The Zimbabwe Stock Exchange (ZSE) was established in 1896 but only opened to foreign investments almost a 100 years later in 1993. It is home to (sixty-three) 63 counters despite the drive to formalise Small and Medium Enterprises (SMEs) so that they unlock value. It has a market capitalisation of ZWL11.81 trillion which translates to approximately USD3.5 billion based on official interbank exchange rate. The Victoria Falls Stock Exchange (VFEX) which trades in United States Dollars provides an alternative capital market which helps companies to raise foreign currency. Its market capitalisation was USD1.314 billion as of 6th June 2023 with twelve (12) companies having listed since its launch in December 2021 as the only stock exchange which trades exclusively in USD in sub-continent. The statistics show that very few companies are subject to market valuation in Zimbabwe which calls for need to have expert valuation to determine fair value. Circumstances which call for such valuation include:
- Partner ownership
- Compliance (e.g. taxation)
The valuation criterion is dependent on the nature of the company's business. Valuation of an agricultural concern would take a different approach from that of a mining and/or telecommunication company. The valuation method is also dependent on market conditions. There is need to depend on available information, both qualitative and quantitative. Subjective valuations are common given absence of independent verification and audit procedures.
Market valuation that expects a listed counter to be trading at the same price in different jurisdictions such as Zimbabwe and South Africa does not hold, thus valuers of companies in Zimbabwe may resort to intrinsic/financial position related valuations to determine the real worth of private companies based on discounted cash flows of future performance. Qualitative factors such as governance, business model, markets and risk management are used to project future performance based on estimates. The difference between Equity (Shareholders Capital + Retained Profits) and Debt (Introduced debt+ Assumed Debt) is the company value (Enterprise Value). Therefore, Enterprise Value = Value of Equity – Value of Debt in the balance sheet. The price per share can be established once the enterprise value is established. It is of great worthy to note that share price in such a case is not only attached to the company value, but also hinged on the number of shares in issue.
Organic growth factor
There is need to consider if a company has not declared any dividend. This entails a reinvestment of all the proceeds generated from inception through to the present day. Considerations should also be made if profits were underestimated due to high management fees levied by foreign partners for technical support, in which case valuations should consider the management fees. Non declaration of dividends and reinvestments builds equity and improve company value.
Market value holds if a hypothetical willing seller and a hypothetical willing prudent buyer in an open market, both with all relevant information decide to trade. The value at which the shares of a company are being traded on the stock exchange may be used if the stock exchange is active and alive to market dynamics. Market valuation, especially in Zimbabwe may result in huge disparities given that shares of the same company may behave differently on the ZSE and Johannesburg Stock Exchange (JSE). The fundamental justifications being that different economic conditions do attach different valuations on the same counter.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.