Spend big on re­tail shares

Can­cel your Christ­mas hol­i­day and start buy­ing in Septem­ber

Finweek English Edition - - Creating wealth - BY VIC DE KLERK vicd@fin­week.co.za

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.

FTSE/JSE AFRICA GEN­ERAL RE­TAIL IN­DEX... DID WELL OVER CHRIST­MAS

Source: I-Net Bridge

RE­TAIL­ERS’ HUGE RE­TURNS

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