Shoprite Holdings in the context of a weak consumer environment has delivered a strong set of results for the six months ending December 2016. The group has managed to increase turnover by 14% while growing diluted headline earnings per share by 15.5%. Shoprite has also increased the dividend cover by a similar margin to the earnings growth achieved (15.4%).
A breakdown of the group’s sales shows double-digit growth across all its divisions. The standout performance was realised by the non-RSA supermarket operations, which grew sales by 32.3% over the six-month period. The non-RSA operations consist of 221 stores and 13 liquor shops in 14 countries across the rest of Africa.
The Angolan and Nigerian operations were the outperformers within the division with the group citing that “Despite the chronic shortage of foreign currency in especially the oil-producing countries, the group enjoyed a significant competitive advantage in that it could fund its stock requirements from its external balance sheet, unlike many other traders in the region”. It would appear that Shoprite is now one of the few South African companies to be succeeding in its expansion into Nigeria, the second-largest economy on the African continent (only marginally smaller than South Africa in terms of nominal GDP).
Monday’s (20 February 2017) announcement citing that the proposed merger between Steinhoff International’s African operations and Shoprite Holdings had been terminated was welcomed favourably by the investment community as it was seen to be potentially earnings dilutive for the company.
The group is proving not only its defensive nature by performing well in a tough economic climate, but also that it remains able to achieve earnings growth in the current environment. It is expected that the momentum achieved in the first half of 2017 will continue into the latter half of the financial year.
The investments into the rest of Africa are paying dividends for Shoprite and becoming material, accounting for nearly 20% of total group revenue. The operations outside of South Africa remain a large potential catalyst for future growth. Trading on a forward price-to-earnings multiple (P/E) just north of 16 times, Shoprite does offer a discount to its SA listed food retail peers, suggesting a relative value in the current market place.
Shaun Murison is a senior market analyst at IG.