South African retailers are now seen offering little value to investors

SA retailers lose allure after Walmart

RETAILER NEWS

Fin24 - Jul 8th 2011, 16:42

Johannesburg - After a stellar run in the months leading up to US retailer Walmart’s R16.5bn bid for Massmart, South African retailers are now seen offering little value to investors.  

“While local food retailers are fantastic businesses, they do not present an attractive value proposition for investors,” Johannes Visser, an analyst who helps run R18bn ($2.68bn) of funds at asset manager RE:CEM, said.

Shares in grocery retailers have gained 15% to 20% in the past 12 months, with the bulk of that coming in the run-up to Walmart announcing its plan to buy Massmart Holdings [JSE:MSM] last September.

Investors piled into the sector ahead of the offer, knowing that the world’s largest retailer was looking for an acquisition in South Africa and betting on which company it would eventually buy.

And the sector retained gains even after Walmart picked its target and bought 51% of Massmart, on growing optimism that consumer spending was on the mend.

“The high valuation multiples for companies such as Massmart, Shoprite Holdings [JSE:SHP], Pick n Pay Stores and Spar Group means that in some cases they are priced for exceptional outcomes and overall, offer average prospects for investors,” Visser said, adding his company has reduced exposure to some retailers and is now investing abroad.

Massmart and Shoprite are trading at 23.9 and 20.8 times their forward 12-month earnings respectively, according to Thomson Reuters data.

By contrast, Australia’s Woolworths is trading at 15.7 times its 12-month forward PE and Britain’s Tesco at 11.2 times.

World Cup hangover

“They are a little overvalued at these levels compared to many of our other stocks,” said Michele Santagelo, portfolio manager at NEWS Trading, referring to South African retailers.

“For example Mr Price has gone up by 10% in the last 10 days with very high PE ratios already on the retailers, it doesn’t look like there’s a lot of value there.”

Santagelo, who declined to disclose the size of his portfolio, said he has cut exposure to stocks such Pick n Pay and Massmart.

Although the latest data shows South Africa’s retail sales accelerating almost 10% in April, sales growth has been much weaker than expected this year.

Some fund managers are also shunning building firms, which were investors’ darlings in the run-up to the soccer World Cup last year.

Investec Asset Management says the construction sector may still have a long way to recover.

“We don’t like the construction sector ... building is flat on its back,” said Chris Freund, a portfolio manager with R25bn funds under his custody at Investec Asset Management.

Freund favours stocks such as luxury goods maker Richemont, which he says gives him an exposure to fast-growing China.

The local construction industry, which avoided the worst of the global economic crisis because of big projects for the soccer World Cup, is now having difficulty recovering as the government and private sector hold back on spending.

The World Cup hangover has pushed shares in the companies such as Aveng and Murray & Roberts down about 15% and 25%, respectively, so far this year.