Spend big on retail shares
Cancel your Christmas holiday and start buying in September
THE SHARE PRICES of South Africa’s leading retailers performed excellently over the past Christmas season, as in the previous two years, and price increases of up to 50% between September and December weren’t unusual. In January and February the increase in share prices in the sector accelerated even more following the generous takeover offer for Edcon. This was the third successive year that you could invest in shares quite indiscriminately in the quarter before Christmas.
Let this be an important lesson and start making preparations now. Get your family off the ridiculous habit of spending thousands on useless gifts at Christmas time and talk them into giving up the traditional, vastly overpriced December holidays.
Buy the retailers’ shares in September. Use the money on your credit card and mortgage. Live from your hoarded provisions for the next three months so that you have to spend as little as possible. Stay at home in December and swim in your neighbour’s pool while he’s away on holiday.
It’s good fun looking back at all the winning investment opportunities. Some call it the benefit of hindsight. But Finweek had a picture of a timidlooking bull on the cover of its 24 August issue and many of the retailers whose shares performed so well (see table) were recommended at that time.
Start now by preparing your family for a new kind of Christmas season, which you’ll start enjoying in about Fe b r u a r y / M a r c h – but then you’ll be travelling first class, because you bought retailers’ shares in good time. It’s too early to predict now, but the same thing will probably happen this year.
Our interest rates are still under some pressure and the Monetary Policy Committee is still thinking things over, but by September the current rising phase in interest rates should be over.
Good presentations have already been received for the total issued capital of two retailers. Nobody can complain about Bain Capital’s offer of R46/share for Edcon.
The R28/share offer for Shoprite will still attract some grumbles, but it’s starting to look better just to accept it and rather invest your money elsewhere where the return is more rewarding.
The table shows that the historical earnings yield on many of SA’s retail shares are already beginning to be slightly lower. However, add about 25% growth for the next 12 months and some of the shares are still trading at return rates of 8% and more. That’s the return after tax. With that kind of return reasonably safe for the first year, a prospective buyer can risk borrowing money costing as much as 12%/year if the interest is tax deductible, while the earnings yield of 8% can potentially provide greater capital growth and dividends for the investor.
The following shares stand out as good targets for the year.
There’s already activity at Steinhoff, which is the fifthlargest furniture dealer in Germany – actually, in Europe.
JD Group’s balance sheet is far too lazy. It’ll have to use more borrowed capital in future to push the return of 22,7%, which it already earns on total capital, up to about 40% on own capi- tal. That kind of move could give a further boost to the share price, which has already performed well recently.
Things could also start happening at Ellerine. It won’t be allowed to merge with JD Group or to be taken over by the latter, but that earnings yield of 10% is very attractive.
Start now by preparing your family for a new kind of Christmas season, which you’ll start enjoying in about February/March.
Investors will in future also look at Massmart with increasing interest. Only 2% of the group’s turnover is based on debt. Call it a cash trader, like Pick ’n Pay. However, Pick ’n Pay is trading at a far better rating on the JSE, while Massmart, thanks to its smaller exposure to food and more to DIY goods, may perhaps have better growth prospects than Pick ’n Pay.
Be sure to keep an eye on Massmart. By the end of next year its shares could easily topple Pick ’n Pay from the position it has held for decades as the country’s favourite retailer for investors.
But don’t start buying shares yet. Just start preparing the family and start saving.