Shoprite’s excellent African adventure pays off
Share price shoots up on satisfying group performance
At a few stages on Tuesday Shoprite’s repurchase of former CEO Whitey Basson’s 8.68 million shares looked like a spectacularly good deal for the company. On September 15 2017 the company paid Basson R1.74-billion for a block of shares that were worth as much as R2.4-billion just five months later.
The Shoprite share reached a high of R274.33 on Tuesday before easing back to a still demanding R266 by the close of trade. The spike in the share price followed the release of interim results that were good but, according to some analysts, not spectacular enough to justify the dizzy levels to which the share soared. At R266 Shoprite was showing a profit of around R500-million on the transaction and Basson was down the same R500-million.
There is still the approximately R144-million annual interest charge on the loan needed to fund the repurchase, which could partly be set off against dividend payments on those shares.
Share price surge
But whatever way you look at it few would have expected the Shoprite share price to have surged to the levels it has in the past few months. The trading conditions for much of the six months to end-December 2017 were exceptionally tough; the South African economy was barely ticking over and the rest of Africa was little better. Despite this Shoprite was able to report a 6.3% increase in turnover and a 5% advance in trading profit. The headline earnings increase of 14.2% was way ahead of most expectations but once stripped of the benefits of a forex gain, rather than a R188-million loss in the comparative period, and a lower-than-expected tax rate the earnings increase looked more sedate. And of course there was the repurchase and cancellation of Basson’s shares to consider when making the earnings per share calculation.Marius Bosman, group chief financial officer, said management was “very proud of, and very happy with” the 5% increase in trading profit. The group’s star performer was Checkers, which grew turnover an impressive 9.6% during the interim. This helped to lift the like-for-like increase at South African supermarkets to 3.5%. The Checkers and Shoprite operational teams have been split in what analysts describe as a significant move to differentiate the two chains.
Like-for-like sales at non-South African supermarkets were down 6.4%. Group CEO Pieter Engelbrecht said this reflected the tough conditions in Angola, where sales were down: “Angola accounts for the lion’s share of non-RSA supermarkets.” The weak contribution from Angola, where taxes are high, was behind the group’s lower effective tax rate.
Making moves into Kenya
Despite the short-term difficulties management remains committed to growth outside South Africa. Engelbrecht said the growing middle class and “exploding population” has helped to underpin significant growth and a 30% return on investment. “An average Angolan store sells four times the amount of champagne sold by an average Checkers store,” Engelbrecht told analysts at a presentation on Tuesday morning.
The group is now making moves into Kenya. It has secured seven sites and expects to be open for business by year-end. “We want to go there on our terms and not irresponsibly. We don’t feel pressure to jump into something if it doesn’t feel right. At this time Kenya feels right,” said Engelbrecht.
One blemish in the six-month performance was inventory. “We’d probably get an ‘e’ for inventory levels,” said Bosman. The enormous new Cilmore distribution centre outside Cape Town was fully stocked but was not fully operational until December. And there were excess stocks in Angola. Bosman expects inventory problems to dog them for another few months while they roll out new SAP systems, which will have substantial long-term benefits.
Engelbrecht said he didn’t really know what was going to happen in the next six months but welcomed the optimism of recent months. “Optimism means one thing, we will have growth.”