• Sun. Apr 14th, 2024

ANALYSIS| Fair Value Gains Drive First Mutual Properties to ZWL$25bn After Tax Profit

ByEconomic Times

Sep 24, 2022

By ETimes

Financial Performance Highlights

  • ZSE listed property concern First Mutual Properties earned a Net Profit After Tax of ZWL$25 billion. The performance was a return to profitability following fair value gains of ZWL$30 billion on the group’s investment property portfolio, which reached ZWL$78 billion in value at 30 June 2022.
  • The group’s revenues increased by 25% in inflation adjusted terms to ZWL$746 million. This was attributed to timeous rental reviews and stable occupancy rates, which averaged 89.23% during the six month period. A more aggressive approach towards collections was also noted, with collection rates during the period improving from 82% to 87%.
  • In contrast, Net Property Income (NPI) declined by 21% in inflation adjusted terms to ZWL$247 million and net operating income (before fair value and monetary adjustments) fell by 46% to ZWL$46 million.
  • The group’s operations generated a net cash flow of ZWL$236 million, which enabled net investment expenditures of ZWL$35 billion. During the period under review the group committed ZWL$85 million towards maintenance and ZWL$3.4 million towards improvements of its property holdings.
  • At the end of the half year period total assets stood at ZWL$79 billion while liabilities were at ZWL$11 billion. The group’s cash and cash equivalents stood at ZWL$779 million, of which ZWL$177 million comprised of short term liquid assets, ZWL$29 million was in local currency balances and ZWL$573 million was in USD balances.
  • Despite an 8% decline in NPI, the Office Property segment remained the groups largest earner at ZWL$241 million followed by retail at ZWL$187 million. The Industrial Property segment yielded the largest NPI growth at 108% to to ZWL$79 million, as well as the best NPI margin at 88%.
  • On its ongoing projects, the group reported that the construction on Arundel Office Park extension was expected to begin in September 2022. The group also revealed that the Mbare Warehouse was completed and handed over to the Tenant (Cash and Cash Carry) in June 2022.
  • Going forward, the group promised to prioritize maintaining high occupancy levels through client relationship management in addition to continuing with property refurbishments, maintenance, and upgrades.
  • The group declared an interim dividend of ZWL$87 million and US$100k.

Commentary and Analysis 
In keeping with trends, the group’s financial performance was dominated by fair value gains, which accounted for the majority of reported profits. Adjusting for the technical gains suggests the group is struggling to match its revenue growth with cost inflation. The group reported that 73% of its cash was held as USD balances, with an implied value of US$1.5 million. At the beginning of the half year period the USD balances had an implied value of US$1.9 million, suggesting the funds were partially used to fund financing and investment activities during the period. The group appears to be taking a pragmatic approach towards utilizing the funds, which is a bit underwhelming but understandable. There is not much scope for any major projects with the amount, and the circumstances necessitate a safety reserve of sorts. All the same, there could be something for the group in the health services sector, which is a property segment of growing interest – given the link to First Mutual Heath. The group’s property holdings are leaned towards classic property classes that are generally underperforming under the current economic environment. Investment in properties related to health services could be useful bit of diversification, with the competitive benefit of an existing strategic connection to the industry. Otherwise, increasing the group’s revenue generation and cost containment should be the key issues in the second half year.

On the ZSE, since the turn of the year the First Mutual Property share has underperformed its peer property stock – Mashonaland Holdings and the market as a whole. The FMP share has lost 43% of its value in nominal terms and 90% in implied USD terms. The share is currently trading at a Price to book ratio of 0.05x which is fairly low. Its low enough to raise the question – are the property stocks are currently undervalued or are the valuations of the property holdings attached to the stocks overvalued? The provision of a hard currency dividend component suggests the group is trying to reward shareholders and improve sentiment towards the share. A continuation in the performance trend might eventually warrant some consideration for delisting the share, particularly as the property operations are already incorporated in the financial reports of First Mutual Holdings – Harare

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