Shoprite

15 April 2024 By PDSNET

In their article on 10th April 2024, Checkers sweeps Pick n Pay as it opens 5 new stores in one day., Businesstech drew attention to the fact that Shoprite had taken over five stores from Pick ‘n Pay on the East Rand. Pick ‘n Pay got into a legal battle with its franchisee over unpaid debts and the franchisee made a deal with Shoprite, the owner of Checkers. The thrust of the article was that Shoprite was continuing to take significant market share away from Pick ‘n Pay.

Of course, Shoprite has been doing very well for many years in its competition with other supermarkets, but the question private investors have to ask is:

 “Is it a good investment?

You will probably have noticed that the Shoprite share price has been falling during 2024, despite its excellent results. Consider the chart:

Shoprite (SHP): 17th of October 2023 - 12th of April 2024. Chart by ShareFriend Pro.

Here you can see that the share closed at an all-time record high at 27632c on 8th January 2024. After that it has been in a downward channel between upper and lower support lines until it broke down on 18th March 2024 and has been falling further since then.

As a private investor you might find it difficult to understand why a company which is doing so well has a share price which is falling. The reason is that investors had simply pushed the share price too high. On the day that it made that record high it had a P:E of 25,23 – which is very high for a grocery retailer, no matter how well it is doing. For context, on 8th January 2024, the JSE Overall index had an average P:E of around 10,5 – so Shoprite was trading at more than twice the market’s average.

A key component of a share’s value at any given price is the nature of is business. Some businesses are very easy to manage while others are very difficult. On the scale from easiest to most difficult, retail grocery chains, like Shoprite, are not the most difficult, but they are certainly among the most difficult.

This is because they have huge working capital requirements, a substantial capital investment, a large usually unionised staff complement and paper-thin margins. These characteristics make it very difficult to manage a supermarket chain and make profits.

Even Shoprite with its enormous footprint made a trading profit of R6,67bn in the six months to 31st December 2024 – which is just 5,9% of its merchandise sales for the same period. Their headline profit was even smaller at 3%. So, if they sell R100 worth of groceries, they are making just R3 profit on that.

You should compare this to a service business which typically has almost no working capital, relatively few high-quality staff and very high margins. A business like Multichoice (MCG), for example, receives debit orders from its 21,7 million subscribers every month.

Their overheads are probably covered before the month starts. Roughly speaking, Shoprite only covers its costs and makes a profit on the last day of the month. So, at its current P:E of 21,3, despite its excellent performance, Shoprite is probably still over-priced and has the potential to fall further.

Almost 33 years ago on 17th October 1991, Shoprite shares closed at 64c. On Friday last week, they closed at 23956c – and that was after falling 13,3% from their record high of 27632c. Throughout that 33 years the company has paid regular dividends. Last year’s dividend was 663c per share.

At some point the institutional fund managers will begin to buy them again and the share will begin to go up. The question is, “Exactly when?” and there is no good way to answer it. You could, of course, take the attitude that Shoprite is a good long-term investment and simply accumulate it on weakness.


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES - JULY 2018

The Ramaphosa Impact

Since the initial euphoria over President Ramaphosa’s election and inauguration, some of the excitement has worn off and the focus of the media has shifted back to South Africa’s many problems. Maybe we have forgotten that this new president is a consummate businessman in his own right and used to negotiating successfully at the highest level. He has recently stated that it was his intention to bring in $100bn of foreign

US Economy and the Rand

The US Federal Reserve Bank’s (The Fed) decision to sell $20bn worth of bonds a month is a monetary policy decision aimed at reducing the size of the American money supply. When a government sells bonds it takes money out of the economy and replaces it with something that is not money (a bond) thereby reducing the money supply. Trading in government bonds by the central bank is known as “open market operations” and is a

Steinhoff Breaks Up At Last

When a blue chip, institutional share like Steinhoff falls heavily, there are always private investors looking to buy it at its much reduced price hoping to make a quick profit. But there is great danger in taking a position too early. Immediately after the Viceroy report was published, Steinhoff fell from around R55 to below 465c and hovered there for just over a week. Then it began to rally, reaching as [glossary_exclude]high[/glossary_exclude]

The S&P500 Revisited

Three months ago, on 6th April this year we wrote an article about the S&P500 and the correction up to that point. We suggested that strong support had been built by the four unsuccessful attempts to penetrate the 2581 level (the green arrows). We said that the bulls would take heart from this and drive the market higher, back towards the all-time

MSCI Emerging Markets Index

Together with about 22 other countries around the world, South Africa is regarded internationally as an “emerging market”. This means that investments in this country are seen as more risky than those in first world countries. That, in turn, means that we have to offer and pay a higher return to attract those investments. Our bench-mark government bond (the R186) is currently offering a return of close to 9% per annum.

Sasol Breaks Up

Two years ago in June 2016, we wrote an article about the fact that Sasol, since the collapse of the oil price, had entered a sideways market between resistance at R392 and support at R360. Sasol’s collapse was caused by the sharp fall in the oil price with the widespread exploitation of shale gas, especially in America. At the time about 60% of Sasol’s revenue came