We sug­gest a long po­si­tion in Sho­prite and a short one in Pick n Pay

Financial Mail - Investors Monthly - - Contents - Stafford Thomas

Long Sho­prite, short Pick n Pay

OUR trade this month pits food re­tail gi­ants Sho­prite and Pick n Pay against each other. Our se­lec­tion of a long po­si­tion in Sho­prite and a short po­si­tion in Pick n Pay re­verses what would have been an ideal trade dur­ing the first 10 months of 2014, dur­ing which Pick n Pay’s share price hit an all-time high, trounc­ing Sho­prite’s, which fell 17%.

This opened up a 20 per­cent­age point per­for­mance ad­van­tage in favour of Pick n Pay over the pe­riod. The per­for­mance gap is clos­ing fast and, we be­lieve, will con­tinue to move in favour of Sho­prite.

Fu­elling en­thu­si­asm for Pick n Pay were its re­sults for the 52 weeks to 2 March 2014. Beat­ing mar­ket ex­pec­ta­tions, head­line EPS (HEPS) jumped 43% above the pre­vi­ous year, seem­ingly con­firm­ing hopes that Richard Brasher, CE since Fe­bru­ary 2013, was fast restor­ing the re­tailer to health. But Brasher is a re­al­ist not prone to mis­lead­ing the mar­ket. The re­sults, he said, re­flected a sta­bil­i­sa­tion of the business still at the start of its re­cov­ery.

A key as­pect of the re­cov­ery will be to re­gain mar­ket share lost dur­ing the years it failed to keep up with new store open­ings by its ri­vals. Ad­dress­ing this through an ag­gres­sive ex­pan­sion of Pick n Pay’s store foot­print is part of Brasher’s strat­egy.

But in an in­tensely com­pet­i­tive mar­ket it will not be easy and, in­deed, Pick n Pay has yet to re­verse loss of mar­ket share.

The 7.1% year-on-year rise in sales it re­ported in the 26 weeks to Au­gust re­flects this. Ad­justed for its in­ter­nal 6.7% food price in­fla­tion, vol­ume was up only 0.4%. This was in a food re­tail sec­tor where vol­umes are grow­ing at an an­nual rate of some 2%.

Pick n Pay faces tough op­po­si­tion from Sho­prite, which, CE Whitey Bas­son has de­clared, will de­fend its lead­ing mar­ket po­si­tion ag­gres­sively. It is liv­ing up to that prom­ise. In Sho­prite’s trad­ing up­date for the three months to Septem­ber, the first quar­ter of its fi­nan­cial year, it re­ported su­per­mar­ket sales in SA up 11.9% year-on-year and to­tal sales up 12,1%. South African food vol­ume growth was im­pres­sive, ris­ing a hefty 5.9% after ad­just­ing for 6% in­ter­nal price in­fla­tion.

Sho­prite is not the only tough com­peti­tor fac­ing Pick n Pay. Wool­worths con­tin­ues to power ahead thanks to its strat­egy of in­creas­ing store space and of­fer­ing a far wider prod­uct range. In Wool­worths, year-to-June food sales vol­ume rose a mar­ket-beat­ing 6.9%.

Spar is also mak­ing in­roads. No­table was Spar’s per­for­mance in the sec­ond half of its year to Septem­ber, with vol­ume growth com­ing through at about 3.3%.

Pick n Pay’s share price has eased slightly from its re­cent high. But it re­mains priced for per­fec­tion on a 38 PE. Based on a con­sen­sus fore­cast by 15 an­a­lysts polled by I-Net Bridge, Pick n Pay’s HEPS will rise 27% in its year to April 2015, enough to trim its PE to a still de­mand­ing 33. Any sign of a slip would be harshly pun­ished. The risk is that Pick n Pay will have to sacrifice mar­gin if it is to at least hold mar­ket share.

It is a high risk, and has seem­ingly al­ready blunt­ing en­thu­si­asm for the company.

Sho­prite, by con­trast, is trad­ing at a far less de­mand­ing 24.5 PE in line with its mean since the 2009 eq­uity mar­ket low. A con­sen­sus fore­cast looks to Sho­prite lifting HEPS 12% in its year to June 2015, putting it on a for­ward 22 PE. On its first quar­ter show­ing the fore­cast ap­pears con­ser­va­tive. Im­por­tantly, the ag­gres­sive pace of store open­ings, a big drag on prof­itabil­ity in the first year of op­er­a­tion, has slowed markedly.

Our trade is based on what we view as a high prob­a­bil­ity that Pick n Pay’s share price will fall on height­ened con­cerns re­lated to mar­ket share loss and mar­gins. Strongly in Sho­prite’s favour is its abil­ity to grow mar­ket share vig­or­ously and a like­li­hood that its forecasts earn­ings will be re­vised up­wards.

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