Business / Companies
Delta, BAT trading at a premium, says analyst
28 May 2015 at 06:49hrs | Views
HARARE - As a few optimistic investors scurry for large-cap stocks on the Zimbabwe Stock Exchange (ZSE) in view of their perceived safety, this could have swelled their stock prices to between "fully-valued" and "overpriced", an analyst has said.
According to Emergent Research head of research Mr Ray Chipendo, the current valuations of some firms on the ZSE could be higher than both their asset and earnings levels.
The South African-based Emergent Research is an independent equity research company covering sub-Saharan equities.
Mr Chipendo gives the examples of Delta Beverages and British American Tobacco Zimbabwe (BAT).
"Our research has suggested that this flight towards 'quality' among institutional investors has pushed prices for big caps beyond what is reasonable.
"BAT and Delta are two examples. We think these companies are now trading at premium on account of perceived safety."
In assessing the efficacy of the two firms' present stock valuations, he forecasts their discounted cash flows, working from the respective companies' current market valuations to project the amount of cash that the companies will have to produce to justify their stock prices.
"For example based on reverse DCF, a valuation approach that calculates the growth assumption factored in stock price - BAT's current price of 1150 cents is priced based on an implicit annual growth rate of 18 percent for the next five years.
"Contrast this growth assumption with the company's current contraction in bottom line. There is nothing in the fundamentals that suggests that BAT will grow its free cash-flow at anywhere north of 5 percent. Fierce competition and lobbying against smoking are all strong headwinds on the company's path," he said.
On Delta, he said declining revenues in lager and sparkling beverages compromise the required growth rate to justify the current price of circa 107 cents.
"Delta's share price of 107 cents is based on a growth rate of 12 percent.
Delta would be described as fairly priced if it could post at least a modest 5 percent growth rate. But reality is somewhat disappointing. Revenue growth in sorghum beers and alternative drinks is not accelerating fast enough to compensate the fall in lager and sparkling beverage revenues.
"In the last financial year, our research shows that sorghum and alternative beverages added $30 million at a time lager and sparkling beverages were losing approximately $60 million in revenue.
"Again we would expect lagers and sparkling drinks to have higher profit margins than sorghum and alternative beverages. We think that under the current economic conditions shrinkage of the bottom line will persist," said Mr Chipendo.
Heavyweight counters' defensive qualities have shone through, especially over the last couple of years when the local bourse has largely underperformed, but analysts say it is critical for investors to pay better attention to the intrinsic value of a firm vis-à-vis its market price volatility.
According to Emergent Research head of research Mr Ray Chipendo, the current valuations of some firms on the ZSE could be higher than both their asset and earnings levels.
The South African-based Emergent Research is an independent equity research company covering sub-Saharan equities.
Mr Chipendo gives the examples of Delta Beverages and British American Tobacco Zimbabwe (BAT).
"Our research has suggested that this flight towards 'quality' among institutional investors has pushed prices for big caps beyond what is reasonable.
"BAT and Delta are two examples. We think these companies are now trading at premium on account of perceived safety."
In assessing the efficacy of the two firms' present stock valuations, he forecasts their discounted cash flows, working from the respective companies' current market valuations to project the amount of cash that the companies will have to produce to justify their stock prices.
"For example based on reverse DCF, a valuation approach that calculates the growth assumption factored in stock price - BAT's current price of 1150 cents is priced based on an implicit annual growth rate of 18 percent for the next five years.
"Contrast this growth assumption with the company's current contraction in bottom line. There is nothing in the fundamentals that suggests that BAT will grow its free cash-flow at anywhere north of 5 percent. Fierce competition and lobbying against smoking are all strong headwinds on the company's path," he said.
On Delta, he said declining revenues in lager and sparkling beverages compromise the required growth rate to justify the current price of circa 107 cents.
"Delta's share price of 107 cents is based on a growth rate of 12 percent.
Delta would be described as fairly priced if it could post at least a modest 5 percent growth rate. But reality is somewhat disappointing. Revenue growth in sorghum beers and alternative drinks is not accelerating fast enough to compensate the fall in lager and sparkling beverage revenues.
"In the last financial year, our research shows that sorghum and alternative beverages added $30 million at a time lager and sparkling beverages were losing approximately $60 million in revenue.
"Again we would expect lagers and sparkling drinks to have higher profit margins than sorghum and alternative beverages. We think that under the current economic conditions shrinkage of the bottom line will persist," said Mr Chipendo.
Heavyweight counters' defensive qualities have shone through, especially over the last couple of years when the local bourse has largely underperformed, but analysts say it is critical for investors to pay better attention to the intrinsic value of a firm vis-à-vis its market price volatility.
Source - BH24
