eBusiness Weekly
Malvin Nkomo
Econet Wireless Zimbabwe (Econet) and EcoCash Holdings Limited (EcoCash), being companies under the same control, are negotiating the transfer of some non-banking assets from EcoCash to Econet in exchange for Econet shares, Business Weekly can report.
In separate cautionary statements, the companies said the envisaged Scheme of Reconstruction will not result in the delisting of both EcoCash and Econet from the Zimbabwe Stock Exchange (ZSE).
Directors of both companies advised shareholders and members of the public to exercise caution and to consult their professional advisors when dealing in the shares of the ‘Companies’ until the finalization of the negotiations.
One of the most direct ways in which the transfer of assets can affect share prices is through its impact on the financial performance of the companies involved.
For example, the transfer of underperforming assets from one company to another has the potential to improve that particular company’s financial position, which includes revenue growth, profit margins, and return on investment, thus attracting more investors, which results in an upward pressure on share prices.
On the other hand, if not done strategically, asset transfers can erode investor confidence and lead to a decline in share prices. To avoid this, the technique in which transfers are communicated to investors as well as the transparency concerning the rationale behind the transfers need to be perfected to safeguard the impacts on share prices.
However, according to Morgan and Co., what remains unclear is what constitutes a banking asset, and this warrants a scenario analysis that covers the possible outcomes of this transaction.
“Our rationale finds context in Econet’s transaction that unbundled Ecocash in 2018. At the time, Ecocash was listed as a standalone entity with the potential to grow into Zimbabwe’s first listed fintech business.
“However, structural and fundamental changes such as (1) the ban on merchant lines, stringent regulation, dollarization, and (iv) stiff competition in mobile USD transactions are a crunch in ZWL and have wilted the business’s future prospects.
“We opine that these developments have warranted this transaction, and this is not the first time that transactions have been reversed in Zimbabwe,” said Morgan& Co. in its market intelligence report on the transaction.
It was noted that, as far as this transaction is concerned, Econet investors are the losers regardless of how it defines a banking asset.
The firm said in the first scenario that it defines digital banking operations (Steward Bank) as Ecocash’s only banking asset and assumes that the transaction refers to assets in the mobile money and insurtech segments.
“As such, these non-banking assets encompass Ecocash, Econet Life, Econet Insurance, Vaya Technologies, Maisha Health Fund, and Mars.
“A look at the performance of these non-banking assets reveals losses from FY23 to date,” reads the report.
It added that both the mobile money and insurtech segments recorded inflation-adjusted losses in FY23 and FY24.
“Only the banking segment was profitable in both periods; as a result, moving these non banking assets will have the effect of lowering earnings in Econet.”
Morgan& Co noted that it looks like the impact will be material considering that the combined losses of these non-banking assets in 1H24 account for 32 percent of Econet’s net earnings over the same period.
“However, if we incorporate that post-rights offer, Ecocash’s bottom line will circumvent exchange losses equating to 77 percent of revenues compared to Econet’s exchange losses equal to 34 percent of revenues, and since these exchange losses are not split by segment in Ecocash’s latest results, it becomes unclear whether the impact is as damning to Econet shareholders as initially suggested.
“We also opine that Econet is still undervalued at the current price, and exchanging these unprofitable non-banking assets for undervalued stock benefits Ecocash shareholders more than Econet shareholders,” said Morgan & Co.
In the second scenario, it is said that banking assets incorporate both mobile money and digital banking assets, in which case the damage to the value of Econet. shareholders will be relatively minimal when compared to the first scenario.
Morgan & Co said the impact of the transaction on these companies’ valuations favors EcoCash, and after the transaction, EcoCash will have exchanged loss-making assets in exchange for an undervalued asset.
“Although we need more information to ascertain the magnitude of the changes and how they impact the valuations of both entities, we remain confident that Econet continues to hold potential exceeding 20 percent in USD.”
In the worst-case scenario, Morgan & Co estimates that Econet FY24 earnings per share in USD will decrease by 13 percent, and the upside potential in Econet will soften from 80 percent to 60 percent.
Ecocash, on the other hand, could experience an increase in its potential upside that will be as high as 35 percent in real dollars, mostly on the back of a disposal of loss-making operations and a holding in an undervalued stock.
