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Expensive retail shares fuel bourse rise
Expensive retail shares fuel bourse rise

Expensive retail shares fuel bourse rise

RETAILER NEWS - Oct 8th 2015, 10:39

Expensive as retail shares look after their strong run over the past few years, they remain the prime mover behind the JSE all share index’s recent gains. 

The all share index has had one of its best runs over the past two weeks, closing up over the past four trading days and is 4.74% higher so far this year after losing 4% in August.

The problem is that retailers are even more highly valued than the all share, trading at an average price-to-earnings ratio of 19.

The general retail index is at 20 and the food and drug index is at 22.

These sectors cannot be counted on to lead the charge in the all share, more so if economic conditions become more negative. "Retailers are not priced for recessionary conditions," Drikus Combrinck, an analyst at Capicraft Investment Partners, said on Tuesday.

But that is exactly what may happen with negative gross domestic product recording a drop of 1.3% in the second quarter, set to be followed by marginal, flat, or possibly even continued negative growth in the third quarter.

Mr Combrinck said that could mean a technical recession, which could hit retailers negatively. "The cycle is turning against retailers, with some disappointing results reported recently," he said.

The retail indices may be heading for a correction soon.

General retailers added 2.77% on Monday, trading within range of the descending 65 day moving average.

"On balance, available evidence suggests some selling pressure is likely to emerge at around 8,200 points, which should be used as a level for short-term profit-taking," Momentum SP Reid said.

On Tuesday the general retail index closed 0.46% lower at 8,041.75, but the food and drug retail index gained 1.47% to 10,129.50.

The outperformance by the two retail indices of the all share masks some divergent performances among individual shares. In the general retail category, Woolworths and The Foschini Group have been top performers, with Woolworths jumping 31% year-to-date and Foschini adding 11.8%.

However, in the same category Massmart has lost 16% and previous high flyer Mr Price has shed 11%.

Despite the setback, Massmart is still trading at a price-to-earnings ratio of 26 and Mr Price is at 24. Foschini theoretically offers some value at a price-to-earnings ratio of 19, but Woolies is at 27.

Pick n Pay has driven the food and drug index upward this year, but is trading at a price-to-earnings ratio of 35 having gained 16.9% this year.

That would imply full value, but Combrinck said Pick n Pay might be an exception. "Pick n Pay is more of a recovery story and has picked up from a low base," Mr Combrinck said.

Shoprite, which is at a price-to-earnings ratio of 21, is down 2.2% this year.

Those retailers not delivering on high valuations can be expected to be hammered if they do not deliver. Pick n Pay’s share price dropped sharply recently after it guided the market to headline earnings growth of between 15% and 25% for the interim period to end August.

Mr Price was also hit hard recently, despite the chain delivering firm results, but they missed expectations.

Further local interest rate hikes, even though moderate, will also be negative for the sector as it will put pressure on consumer spending.

Bargain hunters could have a look at Truworths, up 11% so far this year and trading at a relatively modest price-to-earnings ratio of 11.

Clicks has had a good run, up 16% this year.

Most of the value is already reflected in the price-to-earnings ratio of 26.

Finding value among the food and drug retailers is more difficult. Spar has risen 18.7% so far this year, mainly as a rand hedge on its Irish interests, acquired last year. It is trading at a price-to-earnings ratio of 23.From DFM Publishers (Pty) Ltd 

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