Mr Price or lifestyle prop­erty?

What a growth share should look like…

Finweek English Edition - - Companies & markets - VIC DE KLERK

“KNOW, UN­DER­STAND and even love and be proud of your in­vest­ments” is one of the max­ims that bril­liant US in­vestor War­ren Buf­fett used for build­ing up a for­tune in his own life­time. I couldn’t help think­ing of that when I was stand­ing in the mid­dle of a beau­ti­ful lifestyle prop­erty de­vel­op­ment last week­end. That seems to be the def­i­ni­tion of a high-den­sity – also called Res 2 – prop­erty de­vel­op­ment where be­tween 50 and 250 peo­ple are go­ing to live, work and re­lax to­gether in rea­son­ably lux­u­ri­ous duettes on a small piece of land.

The price is R930 000 for a three-bed­room unit of 156sq m, in­clud­ing the garage. You need R10 000 to re­serve a unit and, nat­u­rally, it was very tempt­ing.

A quick cal­cu­la­tion showed that you could per­haps let the unit for R4 500/month. Com­mis­sion and the levy would take up at least R1 000 of that and the re­main­ing R3 500 – R42 000/year – would guar­an­tee an ini­tial re­turn of 4,5% for the first year. That’s far too lit­tle for a 100% mort­gage, which would cost around R10 000/month.

The short­fall could be as much as R6 500/month, so it would be bet­ter to buy it for cash and re­gard it as a re­tire­ment in­vest­ment. To jus­tify that, the cap­i­tal – or to put it dif­fer­ently, the price of the house – must grow by at least 10%/year over the next decade or so.

I then drove around the block to a new huge Mr Price Home store, which cov­ers an en­tire 6 000sq m and “fur­nishes” the lifestyle duettes with the most won­der­ful furniture and ac­ces­sories. Then I started won­der­ing whether Mr Price shares wouldn’t per­haps be a bet­ter and more pleas­ant in­vest­ment than the duettes.

Three weeks ago ( Fin­week, 5 April), Mr Price was on my short­list of the five best growth shares on the JSE. The group’s an­nual

re­port for the pe­riod to 31 March 2006 con­tains four graphs, which tell a fairy tale.

Turnover has in­creased from less than R100m to the cur­rent R5bn and the in­crease in div­i­dend is much more than the best rental in­come that even the most en­thu­si­as­tic in­vestors in prop­erty could dream of.

The re­port also clearly plays a role in the group’s ob­jec­tives for 2010. They’re sim­ple and to the point: a dou­bling of turnover to R10bn and sus­tain­ing its cur­rent op­er­at­ing profit mar­gin of 10%.

In brief, the two ob­jec­tives tell that the 152c profit per share at­tained for the year to March 2006 could at least dou­ble for the year to March 2010. The div­i­dend could also dou­ble: from the cur­rent 81c to at least 160c.

Things could go even bet­ter, be­cause head­line earn­ings and div­i­dends usu­ally in­crease faster than op­er­at­ing profit, as cer­tain over­heads are fixed.

Mr Price shares are cur­rently trad­ing at R30. That’s 10 times more than the price as re­cently as March 2001. How­ever, that’s wa­ter un­der the bridge. At the cur­rent price of R30, the div­i­dend of at least 160c/share for the year to March 2010 prom­ises in­vestors a cash re­turn of 5,3%/year. That’s af­ter tax.

To equal that the gross rental on the lifestyle duettes must be at least R10 000/month by 2010. And in that pe­riod no­body must have messed up the place or bro­ken the toi­let. Makes you think, doesn’t it?

The size of the Mr Price Home in Mon­tana, Pre­to­ria, is 6 000sq m. Sim­i­lar shops have shot up in Hen­drik Pot­gi­eter Av­enue in Jo­han­nes­burg and in Som­er­set West in the Cape.

The av­er­age size of the cur­rent 130 Mr Price Home shops is only 650sq m, but plans are to in­crease that to 940sq m by 2010. Yet it felt to me as if the huge shop in Mon­tana was rea­son­ably full of peo­ple on Sun­day morn­ing.

That’s the kind of blue-sky op­por­tu­nity we were on the lookout for in our search for the ul­ti­mate growth share. It’s not al­ways IT and new pa­tent shares. The or­di­nary things around you can also be win­ners.

Yes, but you al­ways buy houses with bor­rowed money, the sup­port­ers of in­vest­ing in prop­erty will say. In fact, I only need R10 000 to buy a duette cost­ing nearly R1m. All the ap­pre­ci­a­tion on the R10 000 is earned. That’s true. But the R10 000 will also have to ab­sorb the en­tire monthly in­come short­fall, plus the high cost of sell­ing the prop­erty one day if prices per­haps bog down.

DIS­TRI­BU­TION TO SHARE­HOLD­ERS

Source: Mr Price

NET TRAD­ING AREA

Source: Mr Price

HEAD­LINE EARN­INGS PER SHARE

Source: Mr Price

TURNOVER

Source: Mr Price

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