Johannesburg - It would be difficult for retail group
Massmart Holdings [JSE:MSM] to boast significant operating profit margins in the current economic environment, analysts said on Thursday.
In a sales update, Massmart - the parent company to Makro, Game, Dion Wired, and Builders Warehouse among others - said group sales for the 52-week period to June 27 at R47.5bn were 10.1% up from last year, with overall deflation estimated at 0.4%. Comparable store sales grew by 2.6%.
Abdul Davids, head of research at Kagiso Asset Management, cautioned against reading too much into the sales update, saying the cost of performance and profitability level for the year were not yet known.
"Furthermore, we know that food inflation has been very benign over the period and would have impacted Makro's turnover numbers in particular," said Davids.
"We therefore believe that it would be difficult for Massmart to report a significant increase in operating profit margins, and hence profitability, in this environment."
Nino Frodema, a portfolio manager at Metropolitan Asset Management, said Massmart delivered what on the face of it would seem a reasonable figure, especially given where the economy is at this point of the cycle.
"However, it must be just a little concerning that like-for-like sales growth was only 2.6%, which would suggest that there was a fairly aggressive store roll-out programme (in particular in the Masscash and Massbuild divisions). This could have a knock-on effect on Massmart's cost base and could increase the problem of store cannibalisation," said Frodema.
Soccer Cup fillip to bring cheerOver the past few years, Massmart has been on a buying spree of independent retailers - especially food retailers catering for lower-income earners - as part of the group's growth strategy.
Massmart said sales in the Massdiscounters division rose by 8.5%, with comparable store sales up 3.2%. Masswarehouse sales increased by 3.6%, with comparable sales up 3.6%, Massbuild sales surged by 13.9%, with comparable sales up 3.4%, and Masscash sales were 14.5% with comparable sales up 0.6%.
"This trading update doesn't justify the premium levels Massmart is trading at, but it does give one a little more comfort that the underlying retail sector has not completely collapsed in this down cycle," said Frodema.
Davids is in agreement. "Based on our current forecasts for the 2010 financial year, the share is very expensive relative to its peers - Pick n Pay in particular," said Davids.
Massmart currently trades on an earnings multiple of 23 times, higher than all the top four food retailers Shoprite [JSE:SHP] (19 times),
Pick n Pay Stores [JSE:PIK] (20 times),
Spar Group [JSE:SPP] (16 times), and
Woolworths Holdings [JSE:WHL] (18 times).
However, Danie Pretorius, a retail analyst at RMB Morgan Stanley, believed the update shows a significant improvement in Massmart's second half - especially in the last eight weeks - following a difficult first half.
"There's little question that the environment is improving. The 2010 FIFA World Cup seems to have helped quite a lot," said Pretorius, adding that many retailers his company has spoken to were giving good reports on the effect of the world’s biggest sporting tournament.
Massmart will release its results for the financial year to June 27 on August 26.
- Fin24.com