1997 LUSE YEAR-END MARKET REPORT
THE ECONOMY
1997 is the year that progress came to the Zambian economy. Zambians can all afford to
breathe a sigh of relief as the hard and painful economic reforms embarked on by
government 5 years ago are finally taking root. Inflation and interest rates continued
falling in the year while the exchange rate held up reasonably well. All in all it can be
said that the worst is over. Zambia is, however, not out of the woods yet, speaking of
which brings us to perhaps the highlight of the year: the privatization of the Zambia
Consolidated Copperbelt Mines (ZCCM).
It is widely envisaged that the sale of ZCCM will spark a full recovery of Zambia's
economy. 1997 is the year in which the sale finally got going. By yearend, more than half
of the copper conglomerate's assets were in private hands. The authorities are optimistic
that the privatization will be completed by the end of the first quarter of 1998. The sold
mines are expected to be revamped and fully functional within the next year and a half.
Inflation
The inflation consistently declined during the year: from 33.6% in January to a low of
19.9% in September. It then experienced an upsurge of 1.3% bowing down to pressure from
the upswing in maize prices (resulting from shortages brought about by the poor harvest in
the 96/97 harvest) in October to 21.2%. The figure held steady at 21.2% in the month of
November. Even though the 15% inflation target for 1997 was not been met, there is no
doubt the monetary authorities continued their impressive attack in inflation. After all
it was less than three years ago when inflation approached triple digits. For 1998, the
central bank's targeted inflation rate is an even lower 8%.
Interest Rates
In line with dropping inflation, interest rates persistently fell: from 53.6% for 28
day T-bills in January to 13.8% in December. With an inflation target of 8% for 1998,
interest rates should average 12-15% during the year.
Exchange Rate
The exchange rate remained relatively stable for the first three-quarters of the year
averaging Kwacha1,353 to one United States Dollar. The supply of foreign exchange to the
market was improved as non-traditional exports increased their share of FX contributions
to 20%, gaining on the longtime provider copper which accounts for much of the other 80%.
Thereafter, supply decreased and the currency weakened. All told, the Kwacha lost 11.6% on
the year, a good performance in view of average inflation rates.
El Nino is not anticipated to adversely affect NTE's (Horticulturals, floriculturals
etc.) as these are mostly irrigated crops. The expected importation of maize as a result
of the effects of El Nino may, however, put a substantial amount of pressure on Zambia's
foreign reserves. The privatization of ZCCM is also likely to alter the inflow of FOREX as
the new owners inject new capital in the course of upgrading the mines.
Economic growth for 1998 is expected to be 5-6% (same as 1997). Much of this is
expected to come from tourism and mining investments. At the same time agriculture is
anticipated to take a beating from El Nino and hence it contribution may dwindle.
Construction and manufacturing will grow alongside the mines as fresh capital is injected.
The year 1998 promises to be a very exciting year. With better and more experienced
handling by Government of the expected drought (resulting from the El Nino), we can all
afford to look to this year with a fair amount of optimism.
LuSE MARKET REVIEW
The Zambian stock market saw a marked improvement in prices, the volumes traded, turnover and number of trades over the previous year. Turnover went up by 238% over the last year while volume was 269,620,235, representing an 11 % increase compared to last year.
The market also saw two more companies list on the exchange: Trans Zambezi Industries
and Zambian Breweries. This brings the number of listed companies to 7.
The Lusaka Stock Exchange (LuSE) index gained 104.4 % in Kwacha terms during the year
(between January 2 and December, 31). Taking into account the depreciation of the Kwacha
brings the gains to 83.2% in dollar terms. This makes the LuSE one of the best performing
markets in Sub Saharan Africa and, indeed the world.
The market despite the stellar performance has several short-comings. First and
foremost, the market has an inadequate supply of shares. There is a critical shortage of
stock which results in thin market trading. This has been of great concern to the
investors who want to buy in large quantities.
Participation levels of local investors are still low. This is partly due to the poor
state of the economy rendering the majority of the people unable to invest. The other
reason contributing to the apathy by local investors is lack of understanding of the
benefits to be derived from such investment. These factors have been an impediment to
further gains.
STOCK PERFORMANCE
As shown by the performance of the index in 1997, the year was a success in terms of
stock performance, with all major stocks recording impressive gains. The most active
stocks of the year were: Rothmans of pall mall, Chilling Cement, Zambia Sugar, Standard
Chartered and Zambian breweries.
ROTHMANS
Rothmans was one of LuSE's best performing shares of the year: gaining 187%. After a poor start earl in the year, the stock gained momentum as it's value become apparent to investors. The company's main line of business is the manufacture and sale of cigarettes. The company has been consistently profitable for the past 33 years. Dividends for the year just ended 30th June 1997 increased by 253% on the previous year.
Prospects for the future look bright though unit sales are stagnant. This is more to do with decline in disposable incomes due to various economic factors than to anti-smoking campaigns. Rothmans is also hedged against the effects of El Nino as they stock up 12 months.
The company's real growth in the long term, however, is envisaged to come when disposable incomes begin to rise. In the short term, the company has embarked on a program to reclaim the share of the market lost to raw tobacco. This is being implemented through the introduction of cheaper, and more affordable brands which, unlike raw tobacco, are available all year round.
Rothmans is set to continue its impressive performance in the coming year as the strategies being implemented start to pay off. BUY
CHILANGAChilanga was the first company to list on the LuSE. The company's core business is the manufacturing of cement clinker and cement. Chilanga started the year trading at Kw 50 per share, it has since gained about 210%. The company's performance and it's prospects are strongly linked to the performance of the economy and the privatization of ZCCM. The rehabilitation of the mines after privatization is expected to increase demand significantly. Exports are also set to make a strong contribution to earnings as regional demand for cement continues to grow.
The company has plans to expand its current operations to meet the expected increase in demand. This and the ongoing privatization of ZCCM should sustain the upward movement of the stock price in the coming year. The stock continues to trade below value and displays tremendous upside. BUY
ZAMBIA SUGAR
Zambia Sugar is the country's sole producer of sugar. The company is integrated ( i.e. runs both the plantations and processing mills). Zambia Sugar opened the year trading at Kw12, it has since gone up to Kw 28 (current price) this represents a gain of 155%. The highest price during the year was Kw 41.5 and the lowest K11. The stock traded at around Kw 35 most of the year.
The company is concluding its rehabilitation program aimed at making the company more efficient. The rehabilitation program disrupted operation earlier in the year thus affecting the financial results for year ending 31 March 1998. The situation has been normalized and the rehabilitation program is expected to improve operations. HOLD/BUY ON PRICE DIPS
ZAMBIAN BREWERIES
Zambian Breweries, a joint-venture between South African Breweries and Anglo Val, manufactures clear beer for the Zambian market. The company brews four brands of beer, namely Mosi lager (flagship brand), Castle lager, Ohlossons lager and Castle Milk Stout. Zambian Breweries was introduced to the market in June at an offer price of Kw 150. It then went up to Kw250, a 66% rise. The stock has been trading at Kw250 for most of the year, it eased in the last weeks of December, ending the year at Kw215.
The company has been adversely affected by the high tax on beer and it has since announced its intentions to diversify into the brewing of opaque beer, which attracts a lower tax. HOLD
STANDARD CHARTERED BANK
Standard Chartered Bank has established its itself as one of Zambia's leading banks. The bank has restructured its operations to focus on commercial banking and trade finance. The stock at the start of the year was at Kw 8 and traded at about Kw 13 most of the year representing a 56% gain on the year. The stock closed at a record high of Kw14.
Standard Chartered bank has the opportunity to enjoy an increased customer base due to the continued loss of confidence and closure of indigenous banks. The restructuring of the bank has paid dividends as the bank has become profitable and focused, on its core business. Falling real interest rates are a threat to profits but new investment into the economy is an opportunity. The stock also pays high dividends. STRONG BUY
MARKET OUTLOOK
Activity on the LuSE is expected to continue increasing in the coming year. This is
expected to be as a result of more companies coming on the market via public flotations
resulting from the privatization of state-owned enterprises and the private sector.
However, until a lot more shares are put into the market, the market will continue to be a
primative market compared to many others in the world.
This circular is strictly confidential and is intended for the sole use of the addressee. It may not be reproduced, circulated or disclosed without the prior written consent of Pangaea Partners Zambia. The information herein is based on information from sources deemed reliable, but Pangaea accepts no liability for any loss resulting from the use of the information contained herein or from any omissions. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures. Pangaea Partners (Zambia) Limited, Pangaea Securities Limited, their affiliates, directors, officers and employees may have a long or short position in Zambian securities including any described herein.
