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8/14/2019 Zimbabwe_ a Growth Recession
1/17
ZIMBABWEA growth recession?
There has been great debate about prospects of economic recovery in
Zimbabwe. The IMF projects GDP to increase by 3% this year and then
settle at 6% up-to 2014. The Ministry of Finance (MoF) expects a 6% GDP
growth rate this year and double-digit growth thereafter. Recent data
suggests that the Zimbabwe economy is recovering. In this report we:
investigate the risks to a speedy recovery of the Zimbabwe economy.
We pay particular attention to the banking sector. In our view, politicalhostility between the two main parties of the Government of National
Unity (GNU) is thawing. The recent meeting between the European
Union (EU) representatives and the Government of Zimbabwe (GoZ)
leadership is supportive of our view.
provide a performance analysis of the Zimbabwean equities. Our view
is that investors should remain defensive, but progressively gain
exposure to the mid-cap defensive shares.
A
frica
Peter Mushangwe
Zandisile Mabuya
+27 11 551 [email protected]
September 16, 2009
Fig 1: Zimbabwean equities recovered strongly in April
0.4
0.6
0.8
1
1.2
1.4
1.6
22-Feb-09
8-Mar-09
22-Mar-09
5-Apr-09
19-Apr-09
3-May-09
17-May-09
31-May-09
14-Jun-09
28-Jun-09
12-Jul-09
26-Jul-09
9-Aug-09
23-Aug-09
6-Sep-09
Nigeria
Kenya
RSA
Zimbabw e
MSCI Frontier
8/14/2019 Zimbabwe_ a Growth Recession
2/17
Page 2 of 17
1. Political Overview
Notwithstanding the improvements in relations with the EU,
Zimbabwean politics remain the most dangerous unknown in the
equation. We admit that the holding up of the GNU after the signing of the
Global Political Agreement (GPA) continues to confound the pessimists.
While we believe that liquidity is now more critical than politics for
Zimbabwes recovery, we do not downplay the political risks. Historically,
elections in Zimbabwe, except for the 1980, were largely of no importance.
Despite the improving relationship and possible re-engagement with EU, UK
and USA, political risks are heightened by:
the uncertainty of the tenor of the GNU. Some commentators allude to
impeding elections while others speak of the GNUs tenor as a
minimum of five years. A pronouncement to the tenor of the GNU has
not been made;
the GNUs responsibility to work on issues such as 1) the new
constitution 2) election guidelines 3) property rights and land reform
and 4) re-engagement with USA, UK and EU. We foresee substantial
disagreements and disharmony;
the internal fragmentations within both ZANU PF and the MDC.Factions in the two parties also remain the biggest threat to a smooth
operation of the GNU; and
the succession question that would astound both MDC and ZANU PF.
In ZANU PF, the divisions will probably widen as different possible
candidates try to place themselves in line for succession. In MDC, if
the President of the party, Mr Tsvangirai, resigns after the two terms, it
will be the first time a leader voluntarily gives up power in a major
party in Zimbabwe. Failure to resign would hurt the party and his
image as comparisons to ZANU PF and Mr Mugabe will obviously bepointed out.
In our opinion political risks have waned, but we also admit that it is difficult
to envisage how it can play out in the next year. We however believe that
recovery stories will dominate and overshadow politics. We do not expect
a material improvement in the discount rate of the Zimbabwean
equities nonetheless.
8/14/2019 Zimbabwe_ a Growth Recession
3/17
Page 3 of 17
2. A growth recession?
In our note, The Zimbabwe Dilemma: From Hyperinflation to Possible
Deflation, April 7 2009, we expounded our fears of possible deflation chiefly
due to 1) lack of tools to stimulate the economy, 2) previously high US$
inflation rate and 3) banks inability to expand credit; among other reasons.
With the exception of previous high US$ inflation rate which seem to have
frittered away somewhat, other factors remain fairly strong. The recent data
suggests that Zimbabwe economy has improved. Our discussions with
various company managers point to a fairly strong recovery in capacity
utilization. Capacity utilization have ascended from levels around 10%-20%
pre-dollarization to levels ranging between 30% and 45%. Volumes show a
strong bounce back, albeit due to the base effect.
In this note we pay particular attention to the banking sector. In our view,
Zimbabwe could go through a growth recession conventionally defined as
a situation where Gross Domestic Product (GDP) would grow at a rate lower
than the countrys potential output and have indifferent effect to employment
creation if the liquidity strain continues. Without reasonable inflows of
US$/rands in the economy the recovery of the economy could take a
protracted period. We highlight the following:
Poor growth in capital stock: investment in new plant and
equipment, which we believe is critical, will remain low in the short-
term. Then importation of capital goods has not rebounded since Jan
09. The current capital stock is beyond the steady state in our view,
negatively affecting industrial efficiency and output/supply in the short-
to medium-term
The low quantity and velocity of money: The broad money indicator
has rebounded (in US$ terms) when compared to CY08. However, the
quantity of money in circulation is still low in our view and the pick-upcould be exaggerated by the low base. The velocity is also negatively
affected by the lack of financial assets in the market.
Sluggish recovery of credit expansion as banks balance sheets
remain undersized and liquidity remains tight.
Poor internal demand due to lower income. The economys inability
to create employment on a noteworthy scale would weigh heavily on
8/14/2019 Zimbabwe_ a Growth Recession
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Page 4 of 17
domestic demand. Anecdotal evidence shows continued lay-offs,
particularly in the service industry. Consumption in particular would be
expected to rise as recovery feeds to the poor rural population, but our
view is that this will take a prolonged period.
Export growth post GNU continue to disappoint. The export
statistics continue to fall when compared to last year. We, however,
expect exports to recover in 1H10 due to both improvements of the
global economy and the gradual integration of the Zimbabwe
economy as companies re-gain lost marketshares.
According to the IMF, Zimbabwes GDP is expected to grow at 3%
in CY2009 before doubling to 6% in CY2010 and up-to CY2014.
Inflation which has been negative from January to May this year, rose
to 1% in July and is expected to average 9.9% in CY2010 before
receding to 6.2% in CY2013. Nominal GDP growth rate of around
12% would not notably stand out against other SSA countries in
our assessment. However, the MoF is adamant that real GDP will
exceed 10% in the next 3 years.
While 1) supply constraints in some sectors, particularly agriculture, 2)
the reintroduction of duty on certain items and 3) importation of
inflation from South Africa (rand strength/US$ weakness) could
support upside risks on inflation, it should remain compressedgenerally as long as the economy lacks major liquidity in our view.
8/14/2019 Zimbabwe_ a Growth Recession
5/17
8/14/2019 Zimbabwe_ a Growth Recession
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Page 6 of 17
Source: IMF, Legae Securities
Zimbabwes per capita income is expected to register a strong
recovery but remains one of the lowest in SSA. By 2014, per
capita income is expected to have more than doubled to around
US$500, but it would still be lagging per capita incomes for countries
like Malawi, Zambia and Uganda. In our opinion this puts a strong
strain on domestic demand.
The major constraint to local consumption is the low income
level. Wage levels will remain suppressed in our view, squeezing
internal demand. The dilemma is that wage increases that would
Fig 3: Internal demand is constrained by low income level and little room to improve it
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
E.Guniea
Chad
Guinea
Congo
Tanzania
Ethiopia
Nigeria
Togo
Cameroon
DRC
Rwanda
Gabon
Mali
Liberia
Burkina
Gambia
Uganda
Benin
Senegal
Coted
Mauritius
Sierra
Kenya
Malawi
Mozambi
Zambia
Zimbabwe
Angola
Ghana
SouthAfrica
Botswana
Swaziland
CapeVerde
Namibia
Lesotho
Seychelles
...yet as a percentage of GDP, public sector wage bill is high
% of GDP
Average
50
250
450
650
850
1,050
1,250
1,450
2
000
2
001
2
002
2
003
2
004
2
005
2
006
2
007
2
008
2
009
2
010
2
011
2
012
2
013
2
014
Incomelevelsarelow,(US$percapitaincome)...Malawi Ug an da Zambia Zimbabwe
8/14/2019 Zimbabwe_ a Growth Recession
7/17
Page 7 of 17
exceed levels justified by the economys productivity would not only
reverse the companies competitiveness, but will have a negative
impact on employment as well.
Even at this low level (in absolute terms) as a percentage of GDP,
Zimbabwes public sector wage bill is above the SSA average.
This situation puts the government in a quandary since wage level in
absolute terms is low, but on a relatively basis, and in light of GDP
and the economys production capacity, the level is high. Friction
between labour and government would be expected to continue in our
view, further putting a dent on recovery prospects.
8/14/2019 Zimbabwe_ a Growth Recession
8/17
Page 8 of 17
3. Banking Sector: Consolidate or Die
Zimbabwes banking sector could catalyse both capital investment and
consumption recovery, hence our emphasis on the analysis of the banking
sector in this report. In our point of view, Zimbabwes banking sector requires
significant capitalisation in order to be able to attract convincing external
lines of credit and catalyse the recovery of the economy. Currently the
banking system suffers from:
Poor capitalisation;
Poor liquidity; Low profitability; and
Higher credit and operational risks.
We believe the key theme for Zimbabwean banks will centre on
capitalisation, liquidity management and risk management for the next
year. The Reserve Bank of Zimbabwe (RBZ) set out banks to meet new
minimum capital requirements by March 2010. (Commercial banks =
US$12.5mn; Merchant Banks = US$10.0mn and Building Societies =
US$10.0mn) With low profitability in the industry, building up capital throughretention of profits would be a big ask although profitable banks could cut
dividends in order to accumulate capital. The fragmentation of the banking
industry does not bode well for industry profitability as well. There are 18
commercial banks, 4 merchant banks, 4 building societies and 1 finance
house. The GDP/bank ratio is excessively miniature. Hence, against a
challenging operating outlook, capital adequacy ratios (CAR) will remain low
(relative to new requirements). The dearth of stock issuance would make
capital raising much more difficult in our view. Banks with low loan-to-
deposits ratios may manage to keep higher CAR. Since dollarisation:
The industrys total deposits increased to an estimate of
US$800mn, (Sept 09) Deposits grew by a satisfying 48% from
US$475mn in April to US$706mn by June 09. Loans and advances
show a higher growth rate of 66% from US$158 to US$263 over the
same period of time, but remain fairly vain to the requirements of the
economy. Of concern is the virtual non-existence of consumptive
lending. Lending for purposes of purchasing items like cars, home
8/14/2019 Zimbabwe_ a Growth Recession
9/17
Page 9 of 17
property etc has not recovered since times of hyper inflation. Lending
is mainly for purposes of PPE renovations and trade finance.
Effective lending rates have remained relatively high. Lending
rates averaged 6% to-date. Merchant banks charge higher rates to as
high as 50%. With inflation projected to increase to around 6%, the
risks of further increases in lending rates are meaningful, again
negating endogenous-spurred recovery. The RBZ removed a 6%
above LIBOR interest rate cap and continue to use moral suasion to
encourage lending to the productive sectors at reasonable rates.
The loan-to-deposit ratios are high for some banks. This makes
loan book growth almost impossible for those banks except in
situation where they aggressively build up deposits. ABC,
Kingdom and NMB have high loans-to-deposit ratios Deposits are
also heavily fragmented among the banks, which again will result in
stiff competition on liability space. The structure of the industry small
and undiversified banks does not bode well for the challenge. The
comforting scenario, however, is that banks with higher market shares
in deposits (CBZ, Stanbic, Barclays, FBCH) have low loan/deposits
ratios and room to expand their loan books.
The ALM challenge increased. Deposits are mainly demand as is the
case in most markets, but there challenge is born out of 1) the inabilityof the RBZ to play the role of the lender of last resort and 2) the lack of
money market instruments that have quality credit profile and can be
used to raise funds and/or deposits.
Profitability on core business remains low. Net Interest Income
(NII) and Net interest Margins (NIM) are low. For instance, only CBZ
and NMB recorded NII of above US$1mn for the 1H09. Risk aversion
towards counterparty risk will lead capital to be invested mainly in
perceived lower risk assets and/or with banks that have higher credit
scores, thus produce lower yields. Credit risks as indicated by theprovision levels seem to be on the higher end when compared to
other African countries outside Nigeria. Forward-looking, we would
expect impairment charges to decline as the economy picks up, and
credit risks dissipate.
The raising RTGS activity indicates an improving situation in the
money markets. The increasing activity can strengthen confidence,
8/14/2019 Zimbabwe_ a Growth Recession
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Page 10 of 17
and thus enabling banks to access liquidity. The local interbank credit
markets, however, remain disrupted. Inter-bank loans remain
insignificant at an average that is below US$1mn.
Consolidation is needed in order to replace the damaged banks
in our view. Weaker Zimbabwean banks should be merged to form
stronger banks that could offer size and scale of financial services.
There have been media reports of Nigerian and South African banks
interest to expand their presence into Zimbabwe. In our opinion, this
would be a positive thing for the industry, in spite of the intensification
of competition, specifically on the liability side. We are particularly
worried of banks with narrow shareholding structures and those that
would not stand to benefit from parent support. We should also
highlight that there is not much banks assets to purchase outside the
branch networks and human capital in our view.
Source: Reserve Bank of Zimbabwe, Legae Calculations
Fig 4: The liquidity (deposits levels) is low despite recent improvements
0.0%
4.0%
8.0%
12.0%
16.0%
0.0%
4.0%
8.0%
12.0%
16.0%
Barclays
StanChart
Stanbic
Kingdom
ZBBank
Agribank
NMB
CBZ
MBCA
ZABG
CFX
Metro
Effective lending rates
Effective lending rate
Spread
475
574
706
158
212
263
0
100
200
300
400
500
600
700
800
Apr-09 May-09 Jun-09
Deposits are growing
Deposits
Loans
0% 20% 40% 60% 80% 100% 120% 140% 160%
Barclays
Agribank
FBC
Stanbic
ZB Bank
ZABG
Stanchart
CBZ
Genesis
Premier
Metro
CFX
Renaissance
NMB
Kingdom
ABC
TN
Interfin
MBCA
Loan-to-deposit ratios
Loan/Deposit
0
5
10
15
20
25
30
35
40
45
0
200
400
600
800
1000
1200
1400
15
Apr09
22
Apr09
29
Apr09
6May
09
13
May
09
20
May
09
27
May
09
3Jun
09
10
Jun
09
17
Jun
09
24
Jun
09
1Jul09
RTGSactivityrising,US$mn
Cumulative
US$valueRHS
8/14/2019 Zimbabwe_ a Growth Recession
11/17
Page 11 of 17
Source: Reserve of Bank Zimbabwe, Legae Calculations
Source: Bloomberg, Members of the ZSE, Legae Calculations
Fig 5: The Banking Sector is not profitable, and consolidation would save it
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
0
20
40
60
80
100
120
140
160
180
200
Genesis
TN
Metropolitan
Renaissance
ZABG
Interfin
Premier
NMB
ABCH
ZBH
FBCH
Barclays
Stanbic
CBZ
Deposits are still low although growing
Deposits
loan/Deposit
ZBH
ReN
Interfin
Genesis
TN
Metro
ABCH
Stanbic FBCH
Barclays
ZABGNMB
CBZ
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
-2 -1 0 1 2 3 4
ROE(%)
Profit US$mn
Profitability is low
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
ZBH
CBZ
FBCH
Interfin
TN
ReNaissan
ce
NMB
Stanbic
Premier
ABCH
Genesis
credit risk is high
Provision/Advances
average
0
0.5
1
1.5
2
2.5
3
3.5
10
15
20
25
30
35
40
Jan09 Feb09 Mar09 Apr09 May09 Jun09
interbankcreditmarketremainsinsignificant
Offshoreloans
InterbankloansRHS
Table 1: Salient Features of the Listed Banks, 1H09
ABC
Holdings
Barclays
Bank
CBZ
Holdings
FBC
Holdings NMB Bank ZB Holdings
Share in Issue (mn) 146 2152 684 361 1641 159
Market cap (US$mn) 17.5 215.2 112.9 10.8 11.5 19.1Price (USc) 12 9.5 16 3 0.7 11Total Assets (US$mn) 35.54 116.63 219.77 64.63 24.69 37.70
Total Deposits (US$mn) 18.1 74.0 184.2 37.7 13.8 22.1
Loan/Deposit (US$mn) 13.0% 2.2% 46.0% 27.0% 63.0% 3.2%
Cost/Income120.0% 88.0% 65.0% 85.0% 63.0% 267.0%
NIM 15.0% 8.0% 4.0% 10.0% 1.9% 2.1%
ROE 0.8% 0.6% 1.5% 0.9% 7.4% -4.0%
8/14/2019 Zimbabwe_ a Growth Recession
12/17
Page 12 of 17
4. Performance Analysis
After a significant drop post the dollarization, Zimbawean equities
rallied substantially with the index rising by 162.2% from its trough in
March. In fact the Zimbabwean equities caught up with performances of
major SSA markets and the MSCI Frontier index. We underscore the
following:
Defensiveness of company earnings is still very important. We
however advise investors to progressively seek exposure in the mid-
cap, defensive space. Our rationale is that the large caps have
probably reached full valuation. In our view the mid-caps have higher
upside risk in the wake of full economic recovery. In fact the top 5
companies by market cap make up 46.1% of the total market
capitalisation and about 47.1% of the country GDP estimate. The top
10 represent 66% of the ZSEs market capitalisation.
Most staple consumer companies performed exceptionally YTD.
The large cap consumer shares, Delta, Innscor, and Hippo have
appreciated by 100%, 87% and 123% respectively. Mid-cap stocks
like National Foods, OK, and CFI have appreciated by 733%, 600%
and 325% in that order. Econet, the only telecom company on theZSE went up by 223%.
In our opinion, the Zimbabwean equities will maintain a lacklustre
performance to 2Q10 due to 1) lack of liquidity and 2) low profit
visibility and 3) little room for improvement in the discount rate
due to political risks notwithstanding the improvements.
Companies that released 1H09 results show low levels of profitability
in absolute terms, although the consumer sector has shown resilience.
Market capitalisations remain tiny, but relative to the production
capacity of the economy valuations continue to remain justified inmost cases. On a market cap/GDP basis, Zimbabwean equities do not
provide much upside risk, but the catalyst is the recovery of GDP. Our
mid-cap universe is made up of companies whose market
capitalisations are between US$20mn and US$100mn.
8/14/2019 Zimbabwe_ a Growth Recession
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Page 13 of 17
Source: Bloomberg, Legae Calculations
Fig 6 : After a significant drop, Zimbabwean equities recovered
0.4
0.6
0.8
1
1.2
1.4
1.6
23-Feb-09
9-Mar-09
23-Mar-09
6-Apr-09
20-Apr-09
4-May-09
18-May-09
1-Jun-09
15-Jun-09
29-Jun-09
13-Jul-09
27-Jul-09
10-Aug-09
24-Aug-09
7-Sep-09
Nigeria
Kenya
RSAZimbabwe
MSCI Frontier
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
Nigeria Kenya Zimbabwe MSCIFrontier
Recentperformancenotreallyoutstanding
Jul09
Aug09
8/14/2019 Zimbabwe_ a Growth Recession
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Page 14 of 17
Fig 7: YTD returns of the members of the ZSE as at 16.09.09
83%
76%
75%
70%
62%
58%
53%
50%
50%
47%
45%44%
40%
40% 33%
30%
28%
27%
25%
20%
17%
17%
16%
13%
10%
10%
10%
0%
0%
0%
11%
17%
20%
25%
30%
35%
38%
38%
46%
50%
67%
67%
70%
80%
87%
90%
100%
100%
100%
100%
100%
100%
115%
123%
130%
140%
167%
175%
180%
200%
200%
223%
233%
250%
250%
250%
260%
280%
300%
325%
372%
550%
600%
650%
700%733%
200% 100% 0% 100% 200% 300% 400% 500% 600% 700% 800%
Edgars
Trust
CFX
NTS
PearlProp
Willdale
Ariston
RedStar
Truworths
Falgold
Chemco
ZPI
Celsys
MashColcom
Phoenix
Pelhams
Radar
ABC
Pioneer
Art
Steelnet
FBC
Dawn
Bindura
Interfresh
MedTech
Apex
Zeco
Zimplow
Gulliver
PPC
TPH
Lafarge
NicozDiamond
TAHoldings
Hwange
AfricanSun
BAT
Afre
KMAL
Turnall
DZHL
Barclays
Innscor
Afdis
CAPS
Delta
Hunyani
NMB
Tedco
ZHL
RioZim
Hippo
RTG
FidelityLife
GBHoldings
Border
Astra
M&R
Powerspeed
Econet
Zimpapers
OldMutual
PGIndustries
Seedco
AICO
Cairns
TSL
CFI
StarAfrica
ZBFH
OKZimbabwe
Cafca
CBZNatfoods
Source: Members of the ZSE, Legae Calculations
8/14/2019 Zimbabwe_ a Growth Recession
15/17
Page 15 of 17
Source: Members of the ZSE, Company reports, Legae Calculations
Fig 8 : Profit visibility is low, and add to the risks
20.0%
10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
6
4
2
0
2
4
6
8
10
12
14
TAHLD
RTG
BAT
Colcom
Nicoz
DZHL
M&R
Natfoods
RioZim
Innscor
Profitvisibilityislow
Profit(US$mn)
ProfitMargin(RHS)
10.00
30.00
50.00
70.00
90.00
110.00
PGI
Mash
Bindura
M&R
TSL
Colcom
Border
PearlProp
DZHL
CFI
RTG
Dawn
PPC
BAT
OKZim
StarAfrica
African
Hwange
Natfoods
RioZim
AICO
Marketcapsofour"midcap"sector(US$mn)
8/14/2019 Zimbabwe_ a Growth Recession
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Page 16 of 17
Source: World Bank, Transparency International, Legae Calculations
Fig 9 : Zimbabwe still ranks poorly on Ease of Doing Business and corruption perception (2008)
0
20
40
60
80
100
120
140
160
180
200
Singapore
USA
Denmark
Australia
Saudi
Japan
Mauritius
Malaysia
Israel
France
South
Chile
Romania
Namibia
Rwanda
Turkey
China
Zambia
Ghana
SriLanka
Ethiopia
Uganda
Argentina
Indonesia
Nigeria
Brazil
Tanzania
Mozambi
Ukraine
Mali
Zimbabwe
Angola
Cameroon
Chad
DRC
Cent.Afr.
Zimbabwerankspoorlyoneaseofdoingbusinessat159/182
0
20
40
60
80
100
120
140
160
180
200
Denmark
Singapore
Finland
Canada
Barbados
Spain
South
Mauritius
South
Italy
Ghana
China
Burkina
Madagasc
India
Tanzania
Argentina
Malawi
Zambia
Indonesia
Mozambi
Liberia
Kenya
Burundi
Angola
Zimbabwe
Cambodia
Chad
Iraq
Somalia
CPI(2008).Zimbabwerankspoorlyaswell,166/180
8/14/2019 Zimbabwe_ a Growth Recession
17/17
Legae Securities (Pty) Ltd
Member of the JSE Limited
6-10 Riviera Road, Houghton, Johannesburg, South Africa
P.O Box 87277, Houghton 2041, Johannesburg, South Africa
Tel +27 11 715 3700, Fax +27 11 715 3701
Web: www.legae.co.za email:
Analyst Certification and DisclaimerI/we the author (s) hereby certify that the views as expressed in this document are
an accurate refection of my/our personal views on the stock or sector as covered
and reported on by my self/each of us herein. I/we furthermore certify that no part
of my/our compensation was, is or will be related, directly or indirectly, to the
specific recommendations or views as expressed in this document
This report has been issued by Legae Securities (Pty) Limited. It may not be
reproduced or further distributed or published, in whole or in part, for any
purposes. Legae Securities (Pty) Ltd has based this document on information
obtained from sources it believes to be reliable but which it has not
independently verified; Legae Securities Pty Limited makes no guarantee,
representation or warranty and accepts no responsibility or liability as to its
accuracy or completeness. Expressions of opinion herein are those of the author
only and are subject to change without notice. This document is not and should
not be construed as an offer or the solicitation of an offer to purchase or
subscribe or sell any investment.