Alexandar Gonese Business Correspondent
The time has come for Econet to leave the Zimbabwe Stock Exchange. The Econet share price is trading at almost half its true value, when compared to other listed telecoms operators in Africa. An analysis of Econet’s financial performance ratios, when compared to other listed operators shows, that while it is performing as well as any of these operators, its share price is heavily discounted by as much as 50 percent.

Whilst Econet is the second most valuable stock on the ZSE it is important to analyse its financial performance against that of its peers in the telecoms industry in Africa to be able to see clearly if its share price is over- or under-valued.

To judge Econet fairly we have looked at five other telecom operators in Africa who are listed, namely Vodacom, MTN, Bharti, Safaricom and Mobnil.

From these ratios (on the table below) one would assume that in terms of valuation Econet should be among the most valuable telecom companies in Africa. A look at the share price however sadly shows the opposite.

Econet is completely out of line with its peer group. With an Enterprise Value /EBITDA ratio of 4.7 Econet is, in fact, trailing by 48 percent, on the average of its peers, of 8.98X.

Zimbabwean analysts commonly use price to earnings ratio to analyse listed companies. Disregarding the loss making Mobnil which has a negative PER Econet has the lowest PER at 7.07 against a highest PER of 27.26 and an average PER of 16.32.
Econet is far above its peers yet its share price reflects an underperforming company.

The million dollar question is why?
Some analysts have lazily pointed to perceived poor corporate governance as the reason for the undervaluation of Econet.
When Econet first came to the stock exchange in 1998, it was looking for US$5 million, to help develop its business.

It was then valued at just US$10 million. The company never went back to shareholders again for funds, even by way of rights issues, as would be the case for a company starting out.

Shareholders who have held the shares, which they mostly bought in Zimbabwe dollars, have seen them rise in value by more than 10 000 percent, even excluding the impact of hyperinflation.

You cannot look at that performance and say this is a badly governed company, because if this is what bad governance achieves, then may all companies be governed this way!

It must be noted that although Dr Strive Masiyiwa sought to pioneer cellphone operations in Zimbabwe, Econet was actually the last company to be licensed and to start cellphone operations yet today it is the largest cellular operator in Zimbabwe.
The company has consistently produced stellar results.

Any corporate mis-governance should negatively affect earnings, to the extent that Econet has consistently produced financial results superior to its telecom peers one can conclude that the company is indeed well governed compared to its telecom peers.
In my opinion there are basically two reasons for the undervaluation of Econet, namely Zimbabwean risk and illiquidity of the ZSE, and they can both be explained analytically.

Econet has been listed since 1998, and when you look at the history of the stock performance, it is very clear that the share price held its own, until there was a perception, in the international capital markets that Zimbabwe had become high risk.

During the hyperinflation period, although international investors fled, the stock acted as a shelter for domestic investors, who used it as a hedge against inflation.

When the multi-currency regime was introduced in 2008, although foreign investors began to trickle back, in small numbers, the domestic investors, both institutional and retail were almost wiped out.

Today, the Old Mutuals, and First Mutuals of this world are a shadow of what they were, a few years ago. So basically as illiquidity set in the volumes needed to sustain Econet’s value at its correct level disappeared.
The introduction of a share buyback scheme, by the company, was a textbook response to this situation by the board of the company.

What Econet was essentially doing was acting as a buyer of last resort for its shares, to ensure the price did not collapse completely.
It is interesting to see that while foreign investors were very happy with the scheme since they were            short-term investors, domestic shareholders who are illiquid long-term investors demanded dividends.

Realising that it needed to somehow stimulate domestic activity, the company even resorted to a share split, but it was to no avail, there are no domestic investors left in Zimbabwe.

If the founder wants to realise the full value of the company, the time may have come to execute another textbook solution, which is to delist the company from the ZSE, and go to another exchange like the JSE, or London Stock Exchange.

Based on the multiples of its peers, shown above Econet has a true value well in excess of US$2 billion, which means it can enter any of these exchanges as a respectable company. This will address the issue of illiquidity on the ZSE.

To ensure easy trading for Zimbabwean shareholders the company could maintain a secondary listing on the ZSE. To address the issue of Zimbabwean risk there is need to merge Econet Zimbabwe with those other telecoms businesses controlled by the founder, that are outside Zimbabwe, such as Liquid, which alone is estimated to be valued at about a billion dollars, based on data supplied by a South African, JSE company, that has a minority interest in it. Such a merger will significantly diversify Zimbabwean risk.

The primary purpose of a stock exchange for a company to raise capital, when it needs it.
When an exchange is not able to mobilise capital for any reason, either because of illiquidity, or because it is just too small, that exchange ceases to offer any real value, to a company.

This is what happened when companies like Old Mutual, and Anglo American, had to decamp from the JSE to the LSE. As Econet begins to consolidate its position as a serious telecoms operator in Africa it will need to look at merging with other players.
Deals will be concluded on better terms if Econet is listed on a top exchange like the LSE than if it maintains its primary listing on the ZSE.

  • Alexander Gonese is the MD of TN Financial Services (Private) Limited and writes in his personal capacity.

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