Not your average shopping option
The JSE’s smaller retailers have mostly folded, but there are still options outside the big chains to consider
● Should value-inclined investors be shopping for niche retailing shares?
After all, outside the mainstream grocery and fashion heavyweights — Shoprite, Woolworths, Pick n Pay, Spar, Pepkor, TFG, Truworths and Mr Price — there has never been much excitement about alternative plays in the retail segment.
Sure, there are building equipment retailers Italtile and Cashbuild. Both trade at high single-digit earnings multiples, but the share prices of both are edging close to 12-month lows as interest rate hikes stifle enthusiasm for renovations and building.
You can’t really blame investors for sticking with the larger retail names. So many fringe or specialist retail contenders have come and gone over the past three decades. Unlike smaller miners, technology counters and financial services businesses, the retail second stringers have mostly fizzled out.
In fact the scoreboard shows investors in so-called alt.retail have been on a longterm hiding to nothing.
Older readers might recall the numerous small retail ventures that listed in the late 1980s: small supermarket chain Bloch, vehicle retailer Vaaltrucar, liquor group Aroma, auto spares business Harveys Curnow, World of Music, Musica, mail order retailer Mas Holdings, Dial-A-Movie and others. The 1990s also saw a slew of specialist retailers hitting the market — including LA Group, Mathamo, Arthur Kaplan Jewellery, audiovisual store owner Hicor, Sweets From Heaven, flea market business Global Village, toy retailer Redgwoods and catalogue retailers Housewares and Heritage Collection.
Then there were curiosities such as Winkie Ringo’s Mathieson & Ashley, an office furniture chain that never seemed to make a profit. Acrem Holdings — a retailer of consumer electronics, arms and ammunition, toys and sports equipment — also hung around for a few years.
Though not strictly applicable to every small retail listing that has disappeared off the JSE, there are several factors behind this collective failure.
Often a niche retail business can battle to build enough scale to extract efficiencies from distribution and purchasing functions. And when it does attempt the bigger footprint, it will inevitably start stepping on the toes of larger competitors.
A niche can often be fickle, and if the retail entity can’t adapt quickly enough there can be some serious challenges. Just think of Ellies, and its core offering in satellite television equipment, as a recent example.
Smaller retail enterprises can also have somewhat erratic profit track records. If cash flows aren’t steady, balance sheets suffer — which rules out both corporate action and dividends. Inevitably, the market loses interest.
Niche retailers can also be too far ahead of the curve, like vehicle retailer Forza Group that had an online sales platform nearly 25 years ago.
There are, however, a handful of alt.retail plays on the JSE that might be worth perusing for value investors.
KAL Group
Formerly known as Kaap Agri, this farmercentric services group now has a sprawling retail core in Agrimark — which has been adapted from the old co-op store into various formats such as liquor, convenience and DIY outlets — and The Fuel Company (TFC), a fuel-selling business. The group still has traditional agriservices such as grain storage and irrigation, but the retail component made up R11bn of its R12bn interim turnover to end-March.
Agrimark ploughs a lucrative niche as a one-stop shop for the farming community, and last year showed an enviable operating margin of 6.7% (higher than Shoprite’s). Of course, the big question is why KAL diversified into fuel retailing, where regulated pricing means wafer-thin margins. TFC turned over R6.6bn in the last interim period, but only managed operating profit of R108m — a margin of 1.6%. But this will hopefully change as convenience stores and restaurants are rolled out onto fuel forecourts. KAL is trading close to a 12month low and a modest earnings multiple of six.
On the share weakness, Small Talk Daily analyst Anthony Clark says there are indications that the Public Investment Corp has been selling KAL shares, despite the fact that it has forecast a better year-on-year result. “Yet this retailer is being slammed when it’s coping way better than most, and is more resilient.”
Combined Motor Holdings
With a track record as a listed company extending back to the late 1980s and a heap of dividends paid since, it seems woefully
unjust that Combined Motor Holdings (CMH) trades on an earnings multiple of less than five. While it has a sprawling network of dealerships covering almost every brand, CMH’s market value is just R2bn.
In truth, vehicle retailing has been a rough ride of late, and CMH was fortunate enough to score from decisions made during Covid around its car rental fleet. First Car Rental has been the star performer, and most recently cashed in on the post-Covid tourism boom. But the winter months will be less vibrant for rentals, and the core vehicle retailing segment especially a fragile used car market
won’t have an easy time. The National Association of Automobile Manufacturers of South Africa forecasts new vehicle sales will see only a single-digit increase in 2023. But CMH CEO Jebb McIntosh says given the high price of fleet vehicles and current interest rates, it’s unlikely competitors will be “chasing market share at any cost”. CMH also holds cash of R762m, equivalent to more than R10 a share. Clark points out that if the cash pile is stripped out, CMH’s market value is effectively less than R1.4bn. “For a company with such a long track record of excellent management, it’s dirt cheap.”
HomeChoice
It might be disingenuous to include HomeChoice in a pick of alt.retail stocks, as the business now earns the bulk of its keep from specialised financial services. But it was the group’s traditional catalogue (now digital) retailing business that allowed the launch of financial services into a well-established and lower credit risk client base. Besides, its recent acquisition of PayJustNow (a buy-now-pay-later business) is leveraged to retail. HomeChoice’s finance income in the past financial year grew by 16.3% to R1.4bn, with the gross debtors’ book of the fintech segment increasing by 33.2% to R3.3bn. Fee and other income now accounts for a chunky 18.3% of total revenue.
The retail segment will be interesting to monitor, having turned a loss of R43m into an operating profit of R78m off a 5.6% drop in revenue. HomeChoice trades on a 6.5 earnings multiple and a 7.6% yield on the low side for a vibrant fintech offering. The FM estimates “hard” NAV at about R31 a share, which sets the scene for share buybacks but hopefully not a delisting.
The others
There are several other smaller, off-the-radar retail ventures to ponder. Rex Trueform, which trades on a dismissive 2.7 earnings multiple, is slowly mobilising cash flows from fashion retailer Queenspark to broaden its operating profile (water reticulation, broadcast media and property). Queenspark performed smartly in the six months to end-December 2022, with revenue of R386m styled into operating profit of R78m.
Then there’s Astoria with its 40% stake in Outdoor Investment Holdings (OIH), which comprises mainly the Safari & Outdoor superstore and outdoor wholesalers Inyathi Sporting Supplies and Formalito as well as pet store chain Family Pet Centre. In the past financial year, OIH shot out the lights with a 45% increase in earnings before interest and tax to R170m. The challenge of OIH (and Astoria) will be to keep growing these very specific niches.