It has been slightly over five years since the last Initial Price Offering (IPO) on the Lusaka Stock Exchange. The last IPO was Madison Financial Services PLC (MFS) was concluded on 01 September 2014 with the listing on the stock exchange done on 02 September 2014. MFS had offered 20,000,000 shares representing 40% of the share capital of the company.
MFS listing was oversubscribed with the total shares taken up of 20,197,954 at a closing price of K3.50 from the opening offer of K3.10 representing a capital gain of K0.40. The total number of participants in the IPO was 1,455 represented by 1,252 individuals, 42 institutional investors and 161 MFS employees.
Madison Financial Services (Madison) became the 23rd listed entity on the Lusaka Stock Exchange (LuSE) after their Public Offering (IPO) raised K62 million in the third quarter of 2014. 20 million shares representing 40% of Madison were listed at K3.10 per share. The MFS IPO came in two years with the last IPO involving Prima Reinsurance which raised K30m in 2013 after a barren period of almost five years since Zambia National Commercial Bank’s (Zanaco) listing in 2008. Madison trades under the ticker ‘MFIN’.
In December 2019, the Zambia Forestry and Forest Industries Corporation PLC (ZAFFICO) announced that they would be offering up to 40% of the shareholding of ZAFFICO totaling 160,000,000 Ordinary Shares of the share capital to the public, employees of ZAFFICO and selected institutional investors. The offer opened on the 11th December 2019 following approval by the Securities and Exchange Commission and it is expected to close on 21st January 2020 with the actual listing and commencement of trading planned for 7th February 2020.
This came as a relief to most followers and supporters of the Lusaka Bourse as there has been slow growth in the local exchange which had only 23 listed entities since the first listing of Lafarge Zambia PLC (previously called Chilanga Cement PLC) in 1995. The Lusaka Stock Exchange closed the year 2019 with an All Share Index (ASI) of 4,264.51 and market capitalization of K56,516,055,827.
The ZAFFICO offer
From the Information obtained from the ZAFFICO Prospectus, the company is offering up to 40% of the shareholding of ZAFFICO totaling to 160,000,000 Ordinary Shares of the share capital in ZAFFICO to the public, employees of ZAFFICO and selected institutional investors. The Offer comprises:
- the Subscription Offer by the Company for the subscription of up to 69,996,948 Subscription Shares; and
- the Sale Offer by IDC of up to 90,003,052 Sale Shares
- The Offer Price is ZMW 2.06 per Offer Share.
Key dates to remember in this IPO are as follows;
- Opening of the Offer 11th December 2019
- Closing of the Offer 21st December 2019
- Anticipated date of listing and commencement of trading on the LUSE 7th February 2020
The Business
According to the prospectus the business of ZAFFICO is summarized as below;
ZAFFICO is the largest Forestry company involved in establishing, managing and selling of exotic roundwood in Zambia. ZAFFICO manages 51,659 hectares of land of Pine and Eucalyptus Plantations, representing a balance sheet value for Biological Assets of ZMW 480,145,598 as of 31st December 2018. In addition, ZAFFICO owns approximately 50,000 Ha of unplanted land in Kawambwa, Shiwangandu, Lupososhi, Mpika, Kalumbila, and Mushindamo. In 2003 government and ZAFFICO jointly leased out 694.4 Ha of forest plantations area to Copperbelt Forestry Company Limited and 1,092.3 Ha to Ndola Pine Plantations Limited (Wood Processing Industries) for a period of 25 years.
These leases included the sale of plantation trees. ZAFFICO’s plantations in the Copperbelt Province are in gazetted forest reserves. As such, ZAFFICO is yet to get certificates of title for all its land in the Copperbelt Province. However, ZAFFICO has engaged the government to enable ZAFFICO to obtain certificates of title for the plantation land in the Copperbelt Province). [1]
ZAFFICO’s primary products are mature trees harvested from its pine and eucalyptus plantations. Secondary products include transmission, fencing and construction poles produced from its Pole Treatment Plant which was commissioned in 2018. ZAFFICO has 1,060 registered customers. 6% of the customers are credit customers and 94% are cash customers.
In May 2017, the Government of the Republic of Zambia directed ZAFFICO to sell and export confiscated Mukula (Pterocarpus tinctorius synonym Pterocarpus chrysothrix) logs on its behalf and invest the realized funds, less expense, in the resuscitation of Kawambwa Tea Estate. ZAFFICO has been seeking authority from the Secretary to the Treasury before utilising any of the realized funds. It is important to note that any funds realized from the sale of forfeited assets, including confiscated Mukula logs by the Government, constitutes General Revenue as outlined under Section 88 of the Public Finance Management Act No. 1 of 2018.
Further, In January 2019, the Government of the Republic of Zambia directed ZAFFICO to commence the purchase of the Mukula logs from Concession Licence Holders who harvested the logs legally before the Government banned the harvesting of Mukula trees.
Future Prospects of ZAFFICO
ZAFFICO anticipated the threat of the depletion of mature pine wood. In order to manage the threat of the depletion of mature pine wood, the Corporation devised the 2014-‐2018 Strategic Plan, which was anchored on diversification, value addition, and plantation expansion. As part of a diversification strategy to cushion against the pine depletion of trees, ZAFFICO has leveraged on its key competencies of managing large plantation projects by securing agreements to manage Kawambwa Tea and the cashew plantation. In 2018, the IDC established a Cashew Plantation in Western Province and appointed ZAFFICO as plantation manager and a management contract has since been signed to this effect. [2]
While there is competition in the industry where ZAFFICO is operating, has a larger market share compared to its competition backed by several years of experience. The company aims to consolidate its position in the market by embarking on planting an additional 8,830 Ha clear-felled areas and 5,000 ha of new planted areas over the next six years.
The company also plans to penetrate the market of treated poles both locally and regionally riding on the Pole Treatment Plant capacity to treat 140,000 poles per annum available on to them in the Zambian market.
Financial Commentary
When the ZAFFICO IPO was announced, the market was very eager to see the financial performance and future prospects of the new kid trying to enter the local bourse. Many people thought ZAFFICO was a typical state-owned enterprise with accumulated losses, negative equity, high external debt, etc. However, the prospectus has revealed a well-managed business with consistent profit over the last five years and a strong balance sheet.
Below is a snapshot of the financials of ZAFFICO
Income Statement
2018 | 2017 | 2016 | |
Revenue | 244,715,056 | 208,183,277 | 195,028,756 |
Gross Profit | 205,306,294 | 179,718,820 | 170,356,049 |
Operating Expenses | 83,854,468 | 68,669,435 | 95,825,567 |
Profit For The Year | 119,582,353 | 114,537,712 | 79,510,005 |
Source: ZAFFICO Audited Financials 2018
Key Performance Ratios
2018 | 2017 | 2016 | |
EBIT | 130,480,285 | 120,816,698 | 84,915,845 |
EBITDA | 163,477,834 | 148,222,063 | 96,889,974 |
EBITDA Margin | 67% | 71% | 50% |
Operating Margin | 53% | 58% | 44% |
Gross Margin | 84% | 86% | 87% |
Net Profit Margin | 49% | 55% | 41% |
The above figures point to a well-performing company that has delivered consistency growth in revenue of the last three years at a compounded annual growth rate of 12% and 18% growth YoY between 2017 and 2018. Expenses have remained in check over the same period with growth in both EBIT and EBITDA.
Operating expenses reduced from K95,825,567 to K68,669,435 before increasing to K83,854,468 owing to the increase in depreciation, bad debt write off and exchange losses in 2018.
Revenue and Net Profit for the year ended 31 December 2019 is projected to be K266,362,000 and K155,137,000 respectively. ZAFFICO has consistently paid dividends to its shareholders over the last four years from the year 2015.
Balance Sheet
2018 | 2017 | 2016 | |
Non-Current Assets | 562,722 | 473,559 | 370,530 |
Current Assets | 193,882 | 153,394 | 104,467 |
Total Assets | 756, 605 | 626,953 | 474,998 |
Non-Current Liabilities | 56,367 | 46,134 | 36,725 |
Current Liabilities | 112,695 | 112,133 | 19,266 |
Total Liabilities | 169,063 | 158,266 | 55,991 |
Equity | 587,542 | 468,686 | 419,007 |
Source: ZAFFICO Audited Financials 2018
Key Balance Sheet Ratios
Ratio Analysis | 2018 | 2017 | 2016 |
Current Ratio | 1.72 | 1.37 | 5.42 |
Quick Ratio | 1.51 | 1.30 | 5.08 |
Inventory Turnover Days | 223 | 100 | 99 |
Debtors Days | 43 | 48 | 57 |
Creditors Day | 577 | 461 | 81 |
Gearing | 10% | 10% | 9% |
Non-current assets of ZAFFICO have continued to increase over the period under review due to the increase in biological assets i.e. growing plantations. Property and plant and equipment also contributed to the growth as the company embarked on the purchase of new plant and equipment over the last two years.
Inventory is mainly comprised of treated pole stores and general stores while trade and receivables comprise of receivables from both related party balances and trade receivables.
The company generates huge cash balances closing the year 2018 with a healthy balance of K141,349,000. This was boosted by the sales of the confiscated Mukula sales and cash invested in fixed deposit accounts.
ZAFFICO has strong equity position with no third-party long-term debt and hence gearing is very low at 10%. This 10% is coming from deferred liabilities made up of provisions for retirement benefits due after more than 12 months. Therefore, in actual sense, gearing is zero.
Hope in investing in ZAFFICO
Like all other investments, IPOs should be thoroughly analyzed by the investors and non-investment experts should seek professional advice from a licensed broker and investment advisor before investing in an IPO. As a general rule, investing in IPOs is a high-growth equity strategy.
So, what are the key features that every investor should consider before investing in an IPO like the ZAFFICO IPO?
- Who is selling the shares and what is the proposed use of the proceeds
IPOs are made by the company itself, by existing shareholders (the insiders), or both. Generally, an IPO does better if the company is selling more shares than shareholders as there is a direct flow of capital to the company and therefore a high chance of earning a return for new shareholders. In the ZAFFICO IPO, the company is selling 69,996,948 shares compared to shareholder (IDC) of 90,003,052.
Although this may be seen as an exit strategy for IDC, this is not the case as IDC is returning a substantial shareholding of 60% post-listing demonstrating that they still believe in the future prospects of the business and want to hold firm to the company. Therefore, for ZAFFICO we can rule out a convenient exit strategy for the shareholder.
To guarantee a good return for new shareholders, IPO proceeds should be used for one of three purposes: to fund internal expansion via working capital or the purchase of facilities and equipment; to fund external expansion via an acquisition, or to improve the balance sheet by paying down debt.
According to the ZAFFICO prospectus, the company intends to use the proceeds from the sale of Subscription shares for general corporate purposes, including working capital, operating expenses, and capital expenditures. The expected use of net proceeds from this offering represents the company’s intentions based upon its present plans and business conditions[3]. This demonstrates that the company is aiming for growth.
- Who is going to be running the company?
Just with any other investment, it is important to take a close look at the lists of people shown in the prospectus as Directors and Managers. The track record of those who are going to be in charge is vital. Do they have prior experience in the industry? How long have they been with the company? How much are they being paid? How well rounded is the board? Again, do they also have ‘skin in the game’? That is, is their financial success tied to the company’s? If so, that’s a good sign that management is motivated to do well.
At the ZAFFICO, both the Board of Directors and Management have sufficient experience to manage the affairs of the company. The Board Chairperson is a legal practitioner with over 22 years at the Bar. She has worked in various institutions in legal and corporate secretarial services and served on several boards in the past.
Other notable board members include Ajay Vashee; a Ndola based farmer and former President of the Zambia National Farmers Union (ZNFU), Chearyp Sokoni current CFO for IDC; Dr. Elizabeth Nkumbula, current Commissioner and Chief Executive Officer for the Workers Compensation Control Board; Chris Mwelo, a seasoned Corporate Banker and Treasurer with vast experience in local and international banks.
The Management team is led by Manuel Mutale a chartered accountant with several years’ experience at Chief Executive level in state-owned enterprises. Other members of the management team have qualifications and experience spanning over 15 years each of their areas of operation and expertise.
This team has already demonstrated their capacity and resolve to take ZAFFICO to greater height.
- How big is the market for the product?
The size of the opportunity and the company’s ability to capture market share can make all the difference when it comes to growth and shareholder returns. ZAFFICO is by far the biggest company in this industry and their capacity to deliver and satisfy the market including the new pole treatment plant is unparalleled. ZAFFICO will aim at penetrating the market of treated poles, locally and regionally. ZAFFICO’s Pole Treatment Plant has the capacity to treat 140,000 poles of international standards per year, a competence that is currently unmatched in the Zambian market.[4]
- Risk Factors
Due to investor complaints about the performance of past IPOs, both local and international, this section is now placed early in the prospectus. Normally this section is several pages long and should be read with great care and diligence since it details potential risks which may include:
- Political and Civil Risk
- Currency Risk
- Regulatory Risk
- Company-specific Risks including; markets, capital, liquidity, etc.
- Market Structure and Competition
- Dividend Policy
Investors looking for a regular dividend from their share investments, it is important that the investor reviews the dividend policy of the listing company. ZAFFICO’S dividend policy is guided by the IDC investment policy and guidelines which states that any applicable subsidiary of IDC shall resolve to pay no less than 35% of unconsolidated net profit after tax of any financial year in which a positive unconsolidated net profit after tax is recorded. Going forward, it will be at the discretion of the Board as provided for in the Articles.
CONCLUSION
ZAFFICO IPO has come at the time when the market has been starved of new listings and new investors who didn’t participate in previous IPO especially during privatization of SOEs have been looking for a new investment through IPOs. ZAFFICO is a breath of fresh air in terms of financial performance for most parastatal companies. If you are looking for medium- and long-term investment, and a well-diversified portfolio, ZAFFICO is one such investment to consider.
DISCLAIMER: Potential Investors should seek the services of a licensed investment advisor and stockbroker before investing. Some of the Material contained in the article is as presented by the listing company in the article while the article represents the opinion, assumptions, and analysis of the author.
About the author
Edwin Goli Mulenga is Chartered Accountant, Corporate Banker, Investment Advisor and Public Speaker with over 15 years of Finance and Accounting, Agriculture and Corporate Banking covering Relationship Management, Credit Origination, Debt Structuring, Structured Finance and Syndication. He has a track record of working with multi-stakeholders and cross-sector groups in local and international organizations.
Edwin has is well networked in various business segments, corporations, multinational companies, development organizations, aid agencies, financial institutions, SMEs, professional bodies and the public sector.
References
[1] ZAFFICO Prospectus
[2] ZAFFICO Website