HomeChoice: Are we talking Maltese cross-purposes?


HomeChoice: Are we talking Maltese cross-purposes?

Curious case of a highly successful retailer with a most peculiar corporate structure. Buy it if you dare

Chris Gilmour

HomeChoice lies somewhere between an online and traditional catalogue home delivery retailer. Its origins are in homeware merchandise, sold on credit through showrooms, sales agents or a contact centre, with the emphasis on kitchen and bedroom essentials.
Newer product categories include large electrical appliances, consumer electronics, furniture and fashion. Its more recent fintech division offers unsecured short-term and low-value personal loans, and insurance products such as credit life and funeral policies.
For the interim period to end-June 2018, headline earnings per share rose by 15% to 250c. For the year to end December 2017 HEPS were up by 22% to 504c. Viewed against an economy in recession, this is a good performance and speaks to the ability to offer customers not just the range of goods they are looking for, but also on credit. There are three product showrooms in SA: a small one in Maponya Mall in Soweto, a larger one in East London and the flagship store in Rissik Street Johannesburg, which is over 2,000m². Plans for a rights issue to finance the company’s ambitious five-year rollout of 30 new showrooms were announced earlier this year, only to be put on the back burner due to generally poor conditions in the retail sector.
The psychology behind opening showrooms is to allow customers to touch and feel merchandise before buying, something they cannot do with traditional catalogue shopping. Supporting the sales effort are two distribution centres, a company-owned one in Cape Town and a lease in Ekurhuleni.
The credit offering is fairly low-risk (average outstanding balance per customer of R10,444) and short term (average term length 14.4 months). The strategy is to add further financial services products, including insurance, funeral cover and digital value-added services such as prepaid data, airtime and electricity.
Homechoice, with a market capitalisation of R4.2bn, is listed in the General Retailers-Broadline Retailers sector. On a price/earnings ratio of less than eight times, it appears seductively cheap, especially considering its strong earnings growth of the past year. But investors should be cautious of this share for a few reasons.
It has an on-off relationship with the JSE. Richard Garratt founded HomeChoice in 1985, listing it in 1996, and then delisting the loss-making business in 2003. It was a frowned-upon corporate action, as controlling shareholders voted in favour of leaving the JSE rather than recusing themselves.
Minority shareholders were offered 18c a share, which appeared generous relative to the prevailing share price of 12c, but it was a far cry from the net asset value of about R2 a share.
HomeChoice relisted in December 2014 at R33 a share, enabling Garratt to sell a portion of his holding in the group via this listed entity, which is now trading at about R38.
Also, unusually for an SA company, HomeChoice International is incorporated in Malta, which management says is to facilitate foreign expansion of the business. However a Maltese jurisdiction frequently gets associated with tax efficiency, and although HomeChoice is listed in The Paradise Papers database, one cannot make any untoward assumptions nor simply assume any wrongdoing.
Additionally, it is extremely illiquid, with over 90% of the company being held by two unlisted organisations, and any unrelated minorities would never be heard. GFM owns 70% of HomeChoice International. This entity, through a trust structure, is an associate of Garratt and his daughter Shirley Maltz who is also HomeChoice SA head.
And yet another curiosity is that Garratt, a nonexecutive director of HomeChoice International, is remunerated through a consultancy agreement with the SA operating company, earning him R10m in 2017.
HomeChoice looks good operationally and appears to buck the general retailer trend. But you might be deterred by the complicated Maltese control structure, the contractual arrangement with the founder, its huge family majority ownership, and its comings and goings on the JSE board.
Gilmour is an investment analyst.

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