Is Edgars’ rights offer price fair value?

Plans by Edgars Stores Limited to raise capital through offering additional shares of approximately 45,6 percent of its new issued share capital at just $66,3 million raises questions on what exactly is the true value of local companies.

Using this valuation, it means the whole company will be valued at $145,4 million post this transaction.

The $145,4 million valuation is less than or is 48,8 percent of Edgars’ ZSE market valuation, which was at $297 million on May 27, 2020. This value might not have priced in the new capital injection and the company’s future plans.

The valuation is also less than the company’s equity of $295,4 million as at January 6, 2020.

Edgars’ total assets were valued at $579,7 million as at the same above date.

In US dollar terms, this means the new shares are being offered at just US$2,6 million using the official exchange rate while the entire company is being valued at US$5,8 million at the official exchange rate.

Using parallel market rates, the entire company could be valued at just US$2 million if the rights offer price is to be considered.

If this is what management or the major shareholder considers as the true valuation of Edgars, then the clothing retailer, which sales $629 048 829 worth of apparel per year, has come a long way down from its past valuations.

In November 2013, when the Zimbabwe Stock Exchange probably reached its peak, Edgars was valued at US$35 million.

Economic troubles experienced post 2013 saw Edgars valued at US$17,41 million in January 2016, still much higher than what it’s being priced at now.

Currency changes and hyperinflation has made valuation of Zimbabwe based assets very difficult.

Speaking at the Institute of Chartered Accountants of Zimbabwe Winter School held in Sun City, South Africa in September last year, Former Brainworks Capital finance director and chief operating officer, Walter Kambwanji, said one of the biggest risks in Zimbabwe is valuation of businesses.

He said because of the currency changes in the past 10 years, the valuation of businesses is a contestation as investors disagree on the value.

“True value on business is becoming a serious problem. Investors like consistency and want to project. What they don’t want is where they are not able to predict the future,” Kambwanji said.

Institute of Chartered Accountants of Zimbabwe (ICAZ) chief executive officer Gloria Zvaravanhu, is also on record saying the increased volatility of prices on various markets affects the fair value measurement either directly — if fair value is determined based on market prices (for example, in case of shares or debt securities traded on an active market), or indirectly — for example, if a valuation technique is based on inputs that are derived from volatile markets.

The Australia Stock Exchange (ASX) recently asked Zimplats Holdings Limited to explain how the directors satisfied themselves that the carrying values of property, plant and equipment, inventory, and related profit or loss movements and foreign exchange losses are appropriate and adheres to the relevant Accounting Standards.

In a letter to Zimplats dated April 6, 2020, the ASX also wanted the directors to make “reference to the underlying assumptions used by the directors in coming to this conclusion, as well as any independent valuations and the validity of the assumptions upon which these valuations are based”.

In its audit opinion for Edgars’ 52 weeks to January 5 results, Ernst & Young Zimbabwe gave an adverse opinion saying the exchange rates used for the translation of transactions and balances between the US$ and the RTGS$/ ZWL do not meet the definition of a spot exchange rate as per IAS 21.

“Had the appropriate rates been used, the following significant accounts would have been affected in a material manner; property, plant and equipment, inventories, cash and cash equivalents, deferred tax liabilities, trade and other payables, sales of merchandise, other gains/ losses and other operating income/ expenses,” the auditors said, putting further doubt on the accuracy of the valuation numbers.

Away from the valuation issues, the decision by Mauritian investment management firm SSCG Africa Holdings to not only follow its rights but also to underwrite the Edgars’ latest capital raise initiative should be seen as a vote of confidence in the country’s economic future despite the numerous headwinds currently prevailing.

Zimbabwe has been going through tough times with very limited inflows of international capital as reflected in the sharp drop in foreign direct investment to US$259 million in 2019 from US$717,1 million U.S. in 2018.

Similarly, net portfolio investment inflows declined significantly from $54 million in 2018 to
$3,7 million in 2019, according to RBZ Governor John Mangudya
in the 2020 monetary policy statement.

Dr Mangudya said FDI, in particular, was projected to remain low in the short-term due to perceived country risk profile.

“The decline in both FDI and portfolio investment was, in large part, due to heightened perceived country risk,” he said.

But a few investors like SSCG Africa Holdings are braving it and have shown confidence in future prospects with the injection of new money.

SSCG Africa Holdings through its investment vehicle Bellfield Limited already owns an effective 40,63 percent interest in Edgars and is willing to follow its rights and also to underwrite the $70 million rights offer through its other subsidiary Annunaki Investments (Pvt) Limited.

If other shareholders fail to follow their rights, SSCG Africa will end up owning an additional 27,11 percent, taking its shareholding to 67,74 percent.–

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