Ensure your pick pays
Look offshore for food retail exposure
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.