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We take a look at the trading update announced by SPAR for the 17 week period ending 26 Jan 2019. And it looks like they will be spared the absolute hammering other retailers have received after trading updates.
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About SPAR Group
In the 1960’s with the emergence of grocery chains in South Africa, a group made up of 8 wholesalers were given exclusive rights to the SPAR name and brand in 1963, and serviced 500 small retailers. Over time and through many mergers and takeovers, today the SPAR Group Ltd operates 6 distribution centres and 1 Build it distribution centre, supplying goods and services to over 1 000 SPAR stores across Southern Africa.
SPAR is a warehousing and distribution business headquartered in Durban, South Africa. We have been operating in Southern Africa for over five decades. Since 2011, we have expanded into Ireland (including South West England) and Switzerland. We form part of SPAR International, which is present in 44 countries and has 240 distribution centres that serve 13 million customers every day. The SPAR Group Ltd, headquartered in Durban, South Africa, is present in nine countries, has 10 distribution centres and serves 3 768 retail members through 14 store formats every day.
The group currently owns and operates under the following brand names:
SPAR is a warehousing and distribution business headquartered in Durban, South Africa. We have been operating in Southern Africa for over five decades. Since 2011, we have expanded into Ireland (including South West England) and Switzerland. We form part of SPAR International, which is present in 44 countries and has 240 distribution centres that serve 13 million customers every day. The SPAR Group Ltd, headquartered in Durban, South Africa, is present in nine countries, has 10 distribution centres and serves 3 768 retail members through 14 store formats every day.
The group currently owns and operates under the following brand names:
- SPAR
- TOPS at SPAR (Their liquor store offering)
- Build It (Their build supplies and home renovation offering)
- S Buys (a pharmaceutical wholesale business)
- Pharmacy at SPAR (SPAR looking to take advantage of the lucrative personal care and pharmaceutical market in the same way Clicks and Dis-chem has)
Internationally, SPAR is the biggest independent supermarket retail network in the world with 13 000 stores. As part of a global brand, our retailers are able to leverage off international retail design and trends that have kept the SPAR brand at the forefront of food retailing in Southern Africa. SPAR has the most stores in urban residential areas in South Africa. BWG Group is the largest retailer in the Irish convenience retail market by market share. SPAR Switzerland has a state-of-the-art distribution centre and efficient distribution logistics. Pharmacy at SPAR is a SPAR store format and service that is unique to South Africa, with the potential to be rolled out into Ireland and South West England. 32.4% of our turnover is generated in foreign currency.
So to the trading update we go
TRADING UPDATE FOR THE 17 WEEKS TO 26 JANUARY 2019
HIGHLIGHTS
- Group sales increased by 8.2% to R36.53 billion (the comparative seventeen (17) weeks to 27 January 2018: reported an increase of 7.0%)
- SPAR South Africa Group sales growth of 7.7%
- Core SPAR business sales up 5.7% and like-for-like sales increased 3.8%, with internally measured price inflation of +1.4%
- Exceptionally strong liquor sales growth of 19.2%
- Build It sales growth of 10.3%, building on the momentum seen in the 2018 financial year (“FY18”)
- SPAR Ireland increased turnover by 8.4% (euro-denominated)
- SPAR Switzerland turnover down 1.5% (Swiss franc currency terms) reflecting the difficult Swiss retail environment
GROUP
The SPAR Group increased sales by 8.2% from R33.78 billion to R36.53 billion for the seventeen (17) week trading period ended 26 January 2019 (“Period”) when compared to the same period for 2018.
SPAR SOUTHERN AFRICA
Group sales in South Africa increased by 7.7%, which included the S.Buys pharmaceutical business being recognised for the Period. On a like for like basis, the South African Group sales increased by 7.6% reflecting the weak consumer spend. The core SPAR business reported sales growth of 5.7%, with same store sales increasing by 3.8%. Internally measured price inflation of about 1.4% reflected the decrease in prices from the previous comparative period as deflation continued to be measured in a wide range of grocery and perishable items. The liquor business delivered another impressive performance with growth exceeding 19.2% in a highly competitive retail sector. Building on the momentum seen in FY18, the Build It business produced strong results with sales growth of 10.3% as a result of healthy retail growth and improved customer loyalty.
SPAR IRELAND
The Group’s Irish business recorded solid growth across all retail brands and wholesale divisions in a challenging economic environment. In euro-currency terms, this business increased turnover by 8.4% which also reflected the contributions of the 4 Aces Wholesale and Corrib Foods businesses acquired during the previous calendar year. Sales growth was 11.5% when combined with a slightly weakened rand.
SPAR SWITZERLAND
The Group’s Swiss business continued to reflect the negative local market conditions and sales declined 1.5% in Swiss franc currency terms. This result is still influenced by the strategic disposal of certain corporate retail stores during the latter part of the previous financial year. The wholesale division reported a pleasing growth in sales of 4.8% and is more reflective of the SPAR retail performance. In rand measured terms this business increased turnover by 4.1%. Management remains satisfied that the implemented strategy continues to show positive results. Shareholders are advised that the financial information contained in this announcement is the responsibility of the directors and that it has not been audited, reviewed or reported on by the Group’s auditors.
The financial results for the six months ending 31 March 2019 will be released on SENS on or about Wednesday, 15 May 2019.
HIGHLIGHTS
- Group sales increased by 8.2% to R36.53 billion (the comparative seventeen (17) weeks to 27 January 2018: reported an increase of 7.0%)
- SPAR South Africa Group sales growth of 7.7%
- Core SPAR business sales up 5.7% and like-for-like sales increased 3.8%, with internally measured price inflation of +1.4%
- Exceptionally strong liquor sales growth of 19.2%
- Build It sales growth of 10.3%, building on the momentum seen in the 2018 financial year (“FY18”)
- SPAR Ireland increased turnover by 8.4% (euro-denominated)
- SPAR Switzerland turnover down 1.5% (Swiss franc currency terms) reflecting the difficult Swiss retail environment
GROUP
The SPAR Group increased sales by 8.2% from R33.78 billion to R36.53 billion for the seventeen (17) week trading period ended 26 January 2019 (“Period”) when compared to the same period for 2018.
SPAR SOUTHERN AFRICA
Group sales in South Africa increased by 7.7%, which included the S.Buys pharmaceutical business being recognised for the Period. On a like for like basis, the South African Group sales increased by 7.6% reflecting the weak consumer spend. The core SPAR business reported sales growth of 5.7%, with same store sales increasing by 3.8%. Internally measured price inflation of about 1.4% reflected the decrease in prices from the previous comparative period as deflation continued to be measured in a wide range of grocery and perishable items. The liquor business delivered another impressive performance with growth exceeding 19.2% in a highly competitive retail sector. Building on the momentum seen in FY18, the Build It business produced strong results with sales growth of 10.3% as a result of healthy retail growth and improved customer loyalty.
SPAR IRELAND
The Group’s Irish business recorded solid growth across all retail brands and wholesale divisions in a challenging economic environment. In euro-currency terms, this business increased turnover by 8.4% which also reflected the contributions of the 4 Aces Wholesale and Corrib Foods businesses acquired during the previous calendar year. Sales growth was 11.5% when combined with a slightly weakened rand.
SPAR SWITZERLAND
The Group’s Swiss business continued to reflect the negative local market conditions and sales declined 1.5% in Swiss franc currency terms. This result is still influenced by the strategic disposal of certain corporate retail stores during the latter part of the previous financial year. The wholesale division reported a pleasing growth in sales of 4.8% and is more reflective of the SPAR retail performance. In rand measured terms this business increased turnover by 4.1%. Management remains satisfied that the implemented strategy continues to show positive results. Shareholders are advised that the financial information contained in this announcement is the responsibility of the directors and that it has not been audited, reviewed or reported on by the Group’s auditors.
The financial results for the six months ending 31 March 2019 will be released on SENS on or about Wednesday, 15 May 2019.
Share price performance over last 12 months
The following screenshot was taken from Sharenet and shows the share price performance of SPAR during today as well as providing a summary for the group's performance over the last 3 and 5 years. And is it shows, SPP has been finding it pretty tough out there. However it has increased a bit since we looked at their full financial results published in November last year when SPP was trading in the mid R170's
So should you buy their shares?
Well thats the million dollar question everyone wants to know the answer to. Their margins are paper thin, similar to that of their peers in the industry such as Shoprite. They are looking to expand into the higher margin products such as the personal care and pharmaceutical space with their Pharmacy at SPAR offering. However they are going head on with two giants in the South African market in that product space, namely Dis-Chem and Clicks. Both of which have a significant footprint and market share in this space already.
For South African investors who like to hedge their investments against the volatile Rand, SPAR offers a bit of Rand hedge opportunity with the group earning about one third of their revenues in other currencies. They have a decent dividend yield of over 4%, their PE ratio is on the high side, but they do offer essential goods and services consumers cannot live without so there will always be a demand for the goods they sell, and this type of high demand goods suppliers tend to trade at relatively high PE ratios as investors know demand for their goods will always be there, regardless of what the economic environment looks like.
For South African investors who like to hedge their investments against the volatile Rand, SPAR offers a bit of Rand hedge opportunity with the group earning about one third of their revenues in other currencies. They have a decent dividend yield of over 4%, their PE ratio is on the high side, but they do offer essential goods and services consumers cannot live without so there will always be a demand for the goods they sell, and this type of high demand goods suppliers tend to trade at relatively high PE ratios as investors know demand for their goods will always be there, regardless of what the economic environment looks like.
Below a valuation we did on SPP based on the financial review we undertook during November 2018, when the shares were trading around R175 a share. We basically stated that we see full value for the group at R180 a share, and its trading a bit above that, perhaps in anticipation of profit growht coming up during the half year financial results. Based on the 17 week trading update it certainly looks like SPP will have modest profit growths. So we do not see the share price moving a lot higher from our valuation of R180 odd in the short term.
SPAR Group (SPP) share valuation
Based on their financial results, their cash generation and current cash position as well as their PE ratio and dividend yield, and their small Rand hedge characteristic our valuation model values the group at R180.50 a share. Thus at its current price it is very close to fully valued. We would therefore advise potential buyers of the share to look to buy into the company at levels below R180 a share, preferably closer to the R160 a share, as this provides some meat on the bone for investors looking to minimise potential downside to their investments