be a more favourable outcome, as they look to consolidate economic growth and

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stability before entering national polls. However given the current instability in the GNU and recent statementsby political leaders, the possibility of a national election being held late this year cannot be ruled out.

The second key issue is the countrys indigenization policy, which has been viewed as a threat to foreigninvestment in the nation. Whilst government has made assertions about the enforcement of the Act, severaltransactions have been concluded which show that concessions can and will be made. A case in point isgovernment sale of above 50% of its shareholding in Ziscosteel to Essar Energy in Mauritius in 2010 despitethe conditions of the Act, which state that 51% of all businesses must be indigenously owned. We haveobserved that although both these factors are critical issues in shaping the investment environment inZimbabwe, investors are becoming more willing to invest in the country in spite of them. In 2010, foreign flowswhich decreased after the March enactment of the indigenization regulations, returned in the final quarter of theyear to pursue value in over-punished stocks. We believe this trend will continue this year as investors becomemore resilient to certain factors of political risk and instead prioritise the search for value in this market,especially if negative political utterances are avoided.


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Equities perform in a subdued fashion in 2010The Zimbabwe Stock Exchange began 2010 with a total market capitalization of $4,2bn compared to anestimated $1bn in February 2009, when the bourse officially reopened after a 3 month closure from November2008. Despite estimated GDP growth of 8.1% in 2010 driven by significant growth in the real sector, totalmarket capitalization only grew by 1.9% to close the year 2010 at $4,3bn as depicted in Figure 10 below. TheIndustrial Index declined 0.5% y-o-y from 152 (FY09) to 151.3 (FY10) failing to reflect the increased output andperformance of the economy. The Mining Index, however, did record growth of 8% y-o-y from 185.5 (FY09) to200.4 (FY10), as mining output in the economy increased by an estimated 47% for 2010.Figure 10: Development of Market Cap versus Indices (2010) (Industrial -0.5% y-o-y, Mining +8% y-o-y)

Source: Zimbabwe Stock Exchange: IH Estimates

Figure 10 shows the development of both the Industrial and Mining Indices throughout the year 2010 along withthe monthly movement of total market capitalization. Both the Industrial and Mining indices had a relativelypositive start to the year, before they began trending downwards at the end of 1Q2010. This downward trendnaturally coincided with a decline in total market capitalization during the same period, market capitalisation fell$800mn from the beginning of 1Q2010 to the end of 2Q2010. This change in both the indices and total marketcapitalization can be attributed to the official gazetting of the Indigenisation Regulations in March 2010.Zimbabwes Indigenisation and Empowerment Act (IEEA) was enacted into law in March 2010, stating that allbusinesses with a net asset value of $500k or more, foreign or domestic, had to comply with regulations statingthat indigenous Zimbabweans (as defined in The Act) were entitled to own a minimum of 51% shareholding in

all foreign owned and/or non-indigenous owned companies.The enactment of the Indigenisation Regulations negatively affected foreign deal flow on the Zimbabwe StockExchange which was the primary driver of the market. Official data shows that the percentage contribution offoreign deal flow to total market turnover was 46% in 2010 (up from 35% in 2009). Total market turnover fellfrom a recorded $414mn in 2009 to $392mn in 2010 down 5%, due to the loss of momentum created by theIEEA. The ZSE only began to recover from the negative sentiment that dominated the greater part of the year inthe last quarter of 2010 (reflected in figure 10), as the market became oversold and foreign funds returned tocherry pick bargains in selected stocks. From its lowest recorded point of $3.6bn in July 2010, the marketrecovered $714mn to close the year at $4.3bn.

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Figure 11: Foreign value traded v. Total value traded ($180mn vs $392mn FY10)

413.98391.57

146.42

179.77

2009 2010

Turnover value Foreign deal value


Econet (ECWH: ZH) and Delta (DELTA: ZH) led the ZSE in terms of total value traded in 2010 contributing$160mn of the $391mn turnover recorded for the year. These were the markets two largest counters by marketcap as at 31 December (Econet $834mn; Delta $766mn), the combination of their liquidity and solidfundamentals continue to make them attractive to foreign investors and thus very active on the local bourse.NTS (NTS: ZH) was the top gainer of the year rising 200%, followed by Zimplow (ZIMPLOW: ZH) rising 160%.The largest faller of the year was CFX (CFX: ZH), now Interfin (INTERFIN: ZH), declining 100%, followed byRedstar (REDSTAR: ZH) down 100%, (Redstar was eventually delisted on 17 December).Figure 12: Market Movers in 2010


Sectoral Performance: Retail stocks outperforms marketThe sectoral performance split for the ZSE in 2010 directly reflects the national improvement in GDP per capitafor the year. The best performing sectors were consumer driven, led by Retail (including food, clothing andlifestyle) which rose 48% (by sectoral market cap) against 2009. This was followed by Beverages up 31% from

the previous year. Both these sectors are highly sensitive to disposable incomes and their performance isindicative of increased consumer spending power. The Agro processing sector recorded strong growth

Top 10 Gainers % Change Top 10 Losers % Change Top 10 Value Traded FY10 ($mn) Avg Daily Value ($mn)

NTS 200% CFX -100% Econet 103.39 0.41

Zimplow 160% Redstar -100% Delta 57.87 0.23

Pioneer 140% Zeco -85% Innscor 26.16 0.10

Turnall 123% African Sun -82% Old Mutual 16.44 0.07

Truw orths 119% PGI -71% Seedco 15.56 0.06

Colcom 118% ART Corp -69% Hippo 11.03 0.04DZL 113% GB Holdings -67% OK 9.99 0.04

ABCH 100% TA Holdings -64% RioZim 8.67 0.03

Hw ange 89% Fidelity -63% AICO 8.60 0.03

Trust 86% TN Holdings -60% CBZ 8.52 0.03


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increasing 18% y-o-y as agricultural output in the economy improved by 34% against the previous year. Mostsectors, however, displayed negative performances in 2010, with the poorest performance being in Tourism

where sectoral market capitalisation declined 63% y-o-y. The largest sector by market capitalisation in 2010was Telcom (20%) followed by Beverages and Agro-processors (both 18% each).

Figure 13: ZSE Sector Performances; 2010 (%)

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60%

Telcom

Beverages

Agro

Bankingandfinancial

services

Diversifiedconglomerate

Manufacturing

Tourism

Building&manufacturing

Property

Retail

Pharmaceutical

Media

nngs

Source: Zimbabwe Stock Exchange; IH Estimates

Figure 14: Market composition by Sector

Telcom, 20%

Beverages, 18%

Agro, 18%

Banking andFinances, 13%

Diversifiedconglomerate,

11%

Manufacturing,8%

Other, 12%

Source: Zimbabwe Stock Exchange; IH Estimates


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13

Key Themes in 2011

Sustained economic growth to spur equities. The country, albeit coming off a low base, is currently ona strong economic growth path driven by a continued rise in mining and agricultural output amidst firming globalcommodity prices. The MoF expects inflation to remain subdued between 4-5% in 2011 and domestic revenuesto improve from $2bn in 2010 to $3.2bn in 2011. We expect this current growth trend to have a direct impact onlisted companies and are already witnessing top line growth across many listed stocks, in strategic sectors. Inaddition continued focus on recurrent expenditure (albeit detrimental to the economy in the long run) shouldboost consumer demand.Corporate restructuring, 2011 possible crunch time for corporate Zimbabwe. In 2009 and 2010the common theme for most listed firms was the reconsolidation of operations after the introduction of the multicurrency regime and the normalization of inflation. Going forward we believe the theme has shifted to focus onrecapitalization, restructuring and the alteration of business models, in order to become competitive, restoreworking capital cycles, regain lost market share particularly relative to imports, and re-align capital structures by

expunging expensive local debt. In 2010 we have already witnessed the beginning of increased initiatives in thearena of capital raising and corporate restructuring namely:

OK Zimbabwes (OKZIMBAB: ZH) successful $15mn rights issue in 1Q10, underwritten by SouthAfricas Investec Africa Frontier Private Equity fund. Investec assumed a 7% stake in OK afterpurchasing 29% of unsubscribed stock. The capital raised was used to fund working capital, expungeexpensive debt, upgrade systems and increase the retail network.

PG Zimbabwe (PGIZ: ZH) held a combination of a renounceable rights offer and convertibledebentures in 4Q10 to raise $11.2mn, this again, was used for working capital growth, to expungecostly short term debt, plant replacement and retooling. The CD has tenure of 60 months with abiannual coupon of 10%.

Innscor unbundled its crocodile operation Padenga in 4Q10 to focus on its core strategy in

FMCG. Dairibord Zimbabwe disposed of its stake in citrus company Interfresh (1H10), to recapitaliseand focus on its core business in dairy products.

In 2011, we expect to see continued capital raising initiatives with firms like AICO (AICO: ZH), RioZim (RIOTZ:ZH), and CFI (CFI:ZH) already planning significant capital raises in the first quarter of this year. We also expectto see the continued streamlining of operations with firms such as Innscor and Star Africa still looking at furtherdisposals and ART Corporation in the process of selling off its Mutare Board and Paper Mill in 1Q11.

Lower cost of capital. Debilitating finance costs have negatively impacted the bottom line of most firms.Despite increased deposits in the banking system (up from $1.4bn in January 2010 to $2.6bn in December2010) and improved loan to deposit ratios (76% versus an international benchmark of 70-90%), lending ratesstill remain prohibitive. Due to the volatile nature of deposits, financial institutions are predominantly extendingshort term debt at interest rates between 12-18%. Therefore listed firms looking to raise capital, will have toincreasingly explore offshore debt at more conducive terms, consider asset disposals or alternatively raiseequity capital from shareholders. Financial institutions like PTA, Afrexim Bank and lately DBSA have begun to

extend lines of credit on more sustainable terms which should offer some relief. We also believe that the localcost of borrowing for credit worthy institutions could be reduced below current levels.

Influence of foreign capital. At an investor level, we foresee foreign interest on the ZSE increasing asforeign flows continue to seek higher returns in both developing and potential high growth markets includingZimbabwe. Political stability locally and within the greater context of the economy, given the disturbances inNorth Africa, will clearly remain a guiding factor. Given the normalizing of the Zimbabwean economy, domesticinflows into pension funds are steadily improving and restoring the ability of local institutions to once againactively participate in equities. Overall we see an improvement in liquidity on the back of both local and foreignactivity. Equity returns should be aided by improved dividend streams in 2011, as general profitability improvesin line with economic growth.Developments in fixed income space. Although the money market remained generally inactive due to thelow liquidity levels and the absence of treasury bills; in 2010 we did see the beginning of the exploration of fixed

income instruments. CBZ (CBZH: ZH) in September 2010 successfully instituted a 3 year bond worth $50mndedicated to infrastructural projects and guaranteed by Afrexim bank. The bond was issued on a tender basis,eventually settling on an interest rate of 10%. PGIZ successfully launched a convertible debenture as part of its


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Figure 15: Sectoral Outlook

SectorCY10

weighting Comment Company

Agriculture Overweight

Driven by increased output on the farms amidst firming global commodityprices. Access to finance still a challenge for farmers given the 90 to 120 day

crop cycles and the volatile nature of available funding outside specific outgrower contract schemes.

AICO, DZL,Seedco

Banking Neutral

Local deposits are increasing, as a result loan to deposit ratios are steadilyimproving. Deposits are still volatile though, preventing medium to long term

lending. Central Bank's inability to effectively act as a lender of last resort dueto limited funding, prevents financial deepening.

CBZ, NMB,Barclays

Beverages NeutralRising GDP per capita driving consumer spend will benefit this sector.

Consumption leverage to GDP per capita estimated at 3.5x for 2011, GDPgrowth and volumes highly correlated.

Delta

Insurance UnderweightAlthough dollarisation has improved the collection of premiums, the size of theformal, insurable sector is still limited. Llimited range of investment instruments

specifically in fixed income bracket creating a challenge particularly for shortterm insurers that can not be overweight in equities.

Nicoz, ZHL, Afre

Construction Neutral

Improving capacity utilisation levels and recovering local demand both positivefor this sector. Rand strength will provide an opportunity for local

manufacturers to price competitively against imports and recover market share.Liquidity still a challenge, working capital cycles still in need of improvement.

Power supply issues also a critical factor

Lafarge, PGI

Mining NeutralRising ouput and capacity utilisation in the mines, favourable global commodity

prices, However, significant amounts of capex required in an illiquidenvironment.

RioZim, Hwange

Property OverweightRising local rentals spurred by increasing economic activity in an environmentwith limited supply. However limited liquidity prevents frequent buying activity

which is likely to negatively impact valuations.Pearl

Retail NeutralIncreased consumer spend and improving local supply of goods will positivelyimpact this sector. Strong competitive pressure is likely to impact margins that

are already squeezed.OK, Innscor

Telco Overweight

Diversification into broadband will increase value add going forward andcushion declining ARPU rates as mobile penetration expands. Diversifying intoproducts like mobile money transfer should create positive additional revenue

streams.

Econet

Tourism Underweight

Tourist arrivals increased by 10% in 2010, although bed occupancies are saidto have only increased by 2% (Source: National Budget). ADRs are still belowregional averages. This space is highly susceptible to political developments

and competing destinations within the region.

African Sun


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16

Key Equity Drivers/Catalysts in 2011

Political developments to drive foreign sentiment. With the growing influence of foreign capital,equities are increasingly vulnerable to political sentiment. The possibility of elections this year and thehandling of indigenisation will be critical factors in determining the level of volatility in the market.

Earnings quality Residual contagion from Zimbabwe dollar trading is now completely gone, localdemand is recovering, inputs are improving and inflation is stable.We believe companies will bepunished and rewarded alike on their financial performance

Deepening local financial sector and increased external availability of credit. Systemdeposits inthe local economy grew by 79% in 2010 to $2.5bn, with total loans at 2010 at $1.7bn. We forecastsystem deposits at YE2011 at $3.2bn, with 70% loan to deposit ratio, implying loans availed in 2011 of$2.2bn. We expect the trend to continue, thus positively impacting the cost of lending. In addition theincreasing activity of development institutions like PTA Bank and Afrexim Bank in offering cheaper andlonger lines of credit is likely to have positive impact on industry

IH Base-case Target Market Capitalisation for 2011: $5.1bn (+18% upside)Key assumptions/methodology:

We are forecasting a target market capitalisation of $5.1bn for FY11 implying upside of 18%. Our forecast is based on a weighted valuation of 12 coun ters representing 67% of the ZSEs total

market capitalisation and 62% of daily liquidity in 2010. We have assumed that their weightings in terms of market capitalisation remain the same throughout

2011. We assume the weightings of the respective companies remain the same until 2011. We apply a 20% discount to our fair value to take into account political risk.

Key limitations to our approach are as follows:

The absence of risk adjustment. The fact that our sample only represents a 67% weighting Our valuations are not cash flow-based, given limitations of DCF valuation in an environment in which

there is no proxy for the risk free rate.

It assumes a static composition of the index


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COMPANIES


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Equity Research

BankingZimbabwe

CBZ HoldingsUniversal appeal

Dominant player in the local marketCBZ Holdings group is an integrated financial services group in Zimbabwe. While itscore subsidiary is CBZ bank, the group is also the wholly owner of a BuildingSociety (branded Beverley), Asset Management Company (branded as Datvest),insurance company (branded Optimal) and Property Company. Additionally, thegroup also owns 59% of a local insurer. The groups bank is a number1 player inthe market; it has the largest deposit (22.3% of total), loan (25.9% of total) and thewidest branch network of 59 branches. The group retains over 150k activeaccounts. In addition the group retains a property portfolio acquired during thehyperinflationary period with an estimated at $21mn on the groups balance sheet at1H2010.

Strong Liquidity and Capital Adequacy We estimate that at 2010 will retain Tier 1 capital base of $85mn, reflecting a capitaladequacy ratio of 16.63%. The groups recent focus has been integrate BeverleyBuilding Society under one brand CBZ Bank resulting in a reduction in branchesfrom over 70 in 2009 to the present 59. It is anticipated that this will have a positiveimpact on cost to income ratios, at 1H10, the cost to income ratio was at 71%, weforecast this trend towards 52.6% to 2011E. Going forward managements focus willbe increasing efficiencies in its IT system, monetizing the groups land, andenhancing the scale in the groups smaller businesses, namely insurance.

ValuationThe Zimbabwean banking sector continues to face major challenges, namely due tothe lack of fully functioning Central Bank post dollarization, which effectivelyincreases the cost of financial intermediation due to lack of an interbank market.Thus all banks at the present juncture pursue a liability driven balance sheet model.After the dollarization of the economy in early 2009 banking deposits have seen anaggressive increase, 2010 saw a 56% increase in total system deposits to $2.5bn ofwhich CBZ had 22.3% market share. We forecast total system deposits rising to$3.2bn by YE11. We forecast deposits for CBZ of $637.5mn (2011), representing amarket share of 20%. We assume a LDR of 76%. In 2011, we are forecasting a PATof $22.4 mn, up from $16.7mn in 2010 on the back of strong deposit growth. CBZ istrading at 1.13x its 2011E BVPS and 5.2x its 2011E EPS compared to 13.6x and2.09x for comparable African peers. We are forecasting its 2011E RoE at 23.8%and we expect its RoE to trend to 31% by 2014. In the absence of proxy for CoE,we value CBZ using a weighted PBV and PER on 2011 metrics on the groups

financial services, and derive a one year target price of $0.26, implying upsidepotential of 37%. Key risks in our view include the possibility of increasedprovisioning of NPLs especially on loans availed in 2009 at higher lending rates.However we recommend the stock as a BUY.

Market Data

Report Date 02 Mar 2011

Bloomberg Ticker CBZ: ZH

Rating BUY

Current price $ 0.19

Target price $ 0.26

Market Cap $mn 116.30

Market Weight 2.59%

Common Shares Outstanding mn 684.14

Free-float 32%

Average Daily Value traded $'000 34.31

Last Dividend declared n/a

Dividend Yield 0

PER (+1) 6.97

PBV(+1) 1.37

Share price performance YTD 16%

Share Price Performance (12m)

Year Net Income EPS DPS BVPS P/E P/BV Div Yield (%) RoAA RoAE

2009 7.74 0.0113 0.0000 0.1045 15.0 1.63 0.0% 2.06% 10.8%

2010E 16.69 0.0244 0.0049 0.1240 7.0 1.37 2.9% 2.18% 21.4%

2011E 22.35 0.0327 0.0065 0.1501 5.2 1.13 3.8% 2.62% 23.8%

2012E 33.35 0.0487 0.0097 0.1891 3.5 0.90 5.7% 4.09% 28.7%

2013E 45.83 0.0670 0.0134 0.2427 2.5 0.70 7.9% 5.06% 31.0%

2014E 59.30 0.0867 0.0173 0.3121 2.0 0.54 10.2% 5.06% 31.0%

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Equity ResearchAgro Processing

Zimbabwe

Dairibord ZimbabweMilking Profits

Dairibord, well on the recovery pathDairibord Holdings produces an extensive range of products which include milk,foods and beverages which are marketed in the domestic and foreign markets. Thecurrent revenue split is 35% miks, 35% beverages, 29% foods. The group has over50 brands with factories located in Zimbabwe and Malawi. The group recorded1H10 revenue growth of 93% from prior comparable period ($31mn vs. $16mn).EBITDA rose 76% from $2,7mn to $5,3mn for 1H10. During the period, DZLs h-o-haggregate volumes grew 50%, with beverages increasing 83%, liquid milks 28%and foods 24%. We estimatethat DZLs monthly milk intake in 2010 increased from

900k litres pm in January to 1.7mn litres pm in December, excluding the additional40% pm intake from import milk substitution. Their average market share, though,remained around 50% due to increased competition within the local industry andexternally from milk imports. However, with an active installed capacity of 180mnlitres pa (liquid milks), increasing national raw milk production, and the capitalprojects undertaken in 2010, we believe DZL remains in good stead to defend itsmarket share and potentially increase it going forward.

Beverages division to lead growthNational raw milk production currently stands at 3.5mn litres pm versus estimatednational demand of 5.5mn litres pm. An additional 1mn litres pm is imported forretail, which still leaves an undersupply of 1mn litres pm in the country. We believethat going forward demand can potentially increase by a consumption leverage of1.5x GDP growth (est GDP 9.3% FY11). DZL management estimates that nationalraw milk production will grow by 30% in 2011 due to increased yields per cow. After

83% volumes growth for beverages in 2010, Management believes beverages canpotentially grow another 50% in 2011. There is established demand for beveragesboth domestically and in export markets like Botswana. Although margins arecomparatively thinner in beverages than liquid milks, management believesbeverages will lead growth for the group in 2011. The group intends to spend $8mnin CY11 on capex, to specifically upgrade its beverages capacity, improveinformation systems and purchase new trucks

Attractive ValuationWe estimate DZL trades on PER (+1) 5.7x, and EV/EBITDA (+1) 3.9x to 2011E,placing the stock at a significant discount to emerging market dairy sectorcomparables, at PER 16.9x and EV/EBITDA 10.3x for 2011E. We expect an FY10top line of $84mn given the June interims and then forecast revenue growth of 48%to 124mn for 2011E. We forecast EBITDA of $16.5mn and net income of $10.8mn

for 2011E. Using a weighted combined multiples valuation method (PER &EV/EBITDA), we have arrived at a target price of $0.40 for Dairibord Zimbabwe,implying upside of 123%. We therefore initiate our coverage of Dairibord ZimbabweHoldings with a Buy recommendation.

Market Data Report Date 02 Mar 2011

Bloomberg Ticker DZLH: ZH

Rating BUY

Current price $ $0.18

Target price $ $0.40

Market Cap $mn 62

EV $mn 64

Market Weight 1.39%


Freefloat % 41%

Average Daily Value $000s 28.52


Dividend Yield 0%

PER (+1) 4.8x

EV/EBITDA (+1) 3.4x

Share price perfomance YTD 12%


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Revenue EBITDANet

IncomeEPS($)

DPS($)

EBITDAMargin EV

NetDebt EV/Sales EV/CF EV/EBITDA P/E P/CE P/Bk EV/IC

2010E 83.7 10.9 6.5 0.02 0.00 0.1 63.9 2.1 0.8 7.8 5.9 9.5 7.5 1.7 1.7

2011E 123.7 16.5 10.8 0.03 0.01 0.1 62.3 0.5 0.5 3.2 3.9 5.7 5.0 1.4 1.4

2012E 151.5 23.0 15.5 0.05 0.01 0.2 56.3 -5.5 0.4 2.2 2.8 4.0 3.6 1.1 1.1

2013E 188.8 32.2 22.2 0.06 0.02 0.2 47.4 -14.3 0.3 1.6 2.0 2.8 2.6 0.9 0.9

2014E 238.8 40.3 28.1 0.08 0.02 0.2 35.8 -26.0 0.3 1.3 1.6 2.2 2.0 0.7 0.7

2015E 306.2 51.2 36.1 0.11 0.03 0.2 20.5 -41.2 0.2 1.1 1.3 1.7 1.6 0.5 0.5


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Equity Research

BeveragesZimbabwe

Delta CorporationEver Resilient

Delta, still dominating the marketDelta Corporation is Zimbabwes largest brewer and bottler of lagers,sparkling beverages and opaque beers. The group holds the Coca Cola Cofranchise, as well as parent company SAB Millers lager brands forZimbabwe. Delta, as is to be expected, displayed strong earnings growth in1H11. The company posted revenue growth of 51% from prior comparableperiod ($214mn vs. $142mn). EBITDA in 1H11 was $33mn, up 70% from$19mn in 1H10. There was strong volumes growth in all Delta brands withthe exception of sorghum. Total beverages volumes were up by 16% led by

63% growth in SBs and 47% growth in lagers, sorghum was down 4% astypical consumers of sorghum switched to lagers. A 2H11 update in Octobershowed lager volumes already up 54% against prior year, SBs up 41% andthe decline in sorghums 2% below prior year. Operating margins hadimproved to 19.1% and management plans to increase this margin to 21% in2012E. Deltas beverage market shares currently stand between 90-97% intheir core brands.

Increasing capacityDelta has a current installed capacity of 8.9mn hectoliters, lagers are at aCU of 78% and SBs are at a CU of 82%. With an estimated consumptionleverage to GDP growth of 3.5x and forecasted GDP growth of 9.3% in2011, it is apparent that Delta will have to address capacity issues goingforward as demand improves. The companys budgeted capex spend forFY11 is $72mn focused mainly on upgrading plant and equipment. Webelieve Delta intends to increase its active installed capacity by 600khectoliters to reach a total capacity of 9.5mn hectoliters FY12. Thecompanys key drivers going forward will be their strategic shift to highermargin products particularly in the lagers range and the capex spend onequipment and machinery to reduce maintenance costs. We believe that thesupply chain savings and improved efficiencies will reduce aggregate costsand translate into higher margins as anticipated by management.

Attractive ValuationWe estimate Delta trades on PER (+1) 11.29x, and EV/EBITDA (+1) 6.06x to2012E, placing the stock at a discount to emerging market beverage sectorcomparables, at PER 16.3x and EV/EBITDA 9.1x for 2012E. We expect anFY11 top line of $465mn given the September interims and then forecastrevenue growth of 26% to $589mn for 2012E. We expect FY11 EBITDA of$103mn and then forecast growth of 35% to $139mn for 2012E. We expectFY11 net income of $52mn and forecast 42% growth to $74mn for 2012E.Using a weighted combined multiples valuation method (PER &EV/EBITDA), we have arrived at a target price of $0.87 for DeltaCorporation, implying upside of 21%. We therefore initiate our coverage ofDelta Corporation with a Buy recommendation.

Market DataReport Date 02 Mar 2011

Bloomberg Ticker DELTA:ZH

Rating HOLD



Market Cap $mn 833

EV $mn 841

Market Weight 18.62%


Freefloat % 12%

Average Daily Value $000s 0.407

Last Dividend declared 30.09.2010

Dividend Yield 1%

PER (+1) 16.2x

EV/EBITDA (+1) 8.2x



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Revenue EBITDANet

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NetDebt EV/Sales EV/CF EV/EBITDA P/E P/CE P/Bk EV/IC

2010 324.47 48.92 31.06 0.03 0.00 0.15 840.57 7.69 2.59 7.34 17.18 26.82 4.03 5.23 4.83

2011E 465.45 102.46 51.93 0.04 0.01 0.22 895.50 62.62 1.81 9.29 8.20 16.04 3.27 4.15 3.64

2012E 588.92 138.80 75.03 0.06 0.02 0.24 891.06 58.18 1.43 4.08 6.06 11.10 2.69 3.29 2.92

2013E 692.56 177.47 98.98 0.09 0.03 0.26 844.12 11.23 1.21 3.56 4.74 8.41 2.14 2.58 2.29

2014E 781.73 205.33 118.60 0.10 0.03 0.26 761.87 -71.02 1.08 3.39 4.09 7.02 1.73 2.05 1.92

2015E 842.04 216.18 129.49 0.11 0.03 0.26 669.88-

163.01 1.06 3.16 3.89 6.43 1.49 1.68 1.63

2016E 901.14 227.12 140.18 0.12 0.04 0.25 571.58-

261.30 0.99 2.99 3.70 5.94 1.30 1.40 1.40


25/3322

Econet WirelessData: The New Frontier

Econet released a solid set of 1H11 earningsEconet released an encouraging set of earnings for the 6 month period endedAugust 2010. The company recorded revenue growth of 79% from priorcomparable period ($235mn vs. $131mn). EBITDA rose 66% from $69mn to$114mn for 1H11, the EBITDA margin, however, shrunk 4% from 53% to 49%,due to increased provisions for interconnect fees. During the period, Econetssubscriber base grew significantly from 3,5mn to 4,6mn subscribers(representing 73% market share). We estimate ARPUs however to havedeclined from $15.38 to $9.70 with the inclusion of marginal users associatedwith increased penetration. With subscriber base growth approaching maturity,Econet is now focusing on value added services like broadband to diversifyrevenue streams and cushion against declining ARPUs.

The future lies in dataThe group has already spent $100mn on network development CY10 andmanagement plans to spend another $400mn over the next two years. Thisinvestment is mainly focused on developing Econets fibre backbone toenhance its fixed and mobile broadband service offering. Zimbabwes internetpenetration is 12% which ahead of the average in SSA, while broadbandpenetration is however only 0.14%. Herein, we believe lies the upside forEconet, whose superior infrastructure should enable it take advantage of the

opportunity. Already within 3 months of the official launch (Oct 10) of theirbroadband offering, the group acquired 432k data subscribers. However, thegroup could still see significantly higher uptake of the product, as 432ksubscribers represents less than 10% of the groups total subscriber base. Inaddition, the company in FY11 rolled out a mobile life insurance offering,Ecolife, which has attracted 800k users, while it is anticipated a mobile transferplatform will be rolled out in FY12.

Attractive ValuationWe estimate Econet trades on PER (+1) 6.1x, and EV/EBITDA (+1) 4.0x to2011E, placing the stock at a significant discount to emerging market telecomcomparables, at PER 10.2x and EV/EBITDA 5.1x for 2011E. We foreseeARPUs, cushioned by mobile broadband revenues stabilizing at $9, whileforecast GDP growth of 8%. We expect subscribers to close at 5.3mn for FY11reflecting a 52.3% increase on prior year. We forecast revenue growth of 38.7%

to 503.3mn for 2011E, with EBITDA margins of 49% resulting in EBITDA of$246.6mn. We forecast net income of $141.3mn for 2011E. Using a weightedcombined multiples valuation method (PER & EV/EBITDA), we have arrived ata target price of $6.91 for Econet Wireless, implying upside of 41%. Wetherefore initiate our coverage of Econet Wireless Holdings with a Buyrecommendation.

Market DataReport Date 02 Mar 2011

Bloomberg Ticker ECWH: ZH

Rating BUY




EV $mn 990.9

Market Weight 19.11%


Freefloat % 42%

Average Daily Value traded $000 0.407

Last Dividend declared 31.08.09

Dividend Yield 0%

PER (+1) 6.1x

EV/EBITDA (+1) 4x



Revenue EBITDANetIncome

EPS($)

EBITDAMargin EV

NetDebt

EV/Sales EV/CF

EV/EBITDA P/E P/CE P/Bk ROaE ROaA

2010 362.8 179.3 113.2 0.65 49.4% 990.9 124.8 2.7 2.8 5.5 7.7 6.4 5.3 69.4% 28.8%

2011E 503.3 246.6 141.3 0.81 49.0% 1,060.8 194.7 2.0 2.4 4.0 6.1 4.6 3.1 63.3% 28.9%

2012E 636.2 308.5 173.1 0.99 48.5% 1,103.3 237.2 1.6 2.0 3.2 5.0 3.7 2.0 48.5% 25.1%

2013E 678.9 329.3 178.0 1.02 48.5% 1,093.1 227.0 1.5 2.2 3.0 4.9 3.4 1.5 35.2% 20.5%

2014E 699.5 339.3 179.6 1.03 48.5% 1,091.4 225.3 1.4 2.1 2.9 4.8 3.3 1.2 27.3% 17.7%

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Equity ResearchTelecomsZimbabwe


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Equity ResearchCement

Zimbabwe

Lafarge CementCementing Gains

Lafarge, performing consistentlyLafarge Cement Zimbabwe is a manufacturer involved in the production andsale of cement both domestically and regionally. The group holds anestimated one third of the installed capacity for cement in the country and ismajority owned by international cement group, Lafarge, headquartered inParis. Gross turnover in 1H10 rose by 69% to $17.2mn from $10.1mn, H-O-H, driven by higher domestic demand. Profit before tax increased 300% to$2mn from $691k H-O-H. After tax profits increased by 84% to $1.5mn from$807k, whilst earnings firmed by 50% rising to $0.02 per share from $0.01.

Management provided revenue guidance for 2H10; in line with seasonaldemand, revenue in the second half of the year should exceed that of thefirst half. Given 1H09 revenue of $10.1mn and 2H09 revenue of $18mn(FY09 $28mn), this implies an increase of 44% in H2 vs H1. It is anticipatedthat as the economy continues to recover, construction projects will berevived including shelved projects, leading to increased demand for cement.Zimbabwes cement industry only has two dominant players, LafargeCement and their competitor PPC.

Increasing capacityLafarge Cement currently has an installed capacity of 450k tons per annum.Capacity utilization averaged 70% in 2010, but is anticipated to rise to 80%in 2011 and then 90% in 2012. Lafarges operating margin is ideally between18-20%, although management believes this can rise to 30%. At present thecompanys production split is as follows; 90% cement. 7% clinker and 3%

special paints/aggregates. With a current cement price of $154 per ton andclinker $87 per ton, we believe this split greatly assists the top line,compared to the 2009 split of 70% cement, 27% clinker. Ultimately Lafargeis targeting an output capacity of 1mn tons per year and discussions aroundthis are currently being held by management. This would likely requireinstalling a new plant, the capex for which would be raised by a combinationof debt and equity with the assistance of the parent company in France.Lafarge already has existing export markets in Mozambique and Malawi,where regional cement prices can be as high as $176 per ton (cement). Thefirms current quarry reserves have a lifespan of 15 years and 2 potentialnew reserves are being explored 200km from their present site. Lafargespredominant challenge continues to be consistent power, the firm is in talkswith ZESA about possible solutions.

Attractive ValuationWe estimate Lafarge trades on PER (+1) 8.42x, and EV/EBITDA (+1) 6.1x to2011E, placing the stock at a discount to emerging market cement sectorcomparables, at PER 12.8x and EV/EBITDA 7.6x for 2011E. We expect anFY10 top line of $47mn given the June interims and then forecast revenuegrowth of 23% to $58mn for 2011E. We expect FY10 EBITDA of $8.8mn andthen forecast growth of 36% to $12mn for 2011E. We expect FY10 netincome of $6.4mn and forecast 34% growth to $8.6mn for 2012E. Using aweighted combined multiples valuation method (PER & EV/EBITDA), wehave arrived at a target price of $1,26 for Lafarge Cement, implying upsideof 40%. We therefore initiate our coverage of Lafarge Cement Zimbabwewith a Buy recommendation.


Bloomberg Ticker LAFARGE:ZH

Rating BUY



Market Cap $mn 72

EV $mn 72

Market Weight 1.61%


Freefloat 18%

Average Daily Value traded $000s 14.64


Dividend Yield 0%

PER (+1) 8.4x

EV/EBITDA (+1) 6.1x

Share price performance YTD -6%


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Revenue EBITDANet

IncomeEPS($)

DPS($)

EBITDAMargin EV

NetDebt EV/Sales EV/CF EV/EBITDA P/E P/CE P/Bk

2010E 46.99 8.81 6.36 0.08 0.00 0.19 72.13 0.13 1.56 9.65 8.31 11.32 10.73 3.012011E 58.23 12.01 8.55 0.11 0.02 0.21 70.93 -1.07 1.26 4.26 6.10 8.42 8.07 2.34

2012E 69.93 15.80 11.11 0.14 0.03 0.23 67.75 -4.25 1.05 3.36 4.64 6.48 6.25 1.82

2013E 76.69 18.87 13.16 0.16 0.03 0.25 58.04 -13.96 0.95 3.26 3.88 5.47 5.28 1.43

2014E 84.92 20.84 14.59 0.18 0.04 0.25 47.47 -24.53 0.86 2.97 3.51 4.93 4.78 1.16

2015E 92.12 22.56 15.95 0.20 0.04 0.24 35.65 -36.35 0.79 2.71 3.25 4.51 4.39 0.96


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Equity ResearchHotel and Retail

Zimbabwe

Meikles LimitedLeveraging on Access to Financing

Key player in retail and hospitality spaceMeikles Limited is a conglomerate encompassing hotels, a food retail chain,department stores and an agriculture business. The group operates the largest retailchain in the country, with 51 supermarkets under its TM retail brand, with averagespace per store of 1100 square meters. The group also operates 24 Thomas Meiklesstores, including Department stores, Meikles Home and Beauty Stores, as well ashardware outlets. In the hotel business, the group operates the Meikles Hotel inHarare, Victoria Falls Hotel in the resort town and the Cape Grace Hotel in SouthAfrica. Tanganda, the agricultural arm of the group currently crops 4.4 ha of land, ofwhich 60% are taken up by tea which is sold both as bulk unpacked tea, and aspackaged tea under the Tanganda brand.

Financing to boost Supermarkets & Thomas Meikles StoresTM Supermarkets and Thomas Meikles stores are expected to see significant growthin revenues as the economy continues to pick up and disposable incomes increase.However, both have so far been limited by a lack of financing. Limited capital and lowstock levels have reduced the extent to which TM Supermarkets have benefitted fromgrowing retail sales in the country, and have therefore seen a reduction in groupsmarket share. In addition, TM supermarkets have not been refurbished sincedollarization, as have key competitors. As a result, TM supermarkets have seen salesper month of $16mn in 1H2011 in comparison to sales per month of approximately$19mn for the comparative period by competitor Ok Zimbabwe. . Approximately$13mn in capital from Pick and Pay will see TM supermarkets refurbishing andincreasing stock levels as a result of favorable terms and credit guaranteed by Pickand Pay. Thomas Meikles stores have also suffered from financial constraints,

leading to an inability to extend credit to customers, historically an important aspect ofthe business. Thomas Meikles stores will, however see increased capacity to extendcredit as a result of a relationship with TN Bank, which may allow the group access tocredit at reasonable levels. With 20,000 customers taking up credit at the moment, thegroup aims to have 80,000 customers receiving credit.

ValuationWe value the Meikles Limited Group on a sum of the parts basis. Our valuation of TM

Supermarkets and Thomas Meikles Stores is based on a combined basis. Using

emerging market P/E, EV/EBITDA and EV/SALES of 19.9, 11.7 and 1.06 respectively,

we arrived at a valuation of $92.5mn for the Supermarkets and Department Stores. A

combined multiples valuation based on emerging market agriculture stocks P/E,

EV/EBITDA and EV/SALES of 13.9x, 8.4x and 1.06x to 2012E yields a valuation of

$6.6mn for Tanganda. Emerging market EV/EBITDA and P/E multiples of 9x and

24.2x yield a valuation of $35.2mn. Our sum-of-the-parts valuation results in a total

valuation of $100.81mn for the group, and a 12-month target price of $0.48, implying

downside of 4%. We therefore initiate coverage of Meikles Limited with a Hold

recommendation

.

Market Data

Report Date 02 Mar 2011Rating HOLD

Bloomberg Ticker KMAL: ZH


Target Price 0.48


EV $mn 145.70

Market Weight 2.74%


Freefloat 37%

52 week Average trade value '000 30.78


PER (+1) 30.36

EV/EBITDA (Hist.) 7.62

Dividend Yield 0%

ROE -16%



Total

income EBITDANet

Income EPS ($)DPS($)

EBITDAMargin EV

NetDebt

EV/Sales

EV/CF

EV/EBITDA P/E P/CE P/Bk

2010 162.7 -6.0 -4.5 -0.018 0.00 -3.7% 145.7 23.3 0.9 3.4 -24.4 -27.5 6.2 0.89

2011E 334.4 3.3 -2.5 -0.010 0.00 1.0% 142.2 19.8 0.4 -17.7 42.7 -49.1 3.3 0.90

2012E 353.4 18.1 3.7 0.015 0.00 5.1% 146.4 24.0 0.4 74.3 7.9 32.7 2.9 0.87

2013E 413.5 40.1 20.0 0.082 0.00 9.7% 135.6 13.2 0.3 8.5 3.5 6.1 2.5 0.76

2014E 446.5 48.6 25.9 0.106 0.00 10.9% 117.4 -5.0 0.3 6.0 2.9 4.7 2.0 0.65

2015E 480.3 53.7 29.4 0.120 0.00 11.2% 95.1 -27.3 0.3 5.1 2.7 4.2 1.6 0.56

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Equity Research

BankingZimbabwe

NMB BankSticking to its knitting.

Focus on its niche marketNMB Bank was formed in 1992 as an acceptance house and obtained acommercial banking license in 2000. Liquidity problems led to two bank runsin 2004 and 2007. Post dollarization the bank has seen a return of theprevious management who retain a shareholding in the bank. The bankshistoric strength is corporate banking having pioneered customer service as

key differentiator. The bank has 7 branches across the country. NMB has aprimary listing in Zimbabwe and a secondary listing on the LSE.

Operations in 2011 to be boosted by recent capital raiseIn the face capital constraints related to legacy issues during thehyperinflationary period, as well as new minimum capital requirements of$12.5mn instituted in 2009, the bank undertook a capital raise by way of arights offer. The group raised $10.3mn with African Century, a UK basedinvestment firm underwriting the offer, and retaining a 25% stake.Resultantly we forecast the group had Tier 1 capital of $19mn at the end of2010, reflecting a capital ratio of 90%. In addition we estimate the liquidityratios to have improved from 51.6% in 2009 to 37.5% in 2011. We alsobelieve that the technical expertise that African Century bring to NMB willassist NMB in executing its strategy.

ValuationThe Zimbabwean banking sector continues to face major challenges,namely due to the lack of a fully functioning Central Bank post dollarization,which effectively increases the cost of financial intermediation due to lack ofan interbank market. Thus all banks at the present juncture pursue a liabilitydriven balance sheet model, while liquidity ratios thus remain stubbornlyhigh, limiting margins. After the dollarization of the economy in early 2009banking deposits have seen an aggressive increase, 2010 saw a 56%increase in total system deposits to $2.5bn of which NMB had 3.42% marketshare. We forecast total system deposits rising to $3.2bn by YE11. Weforecast deposits for NMB of $143mn (2011), representing a market share of5%. We assume a LDR of 68%. In 2011, we are forecasting a PAT of $2.13mn, up from $0.33 million in 2010 on the back of strong deposit growth.NMB is trading at 1.33x its 2011E BVPS and 13.2x its 2011E EPScompared to its African peers trading at 2.09x PBV and 13.6x PER. We are

forecasting its 2011E RoE to be subdued (13.4%), we expect its RoE torecover to 28.3% by 2014. In the absence of proxy for CoE, we value NMBusing a weighted PBV and PER on 2011 metrics, and derive a one yeartarget price of $0.013 implying an upside of 18%. Thus we recommend thestock as a HOLD.


Bloomberg Ticker NMBZ: ZH

Rating HOLD



Market Cap $mn 31

EV $mn n/a

Market Weight 0.69%


Freefloat % 25%

Average Daily Val. $000s 3.33


Dividend Yield 0%

PER (+1) 14.5

PBV (+1) 1.5



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Year Net Income(Mn) EPS DPS BVPS P/E P/BV Div Yield (%) RoAA RoAE

2009 2.28 0.0012 0.0000 0.0051 8.0 1.98 0.0% 7.67% 27.2%2010E 0.33 0.0001 0.0000 0.0068 68.6 1.46 0.0% 0.41% 2.4%

2011E 2.13 0.0008 0.0001 0.0075 13.2 1.33 0.8% 1.64% 10.5%

2012E 5.37 0.0019 0.0005 0.0090 5.2 1.12 4.8% 3.38% 23.2%

2013E 7.51 0.0027 0.0007 0.0110 3.7 0.91 6.7% 3.95% 26.9%

2014E 12.17 0.0043 0.0011 0.0168 2.3 0.59 10.8% 4.42% 28.3%


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Equity ResearchRetail

Zimbabwe

OK ZimbabweBoosting margins through cost management

Top-line growth amidst rising operating costsOK Zimbabwe operates the second largest retail chain in the country, with 50stores, and an average of 1400 square meters per store. OK stores operate under4 brands: OK Stores, Bon Marche stores, OK express stores and Pax Cash andCarry stores, to cater to different segments of the population. The group hasbenefitted from a capital injection of $15mn in 2010, underwritten by Investec,which has allowed the group to undertake a refurbishment program. In theunaudited results for the 6 months ended 30 September, OK Zimbabwe postedrevenues of $116mn in 1H2011, representing 53% growth in its topline (y-o-y). Thegroup also witnessed significant improvement in shrinkage, which was estimated at1.48% in 2010, compared to 3.56% in 2009. However, EBITDA declined 37% to$2.4mn on the back of a 67.4% increase in overheads, from $11.1 mn to $18.3 mn,which grew faster than growth in revenues. Management has highlighted that salesper month of $20mn were achieved in October and over $22mn in sales wasexpected in November.

Cost containment central to future prospectsThe Zimbabwean economy is forecasted to grow 9.3% in 2011 and retailers willbenefit from the consequent growth in disposable incomes, consumer spending. Aboost in civil servant wages, estimated at 40%, will also see an increase inconsumers disposable The group is also expected to refurbish approximately 6stores a year in the next few years, spending over $5mn a year on refurbishment, a

move which we expect will increase OKs market share to 15% by 2015, from acurrent estimated 11%. Growth in both domestic disposable incomes andincreasing market share will facilitate significant top line growth for OK. There isalready evidence of this growth in turnover, with revenues for the 1H2011 53%higher than 1H2010. We expect sales of $253mn and $284mn in FY11 and FY12.Management has highlighted that operating costs are expected to remain stable atthese levels, therefore top-line growth will translate into significant growth inEBITDA margins, which we forecast to grow from current 2.5% in FY11 to 3.5%and 4.5% in FY12 and FY13 respectively. We forecast growth in EPS of 132% and83% in FY11 and FY12.

ValuationWe estimate OK Zimbabwe trades on PER (+1) 14.2x, EV/EBITDA (+1) 6.1x andEV/SALES (+1) 0.2x to 2012E, placing the stock at a discount to emerging marketretailers, at PER 19x, EV/EBITDA 11.2x and EV/SALES 1x for 2012E. We expect

an FY11 top line of $252.7mn; on the back of a stronger second half performanceand forecast revenue growth of 12.3% to $284mn in FY12. We expect FY11 andFY12 EBITDA of $6.3mn and $9.9mn. We forecast FY11 net income of $2.8mn andforecast 83% growth to $5.2mn in FY12. Using a weighted combined multiplesvaluation method (PER, EV/EBITDA and EV/SALES), we have arrived at a targetprice of $0.087 for OK Zimbabwe, implying upside of 13%. We therefore initiateour coverage of OK Zimbabwe with a Hold recommendation.

Market Data

Report Date 02 Mar 2011Bloomberg Ticker OKZIMBAB: ZH


Target Price 0.09

Market Cap $mn 75.20EV $mn 77.15

Market Weight 1.68%

Common Shares Outstanding mn 983,000

Freefloat 46.00%

Average daily value traded $'000 38.57


PER (+1) 14.15

EV/EBITDA (+) 6.12

Dividend Yield 0%

ROE 6%

Share price performance YTD -4%


Total

income EBITDANet

IncomeEPS($)

DPS($)

EBITDAMargin EV

NetDebt

EV/Sales EV/CF


2010 187.5 4.9 1.2 0.006 0.00 2.6% 77.1 3.4 0.4 -48.0 15.8 60.2 3.7 4.42

2011E 252.7 6.3 2.8 0.013 0.00 2.5% 60.8 -12.9 0.2 32.3 9.6 26.0 2.0 2.16

2012E 283.7 9.9 5.2 0.024 0.00 3.5% 59.2 -14.5 0.2 37.6 6.1 14.2 1.8 1.90

2013E 327.2 14.7 8.5 0.039 0.00 4.5% 54.8 -18.9 0.2 11.5 4.1 8.7 1.5 1.592014E 383.0 22.0 13.6 0.063 0.00 5.8% 45.8 -27.9 0.2 5.9 2.8 5.4 1.2 1.26

2015E 446.7 29.9 19.2 0.089 0.00 6.7% 32.0 -41.7 0.1 3.8 2.0 3.8 0.9 0.97

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Equity Research

PropertyZimbabwe

Pearl PropertiesA simple supply and demand case

Diverse property portfolio covering prime locationsThe group owns 117,800 m2 of lettable space, split 35% CBD offices, 29%industrial, 21% office parks, 10% CBD retail, and 5% retail suburban. It also owns347,000 m2 of development land, the majority of which is residential. Pearl islooking to further diversify into the leisure space and expand its retail space. Theportfolio is heavily weighted towards commercial, but we believe there may be asignificant opportunity in leisure, given the likely upturn in tourism in Zimbabwe.Most of the companys buildings are comparatively modern and situated in keylocations across the country.

Fundamentalsupport for rentalsPearl Properties unaudited financial results for the 6 months ended 30 June2010 revealed that the company is seeing an increase in rental receipts, withrental income growing 68% (y-o-y), to $3.3mn on the back of improving rentalsper square metre, which grew 66% (y-o-y), to $4.71 per square metre. Rentalyields consequently rose 4.7% to 9.22% on the back of rising rental rates.Rentals on the groups properties are forecasted to rise 15% in 2011 and 10% in2012 from an estimated $5.00 per square metre in 2010. Growth in rental rates isthe result of both demand and supply factors. On the demand side, increasedeconomic activity is driving companies to seek new, high quality spaces in whichto conduct business. On the supply side, which we believe is the main driver; theZimbabwean property sector is facing key constraints in the development of newproperties. Chief amongst these constraints is the lack of long term funding tofinance such projects within the country. Lower yields than the 10% to 15%achievable in other regional markets also continue to limit the extent of foreign

investment in the local property sector. We believe this is likely to remain thecase in the medium term, and existing property owners will continue to benefitfrom the slow recovery in the supply of rental spaces in the economy.

ValuationWe estimate Pearl Properties trades on P/BK (+1) 0.40x and P/NOI factor (+1) of10.8 to 2011E, placing the stock at a discount to emerging market propertycounters, at P/BK of 0.8x and P/NOI of 13.9x for 2011E. We expect an FY10 topline of $6.9mn on the back of growing rentals per square metre and growingrental income. We forecast FY11 revenues to grow to $7.9mn on the back of anincrease 14% in average rentals to $5.8 per square metre. We also expect rentalincome to be supported by a decline in vacancy rates, to 5% from an estimated15% at the moment. We expect FY10 Profit Before Fair Value Adjustments of$3.4mn and $3.5mn in FY10 and FY11, along with book values of $80mn and$90mn. Using a weighted combined multiples valuation method (P/BK & P/NOI),

we have arrived at a target price of $0.0391 for Pearl Properties, implying upsideof 37%. We therefore initiate our coverage of Pearl with aBuy recommendation.

Market Data

Report Date 02 Mar 2011

Bloomberg Ticker PEARL: ZH


Target Price 0.039


EV $mn 35.83

Market Weight 0.79%

Common Shares Outstanding mn 1,238,160

Freefloat mn 18%

Average daily value traded $'000 30.78


PER (+1) 3.39

P/BK (+1) 0.40

Dividend Yield 0%

ROE 3%


Share Price Performance $ (12m)

Total

income EBITDANet

IncomeEPS($)

DPS($)

EBITDAMargin EV

NetDebt

EV/Sales


2009 5.3 3.2 2.4 0.002 0.00 60.5% 35.8 -0.1 6.8 11.2 15.1 14.6 0.48

2010E 6.9 4.4 4.6 0.004 0.00 63.3% 31.9 -4.0 4.6 7.3 7.9 7.7 0.45

2011E 7.9 5.1 10.6 0.009 0.00 64.9% 31.2 -4.7 4.0 6.2 3.4 3.2 0.40

2012E 9.4 6.4 15.6 0.013 0.00 68.2% 27.7 -8.2 3.4 5.0 2.3 2.2 0.342013E 10.2 7.0 15.2 0.012 0.00 68.4% 23.7 -12.2 3.1 4.6 2.4 2.3 0.30

2014E 11.0 7.6 11.1 0.009 0.00 68.7% 19.1 -16.8 2.9 4.2 3.2 3.1 0.28

2015 E 11.9 8.2 11.9 0.010 0.00 68.9% 14.1 -21.8 2.6 3.9 3.0 2.9 0.25

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Equity ResearchAgricultureZimbabwe

SeedcoPushing regional boundaries

Aggressive growth in productionSEEDCO is seed-manufacturing company, with operations in Zimbabwe,Zambia, Malawi and is planning to expand operations in East Africa. Thecompany manufactures maize, cotton, soya beans and winter cereal seeds.Maize seed makes up majority of the groups production, taking up 75% to 80%of total production. Production of maize seed, the groups main product,increased 83% in the period, to 45,000 tonnes. Most of the growth in productionwas registered in Zimbabwe, which experienced growth of 200%, to 23,000

tonnes of maize seed. Malawi and Zambia also saw growth in production of24% and 29%, to 5,700 tonnes and 15,000 tonnes respectively. Strong growthin sales is therefore expected on the back of the strong growth in the groupsseed production. In the unaudited results for the 6 months ended 30 September2010, Seedco posted an encouraging set of financial results, with revenuesrising 58% to $20.3mn and EBITDA rising 217% to $1mn year-on-year.However, as the first half of the year is Seedcos cost accumulation period, thegrowth in intake of seed, along with production was the key take away from theresults. Increasing capacity and support for demandWith existing operations in Malawi, Zambia and Botswana, Seedco is lookingto expand in East Africa in the short to medium term and is exploringopportunities in West Africa. Kenya, Tanzania and Ethiopia, may produceclose to 10,000 metric tonnes by 2013, from an estimated 200 metric tonnes

currently produced. Local production in East Africa will also see a significantimprovement in the groups margins. This is because seed was previouslyexported into the region from Zambia, at a cost of $230/MT, equivalent to 12%of the average price the group receives for maize seed. Regional expansionwill also bring about a diversification of the groups revenues by geography and by season, to assist in the smoothening of Seedcos revenues.Electioneering and government programs which traditionally bring Seedcosignificant demand, along with donor programs attempting to ensure foodsecurity in the region will continue to support the demand for Seedcosproduce. There is some risk that growth in sales in Zimbabwe, Seedcos mainmarket will be constrained by the lack of financing that is currently plaguing thecountry, which may continue to see farmers in the country unable to take uphigh volumes of seed. We believe this is mitigated, however, the expansioninto other African countries.ValuationWe estimate Seedco trades on PER (+1) 10.4x, and EV/EBITDA (+1) 6.7x to2012E, placing the stock at a discount to emerging market agriculture equities,at PER 13.8x and EV/EBITDA 8.4x for 2012E. We expect an FY11 top line of$84.7mn on the back of 83% growth in maize seed production. We forecastFY12 revenues to grow to $135mn on the back of a 58% increase in total seedsales in FY12. We expect FY11 EBITDA of $24.5 and forecast growth of 54% to$37.7mn in FY12

Zimbabwe Equity Strategy-2011 020311

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