Imara: Padenga’s VFEX listing was the wrong call, and it may ‘cannibalise’ ZSE

Mthuli Ncube rings the bell, July 9, to announce the listing of Padenga on VFEX

Padenga’s decision to list on the Victoria Falls Stock Exchange (VFEX) was a win for the new bourse and Finance Minister Mthuli Ncube’s incentive scheme, but the country’s biggest broker says it deprived local investors of a good stock and may lead an exodus from the Zimbabwe Stock Exchange (ZSE).

The company became only the second company, after Seed Co International, to list on the USD-denominated exchange in July.

Padenga grew by exporting crocodile skins to luxury brands in Europe but is now banking on its growing gold investments to drive future growth. Mining now accounts for 57% of Padenga’s revenue.

When Ncube announced in May that gold exporters who list on VFEX can keep 100% of what they earn from any incremental exports, the company saw this as a chance.

Padenga told shareholders that listing on VFEX would help the company “benefit from incentives articulated by the Ministry of Finance”. Listing would also allow the company to “raise capital in foreign currency from a deeper investor base to pursue viable acquisitions in related export sectors”.

At a July 2 EGM, shareholders representing 92.2% of Padenga backed the transaction. But Imara, a minority shareholder in Padenga, voted “No”.

According to Imara Asset Management CEO John Legat, this deal was bad for local investors. It may also be bad news for the future of the ZSE itself.

“We voted against that move. Domestic investors will no longer be able to buy into the company unless they have free funds available. Pension funds largely have ZWL so will not be able to participate,” Legat says in a recent note to clients.

“We like Padenga and are excited by their new gold operations and in our opinion the shares are significantly undervalued so it is a great pity that we will not be able to buy the shares in any meaningful way going forwards.”

Incentives for all?

Government should instead give the same incentives to other miners to encourage them to list on the ZSE. Under the May incentives, miners get to keep 80% of the earnings from their extra output. Only companies on VFEX get 100% of that portion of exports.

“It would have been better for the government to give all listed mining companies the same tax break to encourage domestic listings on the ZSE and to enable local pension funds the ability to hedge against devaluation and inflation by investing in them,” Legat says.

Padenga’s move to VFEX may also encourage other exporters to do the same, which would see the ZSE losing more listings.

Says Legat: “Cannibalisation of the ZSE’s exporters might now be inevitable which would be negative for local ZWL investors.”

This was not the first time Imara voted against a company leaving ZSE.

Imara also opposed plans by Seed Co to delist from the ZSE and give control to Seed Co International. The Reserve Bank of Zimbabwe (RBZ) rejected the proposal. According to Legat, the bank made the right call.

“We were delighted that the RBZ disallowed the Seed Co merger with Seed Co International. As a result of that order Seed Co was relisted on the ZSE in June allowing its true valuation to be reflected on the market. Currently that value stands at US$100 million using ZWL130. Meanwhile, the market value of Seed Co International itself languishes around US$95 million with little trade taking place on either the Botswana Stock Exchange or the VFEX,” Legat says.

“At least now domestic pension funds can continue to purchase one of Zimbabwe’s more successful agricultural concerns.”