6 June 2012

Zimbabwe: African Sun-Dawn Saga Comes Full Circle


LAST week there was a flurry of activity on the Zimbabwe Stock Exchange with a number of shares swapping hands in deals running into several millions of dollars. Some of the notable deals concluded included the acquisition by African Sun shareholders of an additional 12 percent in Dawn Properties, Zimplow's acquisition of a 16 percent stake in Tractive Power Holdings and the buying into Delta by a combination of local and foreign investors.

The ASL deal was the major highlight of the week because it had become topical after Dawn Properties surprised the market when it announced that it was evicting ASL from its eight properties following disagreements over rentals.

After the deal, the market largely thought it was a good deal by the Shingi Munyeza camp to increase its stake in Dawn to try and deal with the lease dispute.

After the deal, I made an effort to dig deep into the archives to come up with the Dawn Properties investment case and see what went wrong.

In September 2003, ASL -- then Zimbabwe Sun Limited -- listed the first property company on the Zimbabwe Stock Exchange through a variable rate loan stock after unbundling the hotel assets and immediately got into a 50-year lease-back arrangement.

Probably in order to ensure that there will not be a situation where the hotel assets are taken away from the operating company, hence defeating the whole reason for unbundling, ASL retained a 19 percent shareholding in the newly listed entity.

The rest of the shareholding was through a dividend in specie on a one-to-one basis for every share held in ASL.

It is understood the ZSE allowed the listing to go through on condition that Dawn diluted its exposure in the hospitality sector and get into other property sectorswithin a period of two years.

The original vision that the Shingi Munyeza-led group had was to unlock shareholder value by allowing the property entity to participate in the real estate sector which would not have been possible had the hotel properties remained under the operating entity.

This meant Dawn would then leverage on the massive balance sheet to go into retail, residential and commercial properties, as well as development.

The rental regimes between the two entities were in line with prevailing market conditions, even now.

This is arrived at when one compares with what other hotels are charging for rent in this market.

In 2006 Dawn was awarded the best ZSE performing counter for the year. This meant the whole unbundling exercise had been well received by the market and shareholder value had been unlocked.

There was also a bonus issue in 2005, which gave three shares for every share held.

Dawn's success influenced other entities to proceed with similar unbundling exercises, resulting in the birth of Mash Holdings, Pearl Properties and ZPI.

Initially, Dawn accounted for over 50 percent of the market capitalisation of all the four listed property entities until about 18 months ago.

Dawn has since relinquished that stranglehold to the other property entities because they are now more diversified and this has given them better yields than Dawn,

which has relied entirely on the expected recovery of tourism and the fact that its rentals are turnover based.

However, diversification of the Dawn portfolio did not materialise as anticipated as the economy went into a hyperinflationary era, which made property development and access to capital extremely difficult.

So Dawn was given an extended grace period to diversify its portfolio and to date I believe that they have made an unsuccessful attempt at diversifying.

What has Dawn done to diversify its portfolio?

From what has been made public, Dawn managed to buy off CB Richard Ellis, a decision that was ill-fated especially with the advent of other listed property entities.

This meant that CB Richard Ellis could not do work for the other major property entities due to perceived interested parties with Dawn.

The same transaction also saw Dawn buying land in Marlborough, which it turned into horticultural land.

Overnight Dawn became a farmer, no wonder the major losses highlighted in the year ending March 2011.

In the meantime Dawn's competitors, including Fidelity, went on an aggressive drive to create land banks, service them and sell them on the market, no wonder Fidelity was the darling of the market in 2011.

Last year, Dawn indicated that it was selling CB Richard Ellis and getting out of its cabbage farming project. This is still to happen.

There was also a proposal to build an apartment block in Baines Avenue in Harare but this also has apparently been stillborn.

Dawn also bought the closed Brondesbury Park Hotel and now wants to sell it. Following the major shifts in Dawn shareholding last week, the market is saying it's ASL who want to ensure they control the property entity as well as to protect their leases at a shareholder level.

This would make sense since it was the brainchild of ASL to create Dawn, perhaps Munyeza and company need to show the market what they intended to do with Dawn. Otherwise this was not such a clever idea after all.

Looking at the balance sheet, Dawn has an asset portfolio, which is clear of over US$70 million. Its rental income grew by 52 percent between 2010 and 2011.

This is expected to improve as tourism recovers and evidence being that ASL has since published its first profit since dollarisation.

The biggest worry on Dawn has been that its cost structure has been very high when all it does is collect rent from one tenant.

With tourism is set to rebound, the rentals for Dawn are likely to significantly improve further.

This could be enhanced even more if Dawn diversified its property portfolio by taking advantage of its clean balance sheet.

Maybe this is what the new shareholders will ensure.

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