JOHANNESBURG - Retailers and wholesalers on the JSE have been clobbered since their respective 2018 financial results.
My analysis of the top 10 stocks in that sector: Woolies, Truworths, Shoprite, Pick n Pay, Foschini, Mr Price, Massmart, Clicks, Pepkor and Spar indicate that around R153 billion or 28 percent were wiped off their total market capitalisation since their 2018 reporting periods.
The food retailers, Pick * Pay, Shoprite and Spar were collectively the worst performers with 35 percent down since their 2018 financial year-ends, while the market capitalisation of specialist clothing retailers, Truworths, Woolies, Mr Price, Pepkor and Foschini are down by 25 percent in aggregate. In the severe economic and trading circumstances some companies stand out though.
Massmart, due to report this week, has already lost more than 60 percent since the end of the company's 2018 financial year. Since 2011 Massmart’s return on capital employed at best was in line with the food and clothing sectors, but the company was mostly an underachiever. The company simply never made an effort to increase shareholder wealth at a faster rate than the borrowings.
In a very tough trading environment the general retailer's margins are under huge pressure. The company advised shareholders recently that a headline loss of more than R500 million can be expected for the first half of the company's financial year on a comparable reporting basis to the audited 2018 financial results, and therefore before adjusting for IFRS 16 where long-term leases are capitalised to the balance sheet.
With losses incurred before interest and tax and given the company's total borrowings to shareholders’ interest probably running at 90 percent plus, the group is in an unenviable liquidity squeeze. Net interest charges are likely to amount to more than R350m in the first half of the year and with total borrowings of more than R4.5 billion. Yes, their failure to plough back profits over time came back to haunt them.
It seems that my “debt death cross” where total borrowings exceed shareholders’ funds and return on capital employed falling short of lending rates for Massmart is in sight. In my opinion Massmart faces a forced sale of assets and close-down of loss making operations and, unfortunately, retrenching employees. A turnaround strategy will not take place overnight - the company's financiers will need to be convinced to reschedule the borrowings. Sounds familiar, does it not?
There are some good performers too! Health and wellness retailer Clicks’ market capitalisation is down by less than 2 percent. And for good reason too. The company has virtually no debt, yes, ungeared, while the return on capital employed is nearly double that of the food and clothing retailers’ aggregate return on capital employed (Roce). The outstanding financial performance of the company has been richly rewarded by the market as over the past 9 years the company’s market capitalisation ranged between 10 and 12 times shareholders’ interest. It is currently trading in line with the average ratio of 11.3 times.
There are some opportunities too!
Mr Price’s market capitalisation is down by more than 45 percent since the end of the company’s 2018 financial year-end. Although its total borrowings are rising steadily it is almost negligible with the total borrowings to shareholders’ interest sitting at less than 2 percent. Mr Price’s return on capital employed matches that of Clicks and is also nearly double that of the food and clothing retailers’ aggregate Roce. The company’s market rating is quite volatile though. Currently the company’s market capitalisation is 4.7 times shareholders’ interest and is at the lower end of the range over the past ten years of between a low of 4.7 (2010) and 13 (2015).
The retail sector in general may have reached value levels again. The market capitalisation to recent shareholders’ interest ratios of Spar, Foschini, Pick n Pay, Shoprite, and Truworths are at the lowest levels since 2009. The difference between 10 years ago and now is that the retailers’ borrowings were less than R6bn, but since then increased ten-fold to more than R56bn as the total borrowings to shareholders’ interest grew to 60 percent from 23 percent in 2009. The higher geared retailers are thus more vulnerable to external shocks than those with little or no debt.
The one that stands out like a sore thumb is, yes, you waited for it, Pepkor! Due to the Steinhoff/Tekkie Town saga Pepkor’s market capitalisation is slightly less than the company’s shareholders’ interest - according to Pepkor’s latest available financials. The company’s return on capital employed is still a marginal 9.4 percent - similar or just below lending rates. Pepkor’s total borrowings is about a third of the company’s shareholders’ interest.
The weighted market capitalisation to shareholders’ interest ratio of the clothing retailers is about 3.4 and if the ratio is applied to Pepkor’s shareholders’ interest it amounts to a possible market capitalisation of the group of nearly R190bn. Could come in handy for Steinhoff and its ill-fated shareholders. Another factor that will become increasingly important in the positioning of the retailers is how consumer behaviour will evolve and impact of online transactions on the industry, but I think the industry is planning accordingly.
In my heydays there was a blue chip counter called Wooltru. The company was unbundled into Woolworths and Truworths and both went their own ways. Both made similar mistakes by venturing offshore and are dearly paying the price for their actions.
One could just imagine what wealth can be unlocked when the two come together again!
The down draft of the domestic and global economic tornadoes are likely to cause serious headwinds to persist in the retail industry and may drive retail stocks further down.
At the time of writing the author held no direct financial interest in any of the shares mentioned in the article.
Ryk de Klerk is an analyst-at-large. Contact [email protected]. His views expressed above are his own. You should consult your broker and/or investment adviser for advice.
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