Retailers’ vanishing fortunes

Shaun Murison, senior market analyst at IG. (Picture supplied).
Shaun Murison, senior market analyst at IG. (Picture supplied).

The first chart below illustrates the year to date (close 31 December 2016 to 13 June 2017) share price performances for some of the larger cap stocks within the broader sector. (Please note that these have not been adjusted for dividend payouts.)

Notable underperformers for the year to date have been the Lewis Group and the Spar Group. Full-year results revealed a 35.8% (further) contraction in the Lewis Group’s earnings over the period.

The Spar Group’s interim results were subdued with the group losing some market share in South Africa and a pre-tax loss in its Swiss operations amidst a deflationary consumer environment, although the Ireland business remained the silver lining, proving resilient in a constrained consumer environment.

Shoprite and Richemont are the notable outperformers for the year thus far. Shoprite’s share price saw an initially euphoric reaction to news that the potential merger with Steinhoff’s African assets had been called off.

The proposed merger had been perceived by investors to prejudice minority shareholders and lack transparency for investors.

Shoprite is also leading the local food retail pack, having posted double-digit sales growth (full-year results ending December 2016) in its South African operations, as well as achieving solid revenue growth in the rest of Africa and in areas where a number of other SA companies have failed (i.e. Nigeria).

Richemont’s results for financial year 2017 saw sales contract by 4% over the period, however investors appeared encouraged by the group’s return to growth in the US and a much improved performance in mainland China and Korea, which are considered the real potential  future catalysts of growth for the company.


Analyst estimates


 

The above graph shows the mean of analysts’ (IRESS: sourced from Standard & Poor’s) future price target estimates for the aforementioned retailers (six to 12 months) compared with the last traded price at the close of business on 9 June 2017.

 


Expressed in percentage terms above, we look at the 9 June closing price relative to the mean of analysts’ estimates to determine a potential discount or premium thereto.

While the recent run in Richemont suggests the company to be trading more or less at a fair value relative to analyst price targets, the Lewis Group might be considered to be trading at a more than 7% premium to what is generally considered fair value.

The rest of the retailers in our list look to be trading at variable discounts to the mean of analysts’ estimates, with the most pronounced discounts being that of Woolworths and Steinhoff International. 

Recent interim results released for Steinhoff International disappointed investors as some of the new acquisitions’ performances included within the results (particularly that of Mattress Firm) had been worse than consensus estimates had predicted.

However, while many 12-month price targets have been revised lower by analysts, the majority of investment houses remain in favour of the stock outperforming and maintain their buy, overweight or outperform ratings for the company.

The decision to separately list the company’s African assets in the third quarter of the year has been widely considered as a value unlock for investors, providing a more direct access to the Pepkor business, which makes up the bulk of the value within the assets being separately listed.

Pepkor remains one of the best discount retailers in the country, achieving continued earnings growth whilst remaining extremely cash generative.

Woolworths delivered a subdued set of results for the interim period ending December 2016, and cautioned that the remainder of the year (ending June 2017) will follow suit.

The company does, however, appear to remain in analyst favour, due to the company’s historically high return on equity (RoE), cash generative nature and strong upper-LSM positioning within the southern hemisphere.

Future growth in a muted global growth environment will be dependent on the successful execution of the Country Road turnaround strategy as well as Australian food and private label roll-outs.

Shaun Murison is a senior market analyst at IG.

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