Shoprite produced first half results yesterday which were better than
the headline growth suggested. Shoprite is our favourite South
African retailer on a long term view. It has the right model and formula
to produce meaningful earnings growth provided that its South African
engine keeps running and growth in African remains successful. The
company is, however, trading at a demanding forward 23x multiple
and with the current market volatility around retailers the short term
for the share is uncertain.
Key points from the results presentation:
- Trading profit was up 16% to 2.5bn, which is a strong number.This did not feed through to HEPS due to (1) the dilutiveeffects of the March ‘12 capital raise where an additional 4% ofauthorised shares was issued and (2) a swing on the forexline, which reduced HEPS by 3%.
- Total space growth was 5.3%, with RSA stores growing at 7.7% and non-RSA at 14.2%. Africa only makes up 13.7% of total sales so it is important that the South African engine keeps running and growing.
- Real SA sales growth amounted to 6.9%. Management anticipates inflation to remain at around the 4.3% level provided the rand strengthens and maize and poultry prices do not inflate excessively.
- Future prospects: management anticipate that margins will remain at these levels to June 2013. Only 19.2% of committed capital is allocated to Africa and indicates that there is still a long journey ahead before Africa becomes a significant player for the Group. The group has a pipeline of 33 stores into Angola (current: 10) and 36 into Nigeria (current: 5) and aim to eventually open 50 stores per year in Nigeria.
- Management mentioned that the according to their internal research the consumer is adding more to their basket but making fewer trips to the stores. New consumer growth is up 4.5% to 3.5mil and the higher LSM groups are still changing to Checkers.
The share is trading at a 23.3x 12m forward PE multiple which we consider relatively expensive. Shoprite is a long term buy as the compounded HEPS growth potential offered by the business is
compelling. Margins are strong and as long as the RSA engine keeps running and expansion into Africa maintains momentum, trading margins could move to levels above 6% going forward. We anticipate that the short term price moves will remain volatile as the future of the retail sector remains uncertain.
Thank you Anchor Capital