IN recent months, the Victoria Falls Exchange (VFEX) has seen an increase in listings coming from the Zimbabwe Stock Exchange (ZSE).
Axia Corporation, Innscor Africa, National Foods, Simbisa Brands, and more recently First Capital left the ZSE and moved to the VFEX.
In their respective circulars, the companies mentioned several reasons as rationale for the move. We look at these as some of the reasons and ascertain if the rationale has materialised or not.
Revenue retention
There are some companies that moved to the VFEX because the bourse offered incremental export incentives.
This incentive improved a company’s marginal profits, especially if it was expanding.
One such company that benefitted from this incentive was Padenga.
So good was this incentive that Zimbabwe’s capital markets welcomed another mining counter — Caledonia Mining — on the VFEX.
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However, this incentive was scrapped in February 2023 in another show of policy volatility, and this nullified this reason.
Raising of additional capital
Stock markets are primarily platforms that bring together companies in need of funding and investors that can provide capital.
However, this has been rendered moot on the ZSE because of the limited uses of the ZWL.
ZSE-listed companies have struggled to obtain USD for imports and capex on the FX auction and raising capital in ZSE is fraught with more risks than benefits.
Moving to the VFEX has proven to be an apt remedy considering the successful capital raise by Caledonia a few months ago.
We are yet to see a capital raise exercise by stocks that migrated to VFEX, and we opine that this might take a while because several of these stocks now generate sufficient United States dollar (USD) for working capital and capex from internal operations, if Innscor’s US$70 million capex drive is anything to go by.
US dollar dividends repatriation
The VFEX was instrumental in setting the Offshore Financial Services Centre (OFC) in Victoria Falls.
Among the many benefits of this initiative is the ability of foreign investors to exit their positions and repatriate their capital and dividends without going through the FX auction.
Given foreigners’difficulty in repatriating investments denominated in ZWL, the migration of stocks opened an exit avenue for such investors.
We also add that this underpinned the strong demand to these stocks prior to their move followed by strong selling pressure post the migration.
Proficient financial reporting
This is perhaps one of the biggest advantages for moving to the VFEX vis-a-viz the growing challenges of reporting in ZWL. Investors of ZSE-listed companies have to contend with misleading blended inflation in reporting inflation-adjusted accounting numbers, over and above the headaches associated with the official exchange rate.
Having a business report in USD brings sanity to the numbers, paints a more reflective picture of performance, andhelps investors assess the return on their investments.
Potential valuation volatility
The valuation of any business tends to be more reliable if a more stable currency denotes the respective business’ numbers. This has somewhat been the case on the VFEX. The move to USD numbers brings about a definitive valuation of the business and as such we do not see notable upside in stocks listed on the VFEX, save for Innscor and Simbisa Brands at current prices.
Lower trading costs
Investors incur less costs in buying and selling shares on the VFEX.
A roundtrip attracts a 2,1% charge on the VFEX compared to 4,8% or7,4% on the ZSE, depending on the investor’s holding period.
The key difference in the cost stems from a capital gains tax charge on ZSE shares disposals, which VFEX investors are exempted from paying.
However, the weighty bank charges associated with Nostro FCA accounts play an offsetting role.
Tax incentives
In addition to a capital gains tax exemption, the VFEX offers a 5% withholding tax on dividends,which is lower than VFEX’s 10%.
For investors with significant shareholding in VFEX-listed counters, this enhances their dividend returns.
Improve regional prospects
The VFEX was expected to improve the visibility of Zimbabwe’s capital markets in the region, but we note that this has not been the case.
According to the VFEX All Share Index, annual returns on the VFEX have been negative since the exchange went live and we attribute this to the better risk-return profile by other regional exchanges and Zimbabwe’s high-country risk. In conclusion, the VFEX comes with incentives that benefit issuers on its bourse.
However, the verdict is quite unclear when it comes toinvestors.
A fundamental investor, who has been on the VFEX since inception has lost real dollar value, something that cannot be said of ZSE investors in recent weeks.
Speculators, who capitalised on the stocks’ migrations emerged winners. Foreign investors who managed to sell their investments on the VFEX at a good price are singing their way to the bank, but the local investor does not feel the same way as the strong selling pressure has resulted in negative YTD returns in 8 out of the VFEX’s 12 counters.
Mtutu is a research analyst at Morgan & Co. — [email protected] or +263 774 795 854.
