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Spar (SPP) will be the stock in focus: (Price at time of writing: R208.35 as 9 May 2016)
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Background and overview of Spar Group (SPP)
According to Spar's webiste: "The SPAR Group Ltd listed on the JSE in 2004, and today operates 6 distribution centres and 1 Build it distribution centre. The distribution centres supply and service independently owned SPAR, TOPS, Build it and Pharmacy at SPAR stores in Southern Africa. Goods are distributed to the stores by a fleet of trucks and trailers, which are owned by the SPAR group.
Using only the best and freshest ingredients, we make premium quality products at very competitive prices. To ensure we keep ahead of brand standards, we have our products tested by an independent laboratory on a monthly basis. Because we are so sure of our quality, we offer customers a ‘Double Your Money Back Quality Guarantee’ on all our SPAR Brand products, including fresh produce purchased from us.
Our goal is to provide our customers with unwavering quality of the highest standards, complemented by excellent and personalised service in a warm and inviting, community environment."
SPAR also has operations in Ireland under BWG Group. Spar operates in a tough market that includes competitors such as Shoprite, Woolworths, Pink 'n Pay
Using only the best and freshest ingredients, we make premium quality products at very competitive prices. To ensure we keep ahead of brand standards, we have our products tested by an independent laboratory on a monthly basis. Because we are so sure of our quality, we offer customers a ‘Double Your Money Back Quality Guarantee’ on all our SPAR Brand products, including fresh produce purchased from us.
Our goal is to provide our customers with unwavering quality of the highest standards, complemented by excellent and personalised service in a warm and inviting, community environment."
SPAR also has operations in Ireland under BWG Group. Spar operates in a tough market that includes competitors such as Shoprite, Woolworths, Pink 'n Pay
Scroll over or click on the funnel chart to get more details of SPPs latest financial results
Financial review
SPP's net profit margin for the year ended came in at 1.9%. Again very low net profit margins for a retailor in South Africa. Similar to those experienced by Shoprite, Pick 'n Pay and Clicks. On the positive front is the weakening exchange rate which should give SPP's next set of reported earnigns in Rands a boost (as their offshore operations earnings will look better when reported in Rands). Spar is covered in most of the small retail space with it being a general grocer, liquor sales stores (Tops), small diy project stores (Build It) and then their pharmacies that they rolling out (similar to market leader in this space Clicks).
Spar's diluted earnings per share (EPS) came in at R7.56, putting Spar on a PE ratio of 27.5 (which is pretty steep for a retailer with such low net profit margins). The pie charts below shows the contibutions of their various operations to turnover and pre-tax profits.
Spar's diluted earnings per share (EPS) came in at R7.56, putting Spar on a PE ratio of 27.5 (which is pretty steep for a retailer with such low net profit margins). The pie charts below shows the contibutions of their various operations to turnover and pre-tax profits.
The graphic below shows the contribution of some of SHP's operating divisions
As can be seen from the pie charts above, SPP earns the majority of its sales and profits from its South African super markets. It makes up 77% of revenues and contributes 90.7% to trading profits. Interesting to note is that their operations via BWG group outside South Africa makes up 23% of revenue but only contributes 9.3% to trading profits. Clearly showing margins are under immense pressure in their offshore operations. Or clients in South Africa are being taken for a ride compared to those overseas?
With earnings per share equating to R7.56 and cash generated from operations per share being around R12 a share it shows they cash generative, but the PE value is higher than peers such as Woolies and Shoprite. One has to wonder what warrants or justifies a potential investor buying Spar ahead of Woolworths or Shoprite? Perhaps the market is expecting a nice windfall in earnings due to exchange rate weakness.
With earnings per share equating to R7.56 and cash generated from operations per share being around R12 a share it shows they cash generative, but the PE value is higher than peers such as Woolies and Shoprite. One has to wonder what warrants or justifies a potential investor buying Spar ahead of Woolworths or Shoprite? Perhaps the market is expecting a nice windfall in earnings due to exchange rate weakness.
Valuation
Based on SPP's financial results, the markets they operate in and the economic environment they find themselves in, we value SPP at between R168 and R169.50 a share. We therefore feel that SPP is overpriced and we would not recommend adding to your current holdings or buying the share at it's current price.
We use our Share Valuation Calculator as guide to valuing shares.
We use our Share Valuation Calculator as guide to valuing shares.