Pricey ponderings

AT AN EARNINGS multiple of 21 times, retail conglomerate Massmart is considered the most expensive stock in the retail sector. Understandably, analysts are a tad reluctant to recommend it as a buy. Massmart – a mainly cash retailer of high-volume/low-margin goods – has also bucked the downbeat trend on the JSE, with its share price surging by more than 35% over the past 12 months.

There’s no doubt Massmart – which posted a 6% fall in headline earnings per share in its 2010 financial year – is benefiting from a lingering rumour it’s a target of United States multinational Wal-Mart. Such speculative sentiment has made the share grossly overvalued, especially considering Massmart isn’t quite one of the traditional defensive stocks, such as food retailers.

OPPORTUNITIES

* Its 2010 annual results suggest Massmart has turned the corner after a difficult year. Sales improved (14,4%) in second half 2009 and there are indications sales have stabilised over the first two months of its new financial year.

* Through the acquisition of independent retailers, Massmart has big plans for the grocery chain Cambridge Food, aimed at lower-end consumers.

* Corporate action. If indeed there’s a suitor (perhaps not necessarily Wal-Mart) there would need to be a decent premium to snatch control of such a sprawling retail footprint.

RISKS

* One of the difficulties Massmart encountered in its last financial year was product deflation, which averaged 0,4%. While conditions are expected to improve, the group could struggle to grow its earnings higher than 10% in the current year.

* Due to the strong rand, Massmart expects its African operations to underperform over the short term (although those gradually improve towards its current year-end).