Message Lun 27 Oct 2014 12:35

ZCCM-IH - A Giant Awakens?

ZCCM-IH - A Giant Awakens Pangaea 27-10-2014.pdf
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Member of the Lusaka Stock Exchange
PANGAEA SECURITIES LIMITED
3RD Floor, Farmers House at Central Park, Cairo Road, P.O. Box 30163, Lusaka, 10101, Zambia
Tel: (260 1) 220707 / 238709 / 238710 Fax: (260 1) 220925 Email: ps@pangaea.co.zm.com
We look at the profile of ZCCM-IH in this note. This does not represent an Initiation of Coverage or Investment Opinion for the avoidance of doubt. The note is factual and does not include investment opinion or valuation recommendation for ZCCM-IH.
Investors should consider this note as only a single factor in making their investment decision.
This note may not be circulated or reproduced without the prior written consent of Pangaea Securities Limited. The information herein is based on sources deemed reliable, but Pangaea Securities Limited accepts no liability for any loss resulting from its’ use or from any omissions. Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures. Pangaea Securities Limited, their affiliates, directors, officers and employees may have a long or short position in Zambian securities including any described herein.
1. ZCCM-IH – a giant across the Copperbelt
The principal activity is to manage the Zambian government's stake in the mining sector. Provided below is a snapshot of the key assets and recent performance within ZCCM.
Note: FY Y/E of associates may differ from Mar Y/E for ZCCM
Member of the Lusaka Stock Exchange
PANGAEA SECURITIES LIMITED
3RD Floor, Farmers House at Central Park, Cairo Road, P.O. Box 30163, Lusaka, 10101, Zambia
Tel: (260 1) 220707 / 238709 / 238710 Fax: (260 1) 220925 Email: ps@pangaea.co.zm.com
2. ZCCM – the awakening of a giant?
Post the restructuring of the group, ZCCM appears poised for a solid strategy going forward. Key points for consideration are as follows:
 Winning commodities suite - Well represented across base metals
 Profitable and cash generative - Low cost operations in a key mining region
 Leverage to changes in commodity prices
 Tier I assets - substantial representation in quartile I of cost curve
 Copperbelt footprint - broad representation across the region
 Expansion and growth opportunities
 Holding company and operating assets have strong management teams
 Dividend paying mid-sized mining company with ability to support policy going forward
3. Key events for ZCCM – potential short / medium term catalysts for the company
a. Maiden dividend declared, resulting in ZCCM as one of the few dividend paying mid-sized mining companies
b. Sell-down by GRZ - regulatory compliance for ZCCM to increase the free-float to 25% a main catalyst for the stock
 Through increased liquidity, ZCCM to attract blue chip investors into the register
c. CEO of ZCCM considering a London listing for the company
 Potential to increase the visibility of the company and attract a different set of investors
 London has a broader set of investors than the JSE, LuSE, etc (Equity Funds, Commodities Funds, EM Dedicated Funds, African Dedicated Funds, Special Situation Funds)
d. Growth exposure in Zambia
 Copper production capacity in Zambia forecast to grow from 585kt in 2013 to 701kt in 2014, increasing to 821kt in 2015
e. Strong balance sheet presents options
 Ability to recapitalise balance sheet post restructuring
 Presents expansion options for both subsidiaries and associates
 Strong balance sheet to support dividend paying policy
Member of the Lusaka Stock Exchange
PANGAEA SECURITIES LIMITED
3RD Floor, Farmers House at Central Park, Cairo Road, P.O. Box 30163, Lusaka, 10101, Zambia
Tel: (260 1) 220707 / 238709 / 238710 Fax: (260 1) 220925 Email: ps@pangaea.co.zm.com
4. ZCCM vs Comparable Companies
The company is trading attracting a valuation that appears to be a mid-range between the Joburg and London. Increased liquidity, strategy articulation expanded shareholder register should at minimum maintain the current trading levels (and potentially command a premium to current valuation).
EV/EBITDA:
P/E:
Member of the Lusaka Stock Exchange
PANGAEA SECURITIES LIMITED
3RD Floor, Farmers House at Central Park, Cairo Road, P.O. Box 30163, Lusaka, 10101, Zambia
Tel: (260 1) 220707 / 238709 / 238710 Fax: (260 1) 220925 Email: ps@pangaea.co.zm.com
Dividend Yield:
5. ZCCM’s “clean balance sheet” presents strategic and financial engineering options
We conduct a high level debt capacity analysis to see whether the company has capacity to engage with strategy and support the dividend paying policy. The analysis indicates that this is highly likely.
ZCCM is currently in a net cash position and the company could optimise the capital structure should they so desire.
Current Total Debt (pre-cash)/EBITDA levels of 0.2x, highlight the potential to increase leverage.
During strategic expansion period, it is acceptable for mining companies to increase their leverage to 2.5x. On this basis, ZCCM could substantially increase their leverage while minimising the liquidity and solvency risk.
We provide a high level analysis below;
ZCCM has the potential to increase their debt position to c.USD297-454m from current levels of USD34m to support the strategy (operational and financial) going forward.
Member of the Lusaka Stock Exchange
PANGAEA SECURITIES LIMITED
3RD Floor, Farmers House at Central Park, Cairo Road, P.O. Box 30163, Lusaka, 10101, Zambia
Tel: (260 1) 220707 / 238709 / 238710 Fax: (260 1) 220925 Email: ps@pangaea.co.zm.com
6. Illustrative valuation analysis
For the avoidance of doubt the exercise is theoretical and does not represent a valuation recommendation.
We provide a high level valuation analysis of ZCCM driven by 2014a results.
a. Assume various EV/EBITDA multiples for the company
b. A range of EBITDA growth rates from 2014a results
Illustrative Equity Value (USDm)
Illustrative Equity Value (K/share)
7. Conclusion
Should you wish to discuss any part of the note further, please contact our sales team.
Ce que l'on conçoit bien, s'énonce clairement, Et les mots pour le dire arrivent aisément. BOILEAU