Dr Gift Mugano

Published: 26 July 2017

In a 2015 investors report, Pan-African stock analysts Imara Edwards Securities projected that Zimbabwe Stock Exchange-listed sugar processor Hippo Valley Estates Limited's share price was significantly under-valued and therefore had an upside of at least 70 percent.

"The counter is trading at a discount to its regional peers at an EV/tonne of $697 against the regional peer average of circa $3 331. We derived a target price of $1,18 using the DCF and relative valuation, implying a 70 percent upside on current price," explained Imara, recommending a 'strong buy'.

More than two years later the stock has (almost inexplicably) been rising since the beginning of 2017. Hippo's share price rose from 0, 36 cents in January 2017 to the current 0, 87 cents - a 141 percent increase.

Just to put this into context, the stock fell to below 0, 20 cents between 2015 and 2016. So is this a case of the company fundamentals finally falling into place? Or is it just a reflection of the broader market.

Let's look at the first issue.For its FY2017 results, Hippo reported an impressive set of results, ahead of most observers' expectations as Government efforts to reduce imports (SI-64) paid off for the group as well.

EBITDA margins improved from 11, 3 percent in the prior comparable period to 19, 1 percent in FY17 while operating margins improved from -5, 6 percent to 9 percent. Finance costs were significantly lower at $4, 35 million against $6, 36 million as the company's debt reduced from $42, 37 million to $18, 08 million.

And profit for the year came in at $7, 67 million, up from a loss of $8, 80 million in the prior year. So the fundamentals seem right. So much that local stockbrokers IH Securities last month set a 12-month target price for Hippo Valley of 0, 85 cents (implying upside of 39 percent).

That 12-month price target has already been exceeded. But then again the Zimbabwe Stock Exchange has been in bullish form for the past couple of months, and Hippo (like several other companies on the local bourse) could simply be just a beneficiary of that.

Economist Dr Gift Mugano says there are instances when there appears to be no correlation between economic and stock market performance.

"The performance of the local stock market (currently) is clearly detached from the rest of the economy. It is actually located within the field of behavioral finance where psychological traits comes into play," he said.

"You may recall that the ZSE recovered late last year when the bond notes were introduced. Investors, in my view, were probably buying stock as safe heavens and this momentum in the face of reduced confidence from the money markets has virtually left capital market as a sound alternative."

Whatever the case maybe, investing wisdom says an investor should benefit from the "folly" of the market, and yet maintain an eye on the fundamentals of the company in question.

According to renowned American investor, economist and professor, Benjamin Graham's concept of ‘Mr Market' in his famous book The Intelligent Investor, an investor should not regard the fads of Mr Market as a determining factor in the value of the shares that heowns. He can and must profit from the market, but should focus on the real life performance of the companies he invested in.

His most known student is the world's richest man, Warren Buffet.
- BH24

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