Room for improvement
The group has been battling to grow its operations on the continent, while a tough economic climate in South Africa has also weighed on performance.
wal-Mart bought a 51% stake in South Africa’s Massmart for $2.4bn in 2011 as part of its strategy to gain a foothold in high-growth markets in subSaharan Africa. The idea was to aggressively expand the group’s portfolio of brands, which includes Game, Makro, Dion Wired, Jumbo Cash & Carry and Builders Warehouse, on the continent.
However, it has been struggling to grow its footprint of just more than 400 stores on the continent (it had 38 stores in 13 countries outside SA at the end of the interim period in June 2016, representing about 9.3% of total sales). Massmart’s attempts to expand through acquisitions have not borne much fruit either, with possible deals with Botswana retail group Choppies and Kenya’s Naivas failing. In contrast, rival Shoprite operates more than 2 600 stores on the continent. Its 23 stores in Nigeria make Massmart’s entire footprint outside SA look small.
Massmart said last year that it anticipates opening five new stores across Ghana, Mozambique, Nigeria and Zambia in the next two years. Establishing legal title to land and land pricing remain challenging, the group said.
Massmart hasn’t only been struggling to grow its operations, but also sales elsewhere on the continent. The group warned in its latest trading update for the 52 weeks to 25 December 2016 that growth in non-South African sales continued to decline. It said total sales for the period grew 7.7% year-on-year to R91.2bn, driven by a “slight pick-up in South African sales growth”. Comparable store sales increased by 5.4%. Product inflation was estimated at 6.7%, it said. The group’s results were set for release on 23 February, after this issue of finweek went to print.
Though the South African economic environment is likely to continue limiting consumer spending across key group categories, including general merchandise and home improvement/DIY, Massmart believes its substantial food and liquor categories will continue to outperform. It also believes that trading may be relatively better in 2017 than it was in 2016.
For a long-term investor, Massmart will eventually find its feet as shopping malls in countries like Nigeria build critical mass. I believe the share is currently trading at attractive levels, and Massmart has room for massive upside when market sentiment finally reverts.
Massmart’s share price has been falling since May 2013. Though it did regain some upside at the beginning of 2016, bias remains predominantly bearish. Massmart would have to trade above 15 655c/share to escape its long-term downtrend and reclaim its previous losses. Until then, investors should hold. I foresee range-bound trading between 10 500c/share and 15 000c/ share in the short term or for the remainder of the year until a breakout in either direction occurs. Go short: Massmart would breach its current support trendline and extend its bear trend below 9 920c/share. Such a move could see it retest its previous 2008 lows at 5 650c/share. Go long: Massmart would end its long-term bearish confinement above 15 655c/share, potentially promoting a gradual 100% retracement to its all-time high at 20 800c/share.
A Makro store in Alberton.