• Growth in profit of 71% (from ZW$5.6 billion to ZW$9.58 billion).
  • Cash generated from operating activities increased 342% to ZW$21, 7 billion.
  • Stock price expected to drop to US$ 31.36.

Simbisa Brands Limited and its 567 stores have shipped to Victoria Falls Stock Exchange (VFEX) to become the 6th company on the security exchange. The group views the VFEX as a way of targeting foreign investors as well as global capital markets. Chief to the move is the benefits associated with the use of the US dollar currency as the currency of denomination. This is supported by a statement by the non-executive chairman in which it was said that in the pursuit of foreign investment, stakeholders require financial statements indexed in a familiar currency. The ZWL dollar is plagued with many distortions that increase business risk and thereby deter investments. With multiple exchange rates for currency transactions, exacerbated by the requirement of hyperinflationary accounting adjustments, it is difficult for anyone to understand and make meaningful valuations from financial data. The move can therefore be understood as a strategy to increase investment using increased transparency.

Additional benefits to the move include favourable tax incentives which enable investors to retain more of their returns when compared to the ZSE. Moreover, the move enables investors to take advantage of offshore settlement options which allow them to efficiently repatriate their dividends and eliminates the foreign currency risk of holding Simbisa shares as a foreign investor. Furthermore, a USD-indexed exchange will support the group's most appropriate functional currency (given that much of its receipts are made in USD)  and its sizeable ownership in foreign assets.

The decision to migrate to the VFEX comes during a period of strong growth. The group received ‘The Best Tangible Returns’ award at the 2022 Zimbabwe Top Companies Survey Awards which highlighted its strong performance.

Despite the impact of global inflation and supply chain challenges which put upward pressure on the cost of doing business and constrains demand, the group was able to achieve growth in profit of 71% (from ZW$5.6 billion to ZW$9.58 billion). Moreover, cash generated from operating activities increased 342% to ZW$21, 7 billion.

In the 2022 chairperson’s report, the board’s decision to, amongst other measures, import their raw materials wasintegral to mitigating global inflation. The group’s growth strategy was driven by the Zimbabwean and Kenyan markets, which added 27 and 39 stores respectively. Further investments included significant expenditure into the expansion of the capacity of its restructured Franchising Division, which is an independently operating division responsible for improving brand quality and customer service in the group's stores. The group's growth trajectory is further indicated by an upward trend that spans over three years.

This strong performance is reflected by a continuous increasein the price of the stock since the stock price reflects all the information about the stock. Under the above, it follows that the price of the stock when delisted from the ZSE and immediately relisted onto the VFEX should not change. Only the currency by which it is expressed should change. This however is distorted by the workings of multiple exchange rates (interbank rate and parallel market rate). 

It is important to note that the official rate (the interbank rate which closely mirrors the RBZ auction rate) does not reflect the realities of the demand and supply of foreign currency. This is affirmed by the group in their 2022 annual report which stated that “the Board’s view is that the exchange rate derived from the Reserve Bank of Zimbabwe weekly Foreign Currency Auction System (“Auction Rate”) is not appropriate and is not a spot rate”. More representative of economic conditions is the parallel market rate, which the wider economy uses to price goods and services. It follows that the rate at which Simbisa’s stock is exchanged matters to understanding the share's value.

The VFEX published the news of Simbisa’s migration in a press release which was titled” Listing of Simbisa Brands Limited on the VFEX.” It intended to notify stakeholders of the listing of The Exchange’s new listing, with effect from 02 December 2022. The press release informed the public that trading in Simbisa Brands securities will commence on 05 December 2022. The closing price of SIMBISA’s stock on the ZSE on the 5th of December following this announcement was ZWL 25091.87c. This was the last recorded price following the delisting of the group from the ZSE pending its transfer to the VFEX. Its price on the VFEX on the same day was US$ 38.3c.

Under the above-mentioned, Zimbabwe has more than one exchange rate, an official rate (named the interbank rate), and a subsequent parallel market rate. Such a situation occurs when a central bank finds that it is no longer able to maintaina managed exchange rate policy for current transactions, that is, to ensure that the supply of foreign exchange (FX) is sufficient to meet legitimate demand at that price. Such a situation results in the rise of a parallel market rate. The spread between the parallel market rate and the official market rate will result in various distortions in the economy. One such distortion is the overvaluation of stocks depending on the rate used to convert ZWL to US$. As stated before, in a country with two exchange rates, the parallel market tends to be more reflective of economic reality. Certainly, this is the case in Zimbabwe.

On the 5th of December, the official interbank rate was US$/ZWL 656,7892. This implies that the closing price of SIMBISA’s stock on the day of delisting was US$ 38.2c. This is identical to the stock price of SIMBISA on the VFEX, dated 5 December 2022. The price of the stock was therefore transferred to the VFEX using the interbank rate, which as mentioned is not reflective of the economic realities in the economy.

If the stock were to have been transferred to the VFEX using the parallel Rate (which is said to be a truer rate of exchange), which on the date was US$/ZWL 800, the stock would have traded at US$ 31.36. 

This implies that SIMBISA is overvalued and its stock is expected to suffer a bear run for reasons similar to BNC. The performance of the stock in the months following its delisting was stagnant. The stock was delisted at a trading price just above its one-month average price of ZWL 23205.37c in November and its three-month average of ZWL 19013.29.

The jump in real value from ZWL 25091.87c to ZWL 30,563(calculated by multiplying the VFEX stock price by the parallel market rate) is misleading and will result in a downward adjustment of stock price towards a US$ price of 31.36.