En­sure your pick pays

Look off­shore for food re­tail ex­po­sure

Finweek English Edition - - COMPANIES & MARKETS - SHAUN HAR­RIS shaunhar­ris@ya­hoo.com

FOOD RE­TAIL SHARES are priced to per­fec­tion. Many – such as Pick n Pay, Shoprite and Mass­mart – are trad­ing on earn­ings mul­ti­ples com­fort­ably above 20 times. The rest are also higher than the av­er­age for the mar­ket. But those high rat­ings are un­likely to de­liver ex­cep­tional value to in­vestors and share­hold­ers. It seems the his­toric rat­ings don’t take ac­count of con­sumers gen­er­ally buy­ing down – and buy­ing less – even of a seem­ingly de­fen­sive in­dus­try.

Chang­ing con­sumer be­hav­iour has cer­tainly been part of the prob­lem at Pick n Pay. It’s thrown out a range of rea­sons for its re­cent poor per­for­mance, now lead­ing to the re­trench­ment of at least 3 000 staff, prob­a­bly more. But through dis­rup­tions in the busi­ness – and the strike is only one dis­rup­tion – reg­u­lar clients have been shop­ping else­where. And Pick n Pay has been los­ing mar­ket share.

Fi­nan­cial re­sults last week from one of the top-rated food re­tail­ers, Shoprite, con­tinue the trend. Turnover was up 7,3% but fell short of an­a­lysts’ ex­pec­ta­tions. Un­sur­pris­ingly, its share price was hit.

Share prices of all SA’s food re­tail­ers haven’t per­formed well year to date, though most are above the mar­ket, which is flat. But the po­ten­tial in share rat­ings isn’t be­ing met. In­vestors need to ap­proach those shares very care­fully.

Jo­hannes Visser, se­nior an­a­lyst at RE:CM, says the high val­u­a­tion mul­ti­ples for SA’s food re­tail­ers mean in some cases they’re priced for ex­cep­tional out­comes. But over­all he says they of­fer av­er­age prospects for in­vestors. “These are some of the best busi­nesses to be found and can cre­ate enor­mous value when they grow. With high re­turns on cap­i­tal and good man­age­ment teams they de­serve to trade on high mul­ti­ples.”

But his ar­gu­ment is their share rat­ings are too high com­pared to global peers. “Lo­cal food re­tail­ers are just priced too ex­pen­sively. Global re­tail­ers – such as Wal­mart and Fam­ily Mart, the Ja­panese food re­tailer – are on his­tor­i­cally low earn­ings mul­ti­ples of around 12 times. We avoid the ex­pen­sive com­pa­nies and try and find value in the mar­ket.”

How­ever, down­rat­ings of SA’s food re­tail shares seem im­mi­nent, start­ing with Pick n Pay and Shoprite. Pick n Pay’s prob­lems go back to be­ing be­hind the curve on in­vest­ing in new dis­tri­bu­tion cen­tres and tech­nol­ogy. It also seems to have lost touch with its tra­di­tional mar­ket – mid­dle in­come shop­pers – while Shoprite up­grades some stores to move into Pick n Pay’s space and Spar has widened its range to also in­clude more mid­dle in­come shop­pers. Even Wool­worths, the top-end food re­tailer, has been bring­ing some prices down and of­fer­ing spe­cial deals to try and at­tract more of the mar­ket. It’s a sign of the times. Con­sumers are buy­ing less – and buy­ing more se­lec­tively – and the food re­tail­ers are scram­bling for mar­ket share.

Visser says RE:CM is look­ing at food re­tail­ers off­shore. In some cases clients have al­lowed the as­set man­ager to change man­dates and be more flex­i­ble. “The ob­jec­tive is to hold the cheap­est com­bi­na­tion of good qual­ity as­sets, se­lect­ing from a wide op­por­tu­nity set as op­posed to own­ing po­ten­tially over­val­ued shares sim­ply be­cause it forms part of the lo­cal in­dex.”

So what should South African in­vestors do?

“Look at their port­fo­lios. And if the food re­tail­ers they hold aren’t of­fer­ing rel­a­tive value, con­sider go­ing off­shore.” Visser’s lo­cal rec­om­men­da­tion is Pick n Pay, though he adds RE:CM re­tains a share­hold­ing in the group.

JO­HANNES VISSER

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