The Sunday Mail
Zimbabwean companies, most of which made a dash for regional markets during the hyper-inflationary era in order to preserve shareholder value, have begun retracing their footsteps home after being plagued by volatile exchange rates, political uncertainty and weakening economies in pre-dominantly resource-dependent countries.
Like many other global investors, local companies were driven by the allure of a region that was — and still is — considered the fastest growing in the world.
Ernest & Young’s 2016 Africa Attractiveness Programme Report indicated that Southern Africa remained the world’s largest investment destination.
Yesterday, Rainbow Tourism Group was expected to wrap up its investment in Mozambique after it recently announced its exit from the Southern African country.
In the 18 months to June 30, 2016, Mozambique’s metical currency tumbled from US$1:34 to US$1:80, which saw RTG incurring exchange losses of more than US$430 000 in the first six months of 2016.
When RTG got a 10-year lease to manage a 180-room hotel in Beira — Mozambique’s second-largest city — in 2010, it bet that it would be able to tap into the growth prospects of a country experiencing significant economic growth. It is not only exchange losses that have forced the company to cut its losses in Mozambique, but a renewal of hostilities between the ruling Frelimo and opposition Renamo.
A slowing economy, whose growth has been downwardly reviewed from the initial projection of seven percent to 4,5 percent, and Maputo’s June 30 decision to freeze spending other than for salaries and pensions, have been major put offs.
Donors and the IMF have also turned their backs on Mozambique after the government admitted to hiding more than US$1,5 billion in debt.
RTG is now pinning its hopes on the Zimbabwe market.
“Our strategy now is to consolidate our position in the motherland and become strong locally first as well as support the local tourism industry,” said CEO Mr Tendai Madziwanyika.
In the six months ended June 30, 2016, RTG reported that losses widened to US$2,9 from US$1,9 million in the same period a year ago, with discontinued operations accounting for more than US$1,6 million of this.
As part of efforts to restructure and realign its portfolio, the hospitality concern announced its withdrawal from the 140-room Beitbridge hotel in June.
From African Sun back to Zimbabwe Sun
It is the same case with RTG’s peer African Sun, whose adventure into the region, particularly West Africa, was forged at the height of Zimbabwe’s hyperinflationary period.
The company changed name from Zimbabwe Sun to African Sun on February 29, 2008 to reflect the grandiose plans to conquer the continent.
As with RTG’s foray into Mozambique, African Sun’s adventure in Nigeria — the continent’s most populous country (170 million people) and dubbed “the African China” — was to be a misadventure.
African Sun also looked to Ghana as the tonic the then Shingi Munyeza-led group needed to launch its regional campaign.
Market watchers were so optimistic about Ghana, which had discovered oil reserves in the Jubilee Fields in 2007, that they forecast its economy to grow by more than 20 percent in 2011.
That did not happen.
African Sun terminated its Ghana operation, where it ran Amber Accra, on August 31 2015 and also exited Nigeria in September 2015.
By retreating from regional investments, African Sun said it would make annual cost savings of US$10 million.
In making a case for discontinuing the investment, chairman Mr Hebert Nkala noted that the regional expansion strategy was “diverting much-needed resources from the much profitable Zimbabwe operations”.
The company’s gearing, which compares shareholders capital to amounts borrowed by the company, soared to more than 74 percent.
And Mr Nkala’s decision seems to have been vindicated.
Africa Sun’s offshore units in Nigeria, Ghana, South Africa and Mauritius had racked up more than US$19,5 million in losses as at December 31, 2015.
This year, the group will be divesting from Mauritius.
The disposal of the business is expected to improve cashflows and reduce the working capital gap by US$1,2 million.
It is the investment of Brainworks Management Capital into African Sun that freed the hospitality giant from being held hostage by Dr Munyeza’s sentimental dream to conquer Africa.
Brainworks now holds a 55 percent stake in the business.
And not only did the regional investments see African Sun lose money, they also cost Dr Munyeza’s job.
On March 31, 2015, the businessmen parted ways with a venture that he acquired when it was unbundled from Delta Corporation together with OK Zimbabwe and Pelhams in 2002.
Focus is now on improving local products, which are the business’s cash cow.
South African group Legacy Hotels International — famed for constructing the Michelangelo Hotels and Michelangelo Towers in Sandton, Johannesburg — was roped in on October 1, 2015 to help spruce up and manage Elephant Hills, Kingdom Hotel, Monomotapa, Hwange Safari Lodge and Troutbeck Inn.
The deal is understood to be worth US$60 million.
Mixed fortunes for insurers
Both short-term and long-term insurers were not spared, either.
There was, however, a compelling case for them to spread risk and hedge their investment for pensioners and policyholders.
To continue to meet payouts for pension benefits and policies in an environment where money was losing value at a shocking rate, a regional offensive was justified.
As a result, Fidelity Life Assurance (FLA) entered the Zambian market in 2008 through a five-year management contract with Cavmont Life.
The deal gave FLA the option to buy the business outright, which the company invoked in 2008 when it purchased the business for US$200 000 and Fidelity Life Assurance Zambia was born.
Barely a year into the venture, FLA began questioning the way the business was being run.
An attempt to staff the operation with Zimbabweans backfired when FLA clashed with the Pension and Insurance Authority of Zambia, and FLAZ’s operating licence was cancelled in December 2009, though reinstated two months later.
Fidelity opted to pass on the concession and on September 2, 2010 it voted to exit Zambia.
Earlier, FLA had ventured into Malawi, market where it bought Vanguard Life Assurance, which incidentally used to be a wholly-owned subsidiary of Zimre Holdings Limited.
Although, it continues to hold onto that investment, the unit continues to face strong headwinds from a depreciating currency.
In the year ended December 31, 2015, the Malawian kwacha fell by 28,4 percent against the US dollar.
Not surprisingly, Vanguard’s underwriting surplus fell 20 percent to US$1,2 million from US$1,5 million in the period.
The jury is still out on FLA’s decision to venture into South Sudan where it has a 49 percent stake in New South Insurance Company, a medical insurance venture.
The new nation of South Sudan, which gained independence from Sudan in 2011, is locked in a bitter conflict pitting President Salva Kiir and opposition leader Riek Machar.
But it has not always been doom and gloom.
Short-term insurer NicozDiamond has units in Malawi (UGI) and Uganda (FICO). It also has associate investments like Diamond Seguros (Mozambique) and Diamond General (Zambia).
In the half-year to June 30, 2016, the Malawian operation recorded a loss of US$50 300, while a profit of US$586 000 was realised in Uganda.
The results from Uganda compare favourably with a profit of US$681 000 recorded by the local unit.
“Premium growth prospects (for Uganda) are still expected to be healthy on the back of infrastructure projects for highways, hydroelectric power and crude oil refinery,” said NicozDiamond chairman Mr James Karidza in a statement accompanying the company’s interim financials.
The East African country’s economy has proved resilient.
The Uganda Bureau of Statistics on June 8, 2016 forecast growth to 4,6 percent for the 2015/ 2016 financial year from five percent in 2014/2015.
And then there is the not insignificant discovery of oil reserves in 2006.
Chinese state-controlled oil company Cnooc Ltd, French-based Total SA and London-headquartered Tullow Oil are projected to spend more than US$8 billion before they start producing oil by 2020.
The push continues
For some local companies, the regional push continues.
That is certainly the case for Simbisa, a unit of Pan-African industrial concern Innscor Africa Holdings, which was unbundled from the parent company on October 1, 2015.
Simbisa houses quick service restaurants Chicken Inn, Pizza Inn, Creamy Inn, Fish Inn and Galito’s, and has operation in Kenya, Zambia, Ghana, DRC and Mauritius.
Its exposure to such a diverse market has had a negative impact, with revenues in the nine months to June 30, 2016 falling about US$6 million from US$114 million a year ago to US$108,3 million.
The drop was mainly attributed to a loss in value in regional currencies against the US dollar, the company’s accounting currency.
Net income plummeted 23 percent to US$3 million from $3,9 million in the same period a year earlier.
Local operations continue to be the mainstay of the business, contributing 62 percent of revenues at US$67 million.
But the regional expansion continues.
Simbisa has 188 counters on the local market and 196 in the region. Though seven new counters were opened in Ghana, five were closed and the company now has 20 in the West Africa country.
In addition, 13 new counters were opened in Mauritius, while two were opened in the DRC, bringing the total there to 10.
Pan-African seed manufacturer Seed Co Limited is also unrelenting in its quest to cover Africa.
The acquisitive local group has subsidiaries in Botswana, Kenya, Malawi, Nigeria, Rwanda, Tanzania and Zambia.
This was a boon for the business in 2015 as exchange gains accounted for 67 percent of non-core income while contributing three percent to headline revenues.
This changed in 2016.
Gains slowed to 48 percent of non-core income and their contribution to revenue fell to 0,04 percent, driven down by devaluation of most currencies in the Western, Eastern and Southern African markets as metal and mineral commodity prices declined.
The bulk of Seed Co’s business is still in Zimbabwe (33 percent), followed by Zambia (21 percent), Malawi (11 percent), Tanzania (10 percent) and Kenya (nine percent).
“The economic activity in Sub-Saharan Africa deteriorated significantly in the period under review, with growth for the region as a whole declining 3,5 percent.
‘‘The steep decrease in commodity prices did severely strain many of the sub-Saharan African economies that resulted in many companies significantly cutting back their farmer subsidy programmes.
“In Zimbabwe subsidy programmes were scaled back by 68 percent, Zambia by 39 percent, while in Malawi beneficiaries were slashed to 1,3 million from 1,5 million,” said Seed Co in its annual financial report.
But the company has not been deterred and is targeting expansion into Ghana, Ethiopia and other countries in East Africa.
Time for a rethink
Mr Kingstone Kanyile, an economist and MD of Mtilikwe Financial Services, said the regional forays were meant to “preserve shareholder wealth” but the realities of a US dollar environment called for a serious review of such investments.
Regional currencies, he noted, depreciated by between 25 percent and 70 percent against the greenback.
“These equity investments where done during the hyperinflation era where the ZIM dollar was in use as the base currency. The local macro-economic environment continued posing challenges and spurred companies to consider survival alternatives beyond the local market.
“This led to regional diversification as a strategy to preserve shareholder wealth. However, due to the rapid decline of the economy, companies were desperate to find regional investments( Zambia, Malawi) at all costs, in pursuit of foreign currency as the returns in any currency was certainly of significant value than the Zimbabwe dollar on free fall.
“However, since these companies redenominated their share capital into US dollar in 2009 on account of dollarisation, the financial performance of these regional investments could be clearly to assessed, as whether the returns to the parent shareholders where sustainable. The present commodity slumps on the world market and slowdown of the global economy has affected most mineral commodity exporting countries in Africa,” said Mr Khanyile.
Experts say in the short-term companies must restructure investment porfolios and consider foreign market entry through joint ventures, franchising, management contracts and creating the necessary intellectual property.
For a long time Africa’s exchange rate risk has been the bane of regional and international investors.
The slow pace in integrating the Sadc, Comesa and the East African Community has been of major concern. Encouragingly, the Tripartite Free Trade Area Agreement, bringing together the blocs, was signed in Sharm-el-Sheikh, Egypt on June 10, 2015.
Trade experts believe that there is need for a renewed push for establishment of an African Economic Community and a monetary union to minimise currency risks.
Notably, the Abuja Treaty signed on June 3, 1991 created the African Economic Community and called for creation of an African Central Bank by 2028.
It also envisaged the establishment of a single currency by 2023.
