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BizDay Zimbabwe

Will Zimplow’s consolidation be unique and fruitful?

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Zimplow last month published a circular to shareholders relating to a proposed share consolidation exercise.
The company is seeking for a 4 to 1 share consolidation subject to shareholder approval at an annual general meeting to be held today.
Other resolutions on the table apart from the traditional business include the amendment of the executive share option scheme and employee share ownership trust.
Post Zim dollar dollar era, a few share consolidations that have been undertaken have not yielded positive results relative to the intended objectives.

Will Zimplow’s consolidation be unique and fruitful or just a corporate chest-beating exercise? Another question key to the investment community is on whether the new-look Zimplow executive team should be focussing on share consolidation rather than on key fundamentals as a way of creating value to shareholders.

Corporate finance theory has highlighted various motivations that companies seek to achieve through share consolidations.
Chief among the reasons relate to reducing price volatility of a stock, easier management of share register and making shares more attractive to a broader range of investors within the investing public.

Such were the motivations by Zimplow according to the circular they published as they highlighted their concern over the high number of its ordinary shares.
In addition, the company highlighted the need to reduce the administration costs of managing the share register and the need to enhance the stock’s competitiveness relative to its peers as a way of attracting new potential investors.

An examination of these motivations by Zimplow may possibly reveal a weak case for consolidation of the listed agriculture and mining supplier.
While Zimplow’s concern for managing the share register may possibly sound reasonable as the number of issued shares will reduce to 155,68 million from the current 622,72 million ordinary shares.

A further investigation on other listed firms which have not considered this option yet having large registers, however, leaves a lot to be desired.
Examples include Dawn Properties, Bindura Nickel Corporation, ZPI, Ariston, RTG, Pearl Properties and Mash Holdings among small and mid-cap stocks while Delta Corp, Barclays and OK Zimbabwe are examples of large-cap counters.

Worth noting is that all these counters currently command issued ordinary shares above one billion with Dawn and Barclays having in excess two billion shares. From this end, Zimplow’s case may possibly have a weak argument relative to these other companies.

Zimplow may take a cue from other consolidations that have taken place in the last 12 to 24 months pertaining to the reduction of price volatility.
The worst case scenario was NMBZ which undertook a similar exercise last year with a 10 for 1 factor which reduced the authorised shares from 3,5 billion to 350 million shares.

After the consolidation, the price was elevated from the 0,5c-0,8c range to 6c to 9c range in July 2013. The price at one point reached a high of 11c before taking a beating. By the end of the year, NMBZ had shed 24 percent to close at 5c and currently it is down 54 percent and trading at 3c.

Pioneer in 2012 also undertook a similar exercise with a similar factor as with NMBZ and reduced the group’s authorised share capital from 1,4 billion to 140 million ordinary shares with 106,48 million of the ordinary shares in issue.

The share price subsequently graduated from the 0,3c-0,7c range to 3c-7c. However, for Pioneer the fortunes were mixed as it closed the year at 1c, down 86 percent from the peak of 7c post the consolidation.

Another 12 months down the line, the transport and logistics company closed the year at 3c, which was a solid two-fold gain.
Key to note on NMBZ and Pioneer is the fact that the consolidations were done so as to allow these companies to increase their authorised share capital following other transactions that would follow thereafter. This currently is different from Zimplow’s case unless it is the first step towards possible transactions within the pipeline.

Only time will tell!
The other side to the volatility issue which may possibly benefit Zimplow is that consolidations reduce the liquidity of a stock.
For Zimplow this possibly can be a game changer as the share price has largely been affected by fire-sale shares that have flooded the market mainly pronounced in the last 12 months. Consolidation may thus possibly reduce the float and to a certain extent limit the downside effect on overall market capitalisation.

Cases of such illiquid counters are Cafca, Radar and BAT among others. Caution, however, must be taken in analysing this issue as some illiquid counters have performed well on the stock market supported by strong financial performance and encouraging outlook.

Basing on the NMBZ and Pioneer case, consolidations may be good, bad or even ugly with the latter two highly probable especially in a bearish environment like the one being faced on the domestic front.

One arguable reason though not mentioned by most corporates in support for consolidations is that, in the eyes of some company chairmen, CEs and FDs at least, the level of your share price is a corporate virility symbol and naturally, the bigger the better.

Thus consolidations may simply be done to prop up prices and ultimately valuations of companies for maintaining their status. Nonetheless, one reason from the Zimplow’s circular that is universally accepted and realistic is that of lowering administration costs and managing the register with ease.

Worth noting about consolidations is that they do not change the underlying fundamentals of a company. What matters above all is not how many shares are outstanding, or what level the share price stands at, but how well the underlying business is being managed, and how much cash is being generated.
From this perspective, the Zimplow executive management team of the new structure have underperformed relative to the market.

This is explained by the share price performance which shows the confidence that investors have on a company’s current and future performance. In 2012, when the merger was consummated between Zimplow and Tractive Power Holdings, the new look Zimplow recorded a negative return of 7 percent compared to a 4 percent return on the ZSE.

In 2013, a negative return of 46 percent was recorded compared to a 33 percent market rally. Further to this, the current market capitalisation of Zimplow of $15,57 million comparing grossly unfavourably to the separate valuations of $13,9 million and $33,6 million on the last traded prices for the old Zimplow and TPH respectively.

Such a huge decline in market capitalisation has mainly been due to the failure by the current executive management team to convince the market on the synergies that the merged entity would capture.

Perception of the business is everything and it appears Zimplow has not been successful on this front. Furthermore, Zimplow’s financial performance has been adversely affected by the tightening liquidity locally, poor rainy season, intense competition from the Far East and a surge in borrowings for the agriculture segment.

On the mining and infrastructure development space, low capital formation from the government, rising competition and stringent regulations such as the indigenisation policy have been the major downside risks.

With all these factors expected to remain prevalent or even increase, the market is justified not to see a quick recovery for Zimplow in the short-to-medium term hence the seemingly low valuations. Lack of a sustainable recovery plan on how the ship will be sailed going forward as most of these factors are out of Zimplow’s control has even worsened the valuations for the company.

Into the future, corporates leader both for listed and unlisted concerns should focus on addressing the real causes rather than addressing symptoms in this case weak stock prices. This is one area where corporate leaders are lacking ultimately leading to considerable value destruction.

Zimplow may need to worry over value creating issues rather than share consolidations as there can be no assurance of attaining the intended benefits after completion of the exercise.

A worst case scenario may be a free-fall in the stock prices considering the bearish outlook for the stock market. Value creation is the only way in which the company can be able to sustainably create a competitive edge relative to its peers both on operational performance and stock market performance.

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