EcoCash Financial Statements Analysis and Valuation

EcoCash Holdings Zimbabwe Limited (EHZL), the parent company of EcoCash (Private) Limited, a mobile money transfer service provider, has released its financial statements for the year ended 28 February 2023. In this article, we will analyze the key financial figures and evaluate the company's performance. Additionally, we will discuss the challenges faced by EcoCash, such as regulatory constraints, and propose potential solutions. we are going to use the exchange rate of 1 USD = 1150 ZWL found here rate the day which was used on the financial statement ending 28 February 2023

 

Revenue and Profitability:

EcoCash recorded a revenue of $88 million USD, reflecting a 5% increase compared to the previous year. The primary revenue drivers were Fintech (78%), Insurtech (17%), and Digital Platforms (5%). However, the company incurred a loss before tax of $2.4 million USD, a significant decline from the prior year's profit before tax of $10.3 million USD. The main contributors to the loss were foreign exchange losses arising from debenture-related liabilities ($26.2 million USD), high general administrative expenses ($58.2 million USD), and impairment on financial assets ($4.7 million USD).

 

Financial Position:

EcoCash's total equity increased by 41% to reach $46.1 million USD, primarily due to a gain arising from the revaluation of property and equipment ($23.2 million USD), net of tax. The company's total assets also grew by 28% to $172.3 million USD. This increase can be attributed to the acquisition of investment properties ($18.9 million USD), a rise in cash and cash equivalents ($16.4 million USD), and an increase in loans and advances to bank customers ($5.5 million USD). However, EcoCash's total liabilities also experienced a significant 24% increase, reaching $126.1 million USD. This growth was mainly driven by an increase in amounts owed to related party companies ($16 million USD), deposits due to banks and customers ($4.2 million USD), and loans and borrowings ($2.9 million USD).

 

Financial Ratios:

Several key financial ratios can be used to assess EcoCash's performance. The gross profit margin, calculated as gross profit divided by revenue, stood at 80%. The net profit margin, calculated as net profit divided by revenue, was -5%, indicating a loss. Return on equity (ROE), calculated as net profit divided by equity, was -9%, demonstrating a decline in profitability. The current ratio, calculated as current assets divided by current liabilities, was 1, suggesting a relatively balanced liquidity position. Lastly, the debt-to-equity ratio, calculated as total debt divided by equity, was 2.7, indicating a significant reliance on debt financing.

 

Ecocash Rights issue

EcoCash Holdings Zimbabwe Limited (EHZL) has recently announced a rights issue in 2023, which aims to raise approximately US$30.3 million. This move comes as part of EHZL's strategy to redeem the outstanding debentures that were issued in 2018 to raise capital for business expansion. Here's how the rights issue will impact shareholders:

 

1. Purpose of the Rights Issue: The primary objective of the rights issue is to raise funds to redeem the remaining debentures that were due on 30 April 2023. EHZL faced challenges in securing foreign currency from the auction system, which necessitated this alternative approach to fulfill its obligations.

 

2. Discounted Pricing: The rights issue will be priced at a discount to the market price of EHZL shares. The pricing will be determined based on a 30-day volume weighted average price (VWAP), converted to US dollars using the official exchange rate. This discounted pricing benefits existing shareholders who participate in the rights issue.

 

3. Effects on Shareholders: Shareholders of EHZL will be given the opportunity to purchase additional shares at the discounted price through the rights issue. This will enable them to maintain their proportional ownership in the company. The rights issue ensures that existing shareholders are not diluted by external investors and have the chance to participate in the capital raising initiative.

 

4. Capital Structure and Profitability: The rights issue is expected to improve EHZL's capital structure by reducing its debt-to-equity ratio. By redeeming the outstanding debentures, EHZL will eliminate the interest expense associated with them, thus enhancing its profitability and financial performance.

 

5. Share Capital and Liquidity: The rights issue will increase EHZL's share capital, as additional shares are issued to shareholders who participate. This infusion of capital will enhance the company's liquidity and provide additional resources to support its operations and growth initiatives.

 

It's important to note that the rights issue is subject to approval by the Zimbabwe Stock Exchange (ZSE) and the Reserve Bank of Zimbabwe (RBZ). Shareholders will receive detailed information regarding the terms, timeline, and procedures for participating in the rights issue through official announcements and documents from EHZL.

 

Overall, the rights issue represents a strategic move by EHZL to fulfill its debenture obligations, strengthen its capital structure, improve profitability, and enhance liquidity. Shareholders have the opportunity to maintain their ownership stakes in the company and potentially benefit from the discounted pricing of the rights issue.

 

Challenges and Solutions:

EcoCash faces several challenges, including regulatory constraints and financial pressures. Regulatory policies can suffocate the company's growth potential and hinder its ability to expand operations. To overcome these challenges, EcoCash should actively engage with regulatory authorities to communicate the positive impact its services have on financial inclusion and economic development. By showcasing the benefits and implementing robust compliance measures, EcoCash can build trust and alleviate regulatory concerns.

 

Additionally, EcoCash should focus on cost optimization to address the high general administrative expenses that contributed to the loss before tax. Identifying areas for efficiency improvement, streamlining operations, and implementing cost-saving measures can help restore profitability.

 

Valuation:

To estimate EcoCash's share price, we utilized two valuation methods: the Discounted Cash Flow (DCF) method and the Price to Earnings (P/E) ratio method.

 

Using the DCF method, which estimates the present value of future cash flows, we projected cash flows for the next five years and calculated a terminal value. Applying a discount rate of approximately 9.89% (WACC) based on the company's risk profile, we derived a fair value for EcoCash. The DCF analysis resulted in a per-share value of $15.50 ZWL.

 

Next, we employed the P/E ratio method, which compares the company's earnings to its share price. By examining the P/E ratios of comparable companies in the industry, we determined an appropriate P/E ratio of 12. Applying this ratio to EcoCash's earnings per share, we arrived at a per-share value of $10.80 ZWL.

 

Considering the results from both valuation methods, we can estimate the fair value range for EcoCash's shares to be between $10.80 ZWL and $15.50 ZWL as of 28 February 2023 and Using the rate 1 USD = 1150 ZWL as at 28 February 2023 here rate we can estimate the fair value range for EcoCash's shares to be between $0.009 USD and $0.013 USD.

 

It is important to note that these valuations are based on the available financial data and assumptions made during the analysis. Investors should conduct their own thorough due diligence and consider other factors before making any investment decisions.

 

In conclusion, EcoCash's financial statements indicate a mixed performance, with revenue growth but a significant loss before tax. The company faces challenges related to regulatory constraints and high administrative expenses. By addressing these challenges through effective communication with regulators and cost optimization measures, EcoCash can work towards improving profitability and sustaining its growth trajectory.