Food retailers are trading at the cheapest premium to the nation’s benchmark stocks index as economic factors curb their profit growth.
The FTSE/JSE Africa Food & Drug Retailers Index has declined 18% this year through August 23 to trade at 22 times earnings. The 166-member FTSE/JSE Africa All Share Index has gained 10% for a price-to-earnings ratio of 20. That cut the gauge’s premium over the all-share to 12% on August 23, the lowest since August 24, 2010, after being valued at more than double the benchmark in June 2012.
“The consumer environment has become tougher,” Diane Laas, an equity analyst at Cape Town-based Investec Asset Management, which manages the equivalent of $105-billion, said on August 22. “The earnings growth outlook for food retailers is looking slower.”
Shoprite Holdings, Africa’s largest food retailer, is battling the worst sales growth in its main South African market in two years as the continent’s biggest economy expands at the slowest pace since a 2009 recession.
Unemployment in the nation of 52-million people increased to 25.6% in the second quarter, the highest in two years, compared with 24.9% a year earlier. Inflation breached the upper end of the central bank’s target range for the first time in 15 months in July, cutting into consumers’ disposable income. Almost 48% of “credit-active” South African consumers, or 9.53-million people, had impaired debt records at the end of June, while about a quarter of 71-million credit accounts weren’t been paid for three months or more, according to the Johannesburg-based National Credit Regulator.
The stock of Cape Town-based Shoprite has decreased 20% this year to trade at 24 times profit. Massmart Holdings, the local unit of the world’s biggest retailer Wal-Mart Stores Incorporated, fell to its lowest in almost two years last week after saying first-half profit declined.
Shoprite is expanding outside its home market, where sales from 153 stores in 16 African countries jumped 28% in the fiscal year through June, the company said August 20. A further 20 stores are due to open by June next year and an additional 27 thereafter.
The company trades at a premium to the all-share index because of its African expansion, Jean Pierre Verster, who helps to oversee the equivalent of $800-million at 36ONE Asset Management, said on August 22.
Pick n Pay Stores, South Africa’s second-largest food retailer, trades at 34 times earnings, the highest on the four-member food and drug index, even after a 16% slump in its stock this year, according to data compiled by Bloomberg.
Pick n Pay plans to cut management jobs to reduce operating costs after annual net income plunged 51%, the Cape Town-based company said on August 7, as it lost market share to competitors, including Shoprite.
Richard Brasher, the former head of Tesco's UK unit, started as chief executive officer in February to lead a sales-growth revival. “Investors are prepared to pay more for an anticipated recovery in the company’s profits,” Verster said. Brasher, 52, said in April that he is “optimistic” the retailer can improve the underlying margins of the business. At Massmart, sales growth slowed to 8.9% in the 26 weeks through June 23 from 15% in the six months ending December 23, the Johannesburg-based company said August 22. The stock, which has slumped 19% this year, is trading at 22 times estimated profit, the highest valuation on the 11-member FTSE/JSE Africa General Retailers Index.
South Africa’s $384-billion economy is set to grow by 2% this year, according to the country’s central bank. Strikes over pay increases at the mines of the world’s biggest producer of platinum and fifth-largest gold miner have shaved 0.3% off the nation’s economic growth this year, President Jacob Zuma said in June.
The rand slid 17% this year, making it the worst performer among 24 major emerging-market currencies tracked by Bloomberg. It gained 0.2% by 8.46am in Johannesburg on Monday. “None of the macro-economic signs in South Africa point to a respite soon,” Investec’s Laas said. – Bloomberg