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Shoprite (SHP) will be the stock in focus: (Price at time of writing: R176.78 as 28 March 2016)
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Background and overview of Shoprite Holdings (SHP)
Shoprite Holdings Limited (“Shoprite Holdings”) is an investment holding company listed on the Johannesburg Stock Exchange Limited (“JSE”) in the “food retailers & wholesalers” sector. Secondary listings are also maintained on the Namibian and Zambian Stock Exchanges.
Shoprite Checkers (Pty) Ltd:
As will be discussed below, Shoprite has been said to be the biggest retailer in Africa. With it being one of the few South African companies to expand successfully into the rest of Africa. It will be hard for other retailers in South Africa, that is looking to expand into Africa to catch up with Shoprite, as they already have the know how and foothold into most of these markets. The biggest challenge for retailers such as Shoprite is improving their paper thin profit margins.
Shoprite Checkers (Pty) Ltd:
- Shoprite, Shoprite Hyper, Checkers, Checkers Hyper and Usave store formats.
- Fast Foods: The Hungry Lion chain now boasts modern, well-designed stores with a focus on fried chicken and operates outlets within South Africa, Botswana, Zambia, Lesotho, Swaziland, Namibia and Angola.
- Liquor Stores: Trading under the Shoprite LiquorShop and Checkers LiquorShop brands respectively, the liquor shops have extended the Group’s offering by providing a selection of wines, beers and a wide range of premium spirits to its customers
- Money Markets: The Money Markets offer a comprehensive range of financial services and products to the Group’s customers through dedicated in-store service counters.
- Furniture: The Furniture division offers furniture, electrical appliances and home entertainment products to customers for cash or credit through its OK Furniture, OK Power Express, OK Furniture Dreams and House & Home outlets in South Africa, Botswana, Namibia, Swaziland, Lesotho, Zambia, Mozambique and Angola.
- Pharmacies and wholesale distribution: MediRite’s mainly in-store pharmacies offer consumers an easy access to affordable healthcare and healthcare professionals. These in-store dispensaries currently operate throughout South Africa and also in Angola and Swaziland. The Group’s pharmaceutical wholesaler, Transpharm, sells and distributes pharmaceutical products and surgical equipment to hospitals and clinics, dispensing doctors, veterinary surgeons and private and corporate pharmacies.
- As a wholly owned subsidiary of Shoprite Holdings, Shoprite Investments conducts the Group’s treasury function and financing of credit sales to third parties.
- As a premier ticketing solution provider and one of the most recognised brand names, Computicket offers theatre, concert, festival, sport and cinema tickets along with bus tickets and gift vouchers through a network of outlets located across South Africa, Botswana, Mozambique, Namibia and Zambia, a call centre as well as the Computicket website. Computicket Travel also offers a variety of travel packages
- Incorporated in the Republic of Mauritius, Shoprite International is the holding company for the majority of the Group’s non-South African retail and property investments.
- Provides first and third party short term insurance to the Group and its customers
As will be discussed below, Shoprite has been said to be the biggest retailer in Africa. With it being one of the few South African companies to expand successfully into the rest of Africa. It will be hard for other retailers in South Africa, that is looking to expand into Africa to catch up with Shoprite, as they already have the know how and foothold into most of these markets. The biggest challenge for retailers such as Shoprite is improving their paper thin profit margins.
Scroll over or click on the funnel chart to get more details of SHPs latest financial results
Financial review
SHP has been reported to be the biggest general retailer in Africa. Its amassed a massive R113billion in sales during its 2015 financial year. Sadly the margins achieved is extremely low (indicative of the space they are operating in). They cater for the poor to very poor and aim to keep prices as low as possible. And in order to do this they have very little room for massive profit margins. While other companies have tried to expand into Africa and failed miserably, SHP seem to be doing this very successfully.
The graphic below shows the contribution of some of SHP's operating divisions
As can be seen from the pie charts above, SHP earns the majority of its sales and profits from its South African super markets. It makes up 77,6% of revenues and contributes 83.25% to trading profits. Interesting to note is that their super markets outside South Africa makes up 14,76% of revenue but only contributes 11.7% to trading profits. Clearly showing margins are under immense pressure in these stores.
With earnings per share equating to R7.71 and cash generated from operations per share being around R12.90, it leaves SHP on a PE ratio of around 23. This is pretty high compared to some of its peers, especially considering the margins earned by some of their peers. But with their size, SHP is surely able to negotiate better rates from suppliers than some of the other chains operating in South Africa.
With earnings per share equating to R7.71 and cash generated from operations per share being around R12.90, it leaves SHP on a PE ratio of around 23. This is pretty high compared to some of its peers, especially considering the margins earned by some of their peers. But with their size, SHP is surely able to negotiate better rates from suppliers than some of the other chains operating in South Africa.
Valuation
Based on SHP's financial results, the markets they operate in and the economic environment they find themselves in, we value SHP at between R179.84 and R182.00 a share. We therefore feel that SHP is fully valued at its current market price.
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.