Miss­ing a trick?

Private eq­uity moves into re­tail when no­body was look­ing

Finweek English Edition - - Companies & markets - ANA MON­TEIRO

RE­TAIL SALES – long the lag­gards of the mar­ket amid fears that con­sumers are los­ing spend­ing steam – are bask­ing in the at­ten­tion be­ing shed upon them by Bain Cap­i­tal’s R25bn bid for Edgars Con­sol­i­dated (Ed­con).

Since the deal was an­nounced on 8 Fe­bru­ary the FTSE/JSE Africa gen­eral re­tail­ers in­dex has jumped 5%, with fash­ion re­tail­ers Fos­chini, Mr Price and Tru­worths gain­ing more than 7% apiece and furniture spe­cial­ist El­ler­ine Hold­ings surg­ing by al­most 10%.

Cer­tain that the mar­ket wasn’t giv­ing Ed­con the credit it was due, the Ed­con board ap­proached in­de­pen­dent ad­vis­ers Cal­iburn to as­cer­tain if there was more value to be had through the private-eq­uity mar­ket.

There clearly was, with the R46/share of­fer price equat­ing to a 51% pre­mium to the price it was trad­ing at be­fore the cau­tion­ary an­nounce­ment on the deal was is­sued.

The trans­ac­tion – dubbed as a “huge vote of con­fi­dence for SA” – will re­sult in a mas­sive cash in­jec­tion for the coun­try, with Bar­clays plc sourc­ing two-thirds of the fi­nanc­ing over­seas and the rest be­ing pro­vided by Absa Cap­i­tal.

Some in­vestors may lament not spot­ting the op­por­tu­nity to buy in May/June last year, when re­tail­ers were go­ing for a song (see graph). And de­spite their rerat­ing last year, re­tail shares have con­sis­tently un­der­per­formed the over­all mar­ket in share price terms and are trad­ing on a lower av­er­age mul­ti­ple than that of the broad­est mea­sure of the mar­ket, the all-share in­dex (see graphs).

African Har­vest Fund Man­agers’ port­fo­lio man­ager Mark Ans­ley says the good news for the sec­tor is con­sis­tently un­der­played. “We can’t es­cape that there’s been a struc­tural change in the econ­omy: struc­turally lower rates, a trans­fer of wealth… and there are many more peo­ple com­ing into SA’s eco­nomic main­stream.”

Last year’s de­r­at­ing of the sec­tor – when it was thought that con­sumer spend­ing “was go­ing to fall off a cliff ” – made for an ex­cel­lent buy­ing op­por­tu­nity, says Re­nais­sance As­set Man­age­ment’s head of re­search Nothando Nde­bele. “While we don’t hold the view that it will fall off a cliff, it’s not plau­si­ble to think that earn­ings will con­tinue to grow at more than 25%.”

While re­tail shares con­tinue to present more value than the rest of the mar­ket, the re­luc­tance to rerate them re­flects in­vestors’ re­fusal to buy the story of struc­tural changes that have taken place in the econ­omy and sup­ports, rather, views that we’ve sim­ply gone through an un­sus­tain­able cycli­cal up­swing, says Nde­bele.

So while the mar­ket ums and ahs about whether to give them a higher rat­ing, the private-eq­uity play­ers move in. Prime tar­gets would be com­pa­nies that have low gear­ing, trade at low price:earn­ings mul­ti­ples, have cash on their bal­ance sheets and are cash-gen­er­a­tive. And the re­tail­ers are it.

Many of them don’t have op­ti­mally struc­tured bal­ance sheets; with very low lev­els of debt in many cases (see ta­ble) there’s room for cap­i­tal re­struc­tur­ing.

Says Nde­bele: “Fresh eyes are tak­ing a look at our re­tail­ers and are spot­ting op­por­tu­ni­ties. If you ex­am­ine the op­er­at­ing ef­fi­cien­cies of our re­tail­ers, they’re com­pa­ra­ble to those of com­pa­nies over­seas. Why should they trade at larger dis­counts to the mar­ket than their global peers?”

RE­TAIL PE... LOOKS CHEAP

Source: I-Net Bridge

FTSE/JSE AFRICA GEN­ERAL RE­TAIL­ERS... OUT OF SPOT­LIGHT

Source: I-Net Bridge

RE­TAIL SEC­TOR: THE NUM­BERS

Source: McGre­gor BFA

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