A good place to hide in tough times

South Africa’s ma­jor chains now at­trac­tive in­vest­ments

Finweek English Edition - - Front Page -

THE SHARES OF al­most all of South Africa’s re­tail­ers are trad­ing at new record lev­els – while re­tail sales in real terms are now only start­ing to pick up again af­ter fall­ing for many months. Nor is it in­fla­tion – the great favourite of all re­tail­ers – that’s push­ing share prices. In fact, the op­po­site is the case. Food in­fla­tion has for all prac­ti­cal pur­poses dis­ap­peared from their shelves. Nev­er­the­less, the shares of the food re­tail­ers are cur­rently far out­class­ing their much more cycli­cal peers, such as fur­ni­ture and build­ing re­quire­ments.

Yes, share prices are dis­count­ing the fu­ture – and the fu­ture doesn’t look bad at all. But the ta­bles in which the for­ward div­i­dend yields and price:earn­ings mul­ti­ples of the var­i­ous re­tail­ers are com­pared show much of the fu­ture fat is al­ready built into their cur­rent share prices. In brief, the re­tail­ers are at­trac­tive in­vest­ments. It’s just a pity we left it slightly too late.

The fi­nance min­is­ters of the world’s lead­ing na­tions col­lec­tively pat­ted them­selves on the back last week on ac­count of the in­creas­ing in­di­ca­tions the world econ­omy is re­cov­er­ing more rapidly than ex­pected ear­lier. Nev­er­the­less, it’s in­ter­est­ing to note the share price of Wal-Mart, the world’s largest re­tailer – cur­rently at US$55 – is still more than 10% lower than at its peak in Septem­ber 2008.

In SA, only Lewis and Fos­chini among our main re­tail­ers still have share prices sig­nif­i­cantly lower than their 2007 peaks. Nor is it any sur­prise both those shares are at the top of many an­a­lysts’ lists of rec­om­men­da­tions of shares to buy now. Es­pe­cially the peace­ful Lewis, at a three-year for­ward div­i­dend yield of 7,4% is very at­trac­tive.

JD Group is the one recog­nised re­tailer that still has a great deal to make up. Its shares are now trad­ing at just more than R45, which is still less than half of the glo­ri­ous R106/share of March 2007. More than just or­di­nary mar­ket forces led to the sharp fall in its share price. How­ever, it looks as if its man­age­ment is slowly bring­ing the wild horse un­der con­trol again. In­vestors with a high-risk pro­file would also do well to look at this share.

The food re­tail­ers’ share in­dex for the past two years shows sta­bil­ity and pros­per­ity. It’s no won­der as­set man­agers al­ways sin­gle out this sec­tor as a safe haven in times of un­cer­tainty. In the past it was also of­ten rec­om­mended as a safe park­ing place for wid­ows’ and or­phans’ money.

The four shares that dom­i­nate the in­dex – Sho­prite, Pick n Pay, Spar and Wool­worths – are just as safe as al­ways, but their div­i­dend yields are cur­rently too low for wid­ows and or­phans.

The new chal­lenge for this sec­tor is to get used to in­fla­tion again over the next year or two, es­pe­cially prob­a­bly very low food in­fla­tion. Pick n Pay was ac­tu­ally quite keen re­cently to point to the low in­crease in food prices as per­haps one of the rea­sons for it hav­ing done so very poorly, es­pe­cially in the six months be­tween Au­gust 2009 and Fe­bru­ary this year. The group only

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