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Massmart (MSM) will be the stock in focus: (Price at time of writing: R118.00 (13 May 2016))
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Background and overview of Massmart (MSM)
Consumers in South Africa will be hard pressed to say that never bought anything from a Massmart owned store. Some of their brands include the following:
Massmart states the following in their financial results:
Massmart is a managed portfolio of four divisions, each focused on high-volume, low-margin, low-cost distribution of mainly branded consumer goods for cash, in 13 countries in sub-Saharan Africa, comprising 403 stores. The Group is the second largest distributor of consumer goods in Africa, the leading retailer of general merchandise, liquor and home improvement equipment and supplies, and the leading wholesaler of basic foods.
- Game
- DionWired
- Makro
- Fruitspot
- Builders Warehouse
- Rhino Cash and Carry
- Cambridge
- Shield
- Trident
- Saverite
- Jumbo
Massmart states the following in their financial results:
Massmart is a managed portfolio of four divisions, each focused on high-volume, low-margin, low-cost distribution of mainly branded consumer goods for cash, in 13 countries in sub-Saharan Africa, comprising 403 stores. The Group is the second largest distributor of consumer goods in Africa, the leading retailer of general merchandise, liquor and home improvement equipment and supplies, and the leading wholesaler of basic foods.
Scroll over or click on the funnel chart to get more details of MSM's latest financial results
Financial review:
The net profit achieved by Massmart amounted to 1.38%, as is the case with other high turnover low margin retailers in South Africa (Pick 'n Pay or Shoprite), the net profit margin achieved by Massmart is extremely low.
The pie chart below shows the contribution of Massmarts's operations to their revenue and pre-tax profit earnings.
Interesting to note from the pie charts above is the fact that some of the shops Massmart is best known for (Dionwired and Game) which falls under Massdiscounters, only contributes 23% of Sales and 10% of pre-tax profits. Masswarehouse (which includes Makro and Fruitspot) contributes around 28% of sales, but 51% of pre-tax profits. Clearly some of their fattest margins are achieved at these outlets.
Another division with strong margins is the Massbuild division. Contributing 14% to sales and almost 30% of pre-tax profits.
Headline earnings per share came in at R5,16 per share placing MSM on a pretty stiff PE ratio of 22.9, which is a very high PE for a company with such low net profit margins. Cash generated per share came in at around R16.80 per share though, which is very strong.
MSM is currently sitting with roughly R12billion in inventories (up by R700million over last 12 months). This is concerning as a inventories build up might signal that MSM is struggling to move products in their stores. With consumers being under ever increasing pressure, this might cause problems for MSM when they sitting with ever increasing inventories.
Another division with strong margins is the Massbuild division. Contributing 14% to sales and almost 30% of pre-tax profits.
Headline earnings per share came in at R5,16 per share placing MSM on a pretty stiff PE ratio of 22.9, which is a very high PE for a company with such low net profit margins. Cash generated per share came in at around R16.80 per share though, which is very strong.
MSM is currently sitting with roughly R12billion in inventories (up by R700million over last 12 months). This is concerning as a inventories build up might signal that MSM is struggling to move products in their stores. With consumers being under ever increasing pressure, this might cause problems for MSM when they sitting with ever increasing inventories.
A few financial ratios to mull over for Vodacom (calculated using our Financial Ratios Calculator):
- Debt to Equity Ratio: 4.31 (more than 2 shows high levels of financial leverage).
- Current Ratio: 0.85 (a measure of liquidity. Less than one signals possible trouble in paying off current liabilities)
- Quick Ratio: 0.31 (Another liquidity measure. Shows how much in liquid assets is available to cover current liabilities or short term debt). This ratio is greatly affected by MSM's massive inventory holdings (around R12billion).
- Return on Assets (ROA): 3.8%
- Return on Equity (ROE): 20.19%
- Net Profit Margin:1.38%
- Dividend Yield:2.19%
Valuation:
While the consumers in South Africa are under pressure, and MSM sitting with extremely low margins, and based on Massmarts financial results we value Massmart at between R102.41 and R103.45. We therefore feel that MSM is over priced at its current levels and would not recommend buying the share at this point in time. We would like to see increased margins or a far less demanding PE before we would recommend buying MSM above other retailers such as Woolworths or Shoprite
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
We use our Share Valuation Calculator as guide to valuing shares. We believe in value investing and our above mentioned share valuation is based on the underlying fundamentals and financial statements of the stock in question.
