Shoprite in the tough spot

“Shoprite is a business that has, to borrow a quote from Charlie Munger on Costco, done more for society than any charitable cause. Of course the company has benefited from government social security programs, being able to do business in places where previously economic activity was limited.”


To market to market to buy a fat pig. The slower growth rates (everyone misses off a much higher base) in China weighed on commodity stocks locally, Anglo American down nearly 6 percent on the day, equally Glencore down heavily, over four and one-quarter of a percent. BHP Billiton fell by nearly one and a half percent, inexplicably South32 was up nearly by the same amount that BHP Billiton was down. What is that about?

And then there was a more noticeable loser at the top of the boards, Shoprite shares were down over six percent, on a first quarter trading update that failed to meet the markets lofty expectations. Mind you, I checked yesterday, the stock might be up over 50 percent in five years, it is however down over ten percent in the last three years. So basically the stock has gone nowhere, and some of the other retailers have crushed it. Of course if you take a longer dated return period, Shoprite has still done exceptionally well. The market clearly looking at the valuations, and see that Shoprite trades on a 20 multiple and is only able to deliver around 5 percent revenue growth in their biggest market, South Africa. Make no mistake, it is tough out there.

Shoprite is a business that has, to borrow a quote from Charlie Munger on Costco, done more for society than any charitable cause. Of course the company has benefited from government social security programs, being able to do business in places where previously economic activity was limited. You can say what you want about the present government, the social security nets created have certainly helped businesses like Shoprite. And in return, Shoprite have benefitted the consumer by being able to deliver cheaper goods, year in and year out. The consumer knows, in 2005, Shoprite turnover was a little over 30 billion Rand, five years later in 2010 at the year end stage it was 67,4 billion Rand. At the end of their financial year in June this year, five years on, the company achieved turnover of 113.6 billion Rand. They have nearly quadrupled revenues in the space of a decade.

Nearly 133 thousand people work at Shoprite (115 thousand in South Africa) currently, as of the end of the last financial year to June, compared to 63 thousand folks back in 2005. In short, Shoprite have created 70 thousand jobs over ten years. That is nothing short of a massive success story in bringing consumers lower priced goods day in and day out. Good for them, good for the consumer. This trading update however was NOT good, released on the day of the AGM. In short, in their local business: The core customer base of its flagship Shoprite chain in particular remained under pressure from mining job cuts, rising electricity costs, labour instability and lack of job creation. And then in their rest of Africa businesses: “Non-RSA Supermarkets achieved turnover growth of 12.8% (18.6% in constant currencies) despite the impact of lower commodity prices and currency devaluations of the three dominant countries in which the Group trades on the continent.”

So when the market values your stock at 20 times, this is unfortunately not good enough. And whilst the company points out: “a stronger double digit sales growth is already evident for the month of October” it is difficult for them to predict Christmas sales. The market has a forward multiple of 17 times with a dividend yield of 3 percent, hardly cheap. And with a negative perception towards emerging markets, and South Africa finding themselves in an unenviable position of being inside of the “fragile five” (Brazil, Indonesia, Turkey and India make up the rest), sentiment could weigh from external investors. And bear in mind that shareholders of this business are looking for the longer term African growth story, for the time being three-quarters of revenues are confined to South Africa, with 80 percent of profits from this one territory (as per the last annual report, 2014).

Of course the risk is that international shareholders like Lazard, JP Morgan, T. Rowe Price, Blackrock, The government of Singapore investment Corporation, Vanguard and First State (all amongst the top shareholders) get downbeat on the growth credentials that the continent offers. I think not, I heard an interview with Jamie Dimon from JP Morgan yesterday in which he was generally positive on the outlook for our continent, Dimon looks well and is great. I agree with Shoprite: “The Group remains optimistic in the medium term.” It may not be time to buy the shares yet, there will however be time, not too much is expected to change in the next 18 months or so.

Over the seas and far away in New York, New York, stocks fluctuated ending marginally in the green (S&P 500 up 0.03 percent, Dow Jones up 0.08 percent and nerds of NASDAQ up 0.38 percent) to notch off another day of gains and the memories of the Northern Hemisphere summer a distant one. Energy stocks were slammed, I saw Jeff Currie, the Chicago lecturer (and holder of economics PhD from the same institution) turned head of Goldman Sachs head of commodities research make some not so exciting predictions about oil markets in the short term. He is always worth listening to, suggesting that we are in a lower oil price for longer scenario.

That is impacting heavily on economies reliant on oil exports, reports yesterday were that Saudi had delayed paying some contractors, a New York Times article over the weekend painted another bleak picture of Venezuela. Currie’s thesis is that cash costs are 20 Dollars a barrel (globally), there is a whole lot of oil in storage capacity already, and we are in a world of surpluses. That is excellent for all global consumers, not so good for the producers, someone is going to have to turn off the taps to return to price equilibrium. Currie suggests that two to three years out, he is bullish on oil prices, from what level he is not too sure. For the time being we ignore.


Generally Electric, the longest surviving Dow Jones Constituent

The company is synonymous with Thomas Edison, one of the greatest investors of the 19th century. The man was however funded for his electrical lighting experiments by none other than the Vanderbilt family and JP Morgan (the person, not the company), we have capital to thank for light bulbs, not political parties or organisations. People make things, people take chances on people and humans all win in the end. Of course the light bulb that Edison invented looks very different today, it is all about saving precious resources today. Using less power to make the same lighting choices. In 1896 the company became part of the Dow Jones Industrials index (only 12 in those days), and is the only remaining member. It hasn’t always been there, it is however 120 years later, the only company left.

The business looks very different today, even from ten years ago. The company is committed to slimming down the finance arm and continues to divest various assets from GE Capital. Third quarter results released last Friday before the bell, showed that earnings per share from continuing operations were flat, revenues for the quarter clocked an impressive 27.9 billion Dollars, even though that was a slight miss from the estimates. Profits of 4.5 billion Dollars were ahead of the market, margins increased a very pleasing 100 basis points.

There is something coming soon, the company is going to spin off a business called Synchrony Financial from GE Capital, what this will do is make the new GE (post the reduction of the credit business, into the rest of the currently listed Synchrony Financial) not important as a financial institution any more. So what you will now own is unfortunately a few Synchrony Financial shares for the GE shares you own.

The results themselves were not really that exciting, predictably the oil and gas business fell off a cliff, they do like the business long term, and I guess it is close to the Jeff Currie thesis above. An abundance for now, the usage should pick up sharply at the lower prices. Climate change, warmer winters might mean lower energy usage however, at least in the winter to warm up. Perhaps more in the summer to cool down, we could do with some rain over here.

Why own this diversified industrial business with reaches to all four corners of the globe (what is that English lovers? There are no four corners on a globe) that reaches into all aspects of life, travel (aviation), healthcare, oil and gas as we mentioned, water purification, power (gas turbines and the like), lighting and energy management? The stock is cheap, the company is getting leaner and meaner and sweating harder than before. The yield is still over three percent pre tax. There is lots to still like, the company is under-appreciated, perhaps as a result of their heritage and size. We continue to hold the stock for all of the reasons above.


Michael’s musings

The free education debate is heating up, here is a post from one of my economic lecturers from days gone by. I respect his opinion as he is very well read and is not afraid to admit when he does not know something.

“Higher education not only should be free, it can be free since there is enough money. This is because, unlike a household, a government does not face a budget constraint, despite all the BS credit rating agencies tell us. A government with its own fiat currency and a floating exchange rate is in fact a currency CREATOR, not a currency user.

If you understand the history and reality of money, you would know that taxation is not needed to finance government spending, but that it is in fact the other way round. It is government spending that enables people to pay their taxes. In other words, we don’t need more taxes to enable to finance higher education – that is utter nonsense. Free higher education will even generate higher tax revenue if that is what we want.

A government can create as much currency as the real resources of its economy allows – in other words up until the point where it causes inflation. And that point is much, much further out than most economists (like me in the past) make us believe.

Anyone who has studied the actual history of money (not the fictional history of economics textbooks) will tell you that money is essentially a product of our collective imagination – so it has NO inherent limits. If it is scarce it is only because we choose to keep it artificially scarce.”

There are many points and theories that he touches on, some that I don’t agree with. I don’t want to get into the free education debate itself but look at, “what is money”? As soon as you view money as anything more than a way of simplifying transactions, you then run into trouble. Why did QE not create inflation in the US? It was due to the real resources of the country (and globe) being higher than the cash in the system, which results in under utilisation of the resources or deflation.

The above post is more than likely going to stir emotions and challenge views. It highlights that there are many conflicting economic theories out there but that is what creates a market.


Home again, home again, jiggety-jog. European markets are called lower, Xi Jinping is visiting the United Kingdom ahead of the fifth plenary session of the 18th central committee of the Communist party of China, next week. As was pointed out, this is a sign that Xi is large and in charge, there is no infighting in the upper echelons of power, if he is confident enough to have stepped away. We are possibly expecting a lower open here, who knows what could happen during the course of the day. IBM reported last evening, the 14th straight quarter of lower growth, the stock had slid sharply in pre market and after hours trade. Is it a Buffet mistake, the investment, or is he using this as an opportunity to buy more shares at what will be close to a 52 week low?


Sent to you by Sasha and Michael on behalf of team Vestact.

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