South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
Shoprite slumps as consumers struggle in Angola and Nigeria
Shoprite is feeling the pinch of troubled economies in key markets
Retail group Shoprite that operates in 15 countries in Africa, this week released its results for the financial year ended 30 June 2019.
- While sales were up 3.6% to R150.4-billion, and the group opened 126 new stores over the period, trading profits sank 14.3% to R6.9bn from the previous year, and diluted headline earnings per share dropped 19.6% to 779.9c.
Shoprite’s selling price inflation was 1.2% in South Africa, its major market with 74.9% of overall sales. This put a dampener on its South African trading margin, which sat at 5.5% for H2.
The second half of the group’s financial year, however, showed a significant improvement, with Q4 sales in up 9.4%, indicating a mild recovery in its primary market.
Problems in the non-South African business
Shoprite CEO Pieter Engelbrecht in presenting the results said Shoprite’s non-South African business was struck heavily by “on-going forex shortages, currency devaluations and the aftermath of rampant inflation”, particularly in Angola. The non-South Africa businesses recorded a trading loss of R265m, with “no foreseen respite in short-term trading conditions in the region”.
While Engelbrecht said the during his presentation the group was committed to customers in the 14 non-South Africa countries in which it operates, speaking to analysts later he added a “but not at any cost” proviso.
This was a noteworthy change says equity analyst Damon Buss of Electus Fund Managers.
- “Management mentioned that Shoprite had exited countries before, and the fact that they even mentioned it means they’ve had those discussions,” he said. “While they have never provided the actual split, their four biggest markets – Angola, Nigeria, Zambia and Mozambique – account for 70% of the non-South Africa business, and Angola alone about 40%, so there’s a long tail from the other ten countries.
- “The problem is that their two largest non-SA countries are oil-dependent and under immense pressure. The recent MTN results showed that the Nigerian consumer appears to be going backwards, not improving. Shoprite almost cannot exit its two most problematic territories with the biggest challenges.”
Tough trading environment
Buss says Shoprite’s results were more disappointing than what management had flagged in a July trading update. “However, the hyper-inflation adjustment won’t repeat next year. The dividend being down by a third implies that real earnings in the business were down that much. That’s really weak for the largest and supposedly strongest food retailer in South Africa, and shows just how tough the trading environment is.”
He added he was surprised Shoprite’s management had changed tack regarding what it used to consider strategic assets, such as its logistics operation.
- “It speaks to the pressure the group is under, especially with dollar-linked costs, that their argument is now that they’re happy to lease these assets as they try to free up cash from any source they can to fund growth and the dividend.”
Shoprite entered Kenya late in 2018 in an attempt to gain a foothold in territory left up for grabs through the demise of Nakumatt and Uchumi Supermarkets.
Buss thinks the “Africa Rising” narrative and demographic dividend timeline, however, is being pushed out again as African economies continue to struggle with diverse issues. “Any normality, when it returns, especially from a currency perspective, will benefit Shoprite,” he said.
Pushing into new market segments
In the meantime, the group hopes its push into the upper-market segments of South Africa – territory currently dominated by Woolworths with its offerings targeted at affluent customers – will tide it over.
Shoprite has revamped 21 Checkers stores into FreshX formats, with 59 still to come according to the group’s plan.
- “Checkers has previously never targeted this market, and Pick n Pay has done a relatively poor job of servicing affluent consumers,” said Buss. “But consistency, good locations, and supply chain, which will diverge from its traditional dry-goods business model based on volume and price, will be important. Checkers will also need time to get anywhere near the innovation levels at Woolworths.”
Byron Lotter from the asset management firm Vestac said it made sense for Shoprite to stay where it is in terms of footprint for now.
- “In the places they operate throughout Africa, there is a lack of real competition, which means when things go well economically, Shoprite does incredibly well. And they’ve been willing to take that risk. But all eyes are on the South African economy as they try to manage volatility in other territories.”
Lotter said investors should bear in mind that excursions into developed markets by South African multinationals had ended badly too.
Bottom Line: “It’s not just Angola that’s risky. Shoprite is a well-run business-operating environment. When the cycle changes, they’ll be poised to benefit.”