Off­shore is in fash­ion

It is lit­tle won­der that re­tail­ers are look­ing over­seas, given the slug­gish lo­cal econ­omy, writes Colleen Goko

Financial Mail - Investors Monthly - - Feature -

er­haps feel­ing the grass is al­ways greener on the other side, three large JSE-listed re­tail com­pa­nies have set up shop off­shore, with the UK and Aus­tralia prov­ing to be the most pop­u­lar in­vest­ment des­ti­na­tions.

All of their share prices have been down­graded and it might be time for in­vestors to start shop­ping for longer-term value.

Ger­mien du Plessis, the fi­nance prin­ci­pal of niche in­vest­ment bank Bravura, says it is lit­tle won­der that re­tail­ers are look­ing off­shore, given the slug­gish lo­cal econ­omy as well as the con­tin­u­ing rand vo­latil­ity and the threat of a rat­ings down­grade.

“Off­shore ac­qui­si­tions in­tro­duce hard-cur­rency earn­ings to the in­come state­ment. A com­mon theme is also that while Africa re­mains a great fron­tier which of­fers su­per-prof­its in some ar­eas, the African ex­pan­sion story is of­ten fraught with reg­u­la­tory and lo­gis­ti­cal dif­fi­cul­ties.

“We there­fore see that the trend is set to con­tinue for South African cor­po­rates to look to First World economies, in­clud­ing the UK and Aus­tralia, for di­ver­si­fi­ca­tion op­por­tu­ni­ties,” she says.

TFG, Tru­worths and Wool­worths are among the lo­cal com­pa­nies that have size­able off­shore ex­po­sure, and which are making height­ened moves to ex­pand these investments.

TFG (for­merly The Fos­chini Group) paid R2.6bn in 2015 for an 85% stake in the UK’s Phase Eight, while re­tain­ing the right to buy the re­main­ing 15% in three

Pe­qual tranches in the four to six years af­ter the com­ple­tion of the ini­tial trans­ac­tion. In March this year, it also ac­quired High Street fash­ion chain Whis­tles for an undis­closed amount as part of its strat­egy to ex­tend its op­er­a­tions in the north­ern hemi­sphere — and there are early sugges­tions that these over­seas investments could pro­vide hand­some re­wards, at least for now.

The com­pany re­ported to­tal re­tail sales growth of 31.2%. Ex­clud­ing the im­pact of Phase Eight, the group achieved re­tail sales growth of 11.6% with com­pa­ra­ble sales growth of 5.7%.

How­ever, while Phase Eight con­trib­uted R3.6bn (17%) to group re­tail sales of R21.1bn, its con­tri­bu­tion to head­line earn­ings growth was min­i­mal.

Chief fi­nan­cial of­fi­cer An­thony Thun­ström says though the group has ex­panded into the UK, it should not be seen as a sign that those north­ern mar­kets are trou­ble free. Still, TFG has big plans for Phase 8, which has 542 stores and con­ces­sions in depart­ment stores in 21 coun­tries.

“Re­tail­ing in that re­gion has in gen­eral been de­clin­ing,” Thun­ström says, adding that the group will con­tinue to look for suit­able ad­di­tions to its port­fo­lio of brands.

TFG is cur­rently trad­ing at an earn­ings mul­ti­ple of 12.4 times.

Tru­worths — which bought UK fash­ion footwear chain Of­fice Re­tail group for R5.5bn in De­cem­ber 2015 (its first foray into that re­gion) — says for the year to June 26 this year, group re­tail sales rose 46% to R17bn, with Of­fice con­tribut­ing sales of R3.8bn.

Op­er­at­ing profit in­creased 21% to R4.2bn. But its op­er­at­ing mar­gin de­clined to 24.9%, from 30.5% due to higher trad­ing costs with the UK op­er­a­tions ac­count­ing for 27% of rev­enue.

Tru­worths also says Of­fice will be its spring­board into the rest of Europe. Of­fice al­ready has stores in Ger­many, and it en­vis­ages a fur­ther 10-15 store open­ings by the end of Jan­uary 2018. This will bring its to­tal Ger­man port­fo­lio to be­tween 16 and 21 stores.

Tru­worths says Ger­many is a par­tic­u­larly at­trac­tive mar­ket for footwear as the largest Euro­pean econ­omy, and be­cause ex­ist­ing com­pe­ti­tion in that mar­ket is frag­mented.

Nev­er­the­less, in Of­fice’s main mar­ket in the UK, CEO Michael Mark has warned that op­er­a­tions there re­main uncer­tain.

Lat­est data from Bri­tain shows that re­tail­ers there were hit by

GOTTGENS/BLOOMBERG Pic­ture: CARLA

David Jones’s sales rose 8.4% in Australian dol­lar terms

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