Put th­ese two on your shop­ping list

But there’s no hurry – wait for a down­turn in the mar­ket

Finweek English Edition - - Creating wealth - LU­CAS DE LANGE

“DON’T BUY NOW, but look for shares with a sound his­tory and good prospects. Wait for a down­turn – it will come, even though on the JSE th­ese days the only way is up – and then buy at lower prices. Prefer­ably at sup­port lev­els. If you buy too early, and the price keeps fall­ing, use War­ren Buf­fett’s ad­vice: ‘If you pick up a bar­gain, and the price falls, buy more, be­cause then it will be a big­ger bar­gain!’. ”

This ad­vice comes from a lead­ing stock mar­ket com­men­ta­tor, fol­low­ing the re­cent col­umn in which we dis­cussed in­vestors’ un­cer­tainty about what to do next. ( Fin­week, 8 Fe­bru­ary).

Well, what kind of com­pany is sound? Re­cently there have been two good ex­am­ples: Wool­worths and City Lodge.

The most in­ter­est­ing as­pect of Wool­worths’ half-year re­port to De­cem­ber, is un­doubt­edly the suc­cess it’s achiev­ing with its con­ve­nience food stores, cur­rently be­ing opened at a rapid pace. CEO Si­mon Sus­man be­lieves that the trend of buy­ing pre-pre­pared food at con­ve­nience stores has only just started in SA.

Turnover in the group’s food di­vi­sion in­creased by about 26% (21% in 2005) – de­spite prob­lems with sup­plies over the Christ­mas pe­riod – and its con­tri­bu­tion to rev­enue is now 53%, which con­firms to what ex­tent the share is ac­quir­ing a de­fen­sive char­ac­ter. This as­sumes that its vul­ner­a­bil­ity is less dur­ing mar­ket cor­rec­tions, since food is re­garded as non-cycli­cal. It’s in the process of en­larg­ing mar­ket share, which is cur­rently at 9%. The com­pany’s cloth­ing and house­hold goods only recorded an im­prove­ment of about 14%. This is an area where in­tense com­pe­ti­tion is ex­pe­ri­enced from chains like Mr Price, Board­mans and @Home. The fi­nan­cial ser­vices di­vi­sion is still grow­ing strongly, with an in­crease of nearly 25% in the value of its per­sonal loans, shop­ping and credit cards.

The Aus­tralian sub­sidiary, Coun­try Road, showed con­tin­ued im­prove­ment.

Profit af­ter tax grew to A$5,2m (A$2,3m), af­ter turnover rose by just un­der 14%.

At nearly R9bn (R7,4bn), Wool­worths’ to­tal group turnover for the half-year was 21% up on the fig­ure for the cor­re­spond­ing pe­riod of the pre­vi­ous year.

Op­er­at­ing profit shot up by 31%, while the op­er­at­ing profit mar­gin im­proved to 10,7% (9,8%).

How­ever, head­line earn­ings rose by only 22% (partly be­cause of non-re­cur­ring STC), while the in­terim div­i­dend was pushed up by 23%. For the full fi­nan­cial year 125c/share and a div­i­dend of 76c are pre­dicted, which at its cur­rent price gives a price:earn­ings ra­tio of 16 and a div­i­dend yield of 3,7%.

Wool­worths is there­fore not cheap. So where should one con­sider buy­ing it, if there’s a down­turn on the JSE? As the graph shows, the high­est clos­ing level of 1 750c – be­fore last year’s mar­ket down­turn should be a good ref­er­ence point, with 1 280c con­sid­ered a bar­gain level. It’s re­mark­able how quickly and how strongly, Woolies re­cov­ered as soon as the 2006 mid-year panic blew over.

Tech­ni­cally, City Lodge has an even sounder pat­tern. At the time of the mar­ket set­back last year, it didn’t even drop through its long-term mov­ing av­er­age.

The ho­tel group says in its re­port for the half-year to De­cem­ber that its av­er­age room oc­cu­pancy has risen to an ex­cep­tion­ally high 83%, which pushed the op­er­at­ing profit mar­gin up to 49,8% (47,3%) and op­er­at­ing profit by 21% to R125m. Head­line earn­ings were 24% higher at 203c/share, while the in­terim div­i­dend in­creased by 24% to 145c. Fore­cast earn­ings for the full year to June are 425c and a div­i­dend of 301c. At its cur­rent price of about 7 400c, that rep­re­sents a p:e of 17,4 and a div­i­dend yield of 4,1%. Like Wool­worths, it’s fully priced, though the div­i­dend yield is at­trac­tive.

City Lodge has ma­jor ex­pan­sion plans, in­clud­ing in­vest­ment in four new ho­tels, which will push the num­ber of ho­tels up to 42 and the to­tal num­ber of rooms up from 603 to 4 772. Add to this, healthy growth in busi­ness travel and the num­ber of tourists who visit SA, and it’s a worth­while stock to in­clude in one’s shop­ping bas­ket. An in­creased de­mand for ho­tel ac­com­mo­da­tion in the run-up to the world soc­cer tour­na­ment is an­other im­por­tant plus fac­tor.

The bal­ance sheet is strong and cash flow is good. In the past half-year, R6m (R4,5m) in­ter­est was earned on cash bal­ances. The new ho­tels and the ex­pan­sion of ex­ist­ing units will cost about R171m, of which R20m has al­ready been spent.

At what level would this group of­fer a buy­ing op­por­tu­nity dur­ing the next mar­ket down­turn? A good idea would be some­where around the value of the long-term mov­ing av­er­age at 5 800c. The graph con­firms that ev­ery time the price falls to the av­er­age, it rep­re­sents a buy op­por­tu­nity.



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