Retailers too pricey - analysts

Johannesburg - Analysts have downgraded South Africa's food retailers, after an investor buying spree which saw the sector's share prices rise dramatically over the past six months.

According to data collected by business data company McGregor BFA, broker consensus rates only Woolworths (both a food and clothing retailer) as a "buy". Both Shoprite and Pick n Pay are a "sell", while Spar is a "hold".

Most analysts have interpreted the surging interest in these counters as an expression that investors were regaining confidence in the retail stocks, while others have pointed to foreign investors as the main drivers in this buying spree.

But rising share prices have also sparked suggestions that retailers are currently expensive, relative to other shares in the market. Trading at premium multiples of up to 18 times, food retailers are considered the priciest.

Warren Buys, a portfolio manager at Cadiz Asset Management, said it was understandable that food retailers generally trade at premium multiples due to their defensive nature. He nevertheless found it hard to believe that local investors were seeing value in these shares in a falling food inflation environment.

He said the answer probably lies in speculation that foreigners bought the most shares.

"Our food retailers have historically traded at around 20% discount to other emerging market food retailers and are currently trading below this at around a 25% discount," said Buys. "This could be part of the reason why foreign managers would see some value in our food retailers."

Coronation Fund Managers' Quinton Ivan, another portfolio manager, agreed that signs of economic recovery triggered some investor confidence.

But he added that the revival pace remained largely uncertain. Because of this, investors still preferred defensive stocks which offer a degree of earning certainty - something which could explain the demand for food retailers.

"It's still very tough out there. There is a significant risk of earnings disappointment for many cyclical counters that were pushed, with the return of global risk appetite, in anticipation of a recovery in earnings," said Ivan.

He added there were other reasons investors were considering. Shoprite has generally performed exceptionally well throughout the recession, gaining market share and delivering good returns, he said.

Woolworths stands to benefit from last year's interest rates cuts, which increases the disposable income of its customers. Investors are also anticipating a strong earnings recovery off a low base.

- Fin24.com