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Retailers could have investors smiling again

Dec 04 2017 12:13
Schalk Louw

I recently cautioned investors against constantly swimming upstream in the investment world (Analysts predict more upside for the JSE, 16 October, see

It always makes me think of the joke about the man who was driving on the N1 highway when he suddenly got a call from his wife on his cellphone, warning him that she just heard on the radio that a motorist was driving in the wrong direction on the same highway, causing havoc with oncoming traffic.

He impatiently snapped that it wasn’t just one motorist, but hundreds of them driving in the wrong direction.

I don’t want to contradict myself in this column, but sometimes you have to swim upstream to find value.

In this case, I’m referring to the general retail sector listed on the JSE. I doubt whether you’ll find a more “upstream” view than what’s reflected in this sector, because while the FTSE/JSE All Share Index (Alsi) grew by more than 20% over the past 12 months (until 31 October), the retail sector managed to decrease by 4%.

Before I continue, however, I want to point out that there are quite a few good reasons why this sector is under severe pressure, ranging from the strong rise in the number of online retailers to the immense pressure placed on our local economy for several years.

While the retail sector’s returns declined, the fact remains that not unlike with the resources sector roughly two years ago, such negativity is often exaggerated.

This week I would like to look at a few reasons why this negativity may be exaggerated.

1. Valuations seem very reasonable

As from 1996, the general retail sector was trading at an average of 97% of the price-to-earnings ratio (P/E) of the JSE. It is currently trading at 72% of the JSE’s P/E.

These levels are quite interesting, because we’ve only seen them on three previous occasions since 1996: the 1998 correction, the great unrest in 2001 and the great correction of 2008. But it’s the expected forecasts that make this even more interesting.

By only looking at the five largest companies in this sector (Mr Price, Massmart, TFG, Truworths and Woolworths), you will see that analysts’ one-year expected P/E currently trades at 13 times compared to the JSE’s 21 times – roughly 35% cheaper than the average since 1996.  

2. Intrinsic values are looking very attractive

Most of the top five biggest retailers traded at a premium to their intrinsic value until 2015, but these valuations have since turned the other way, with these companies now trading at an average of 25% below their intrinsic valuations.

3. Return on equity

Despite the fact that the past 12 months certainly haven’t been kind to these companies, I do believe that they remain good-quality ventures.

Their average return on equity amounts to 27%, which will definitely train a magnifying glass on any further possible declines in share price movements.

4. Dividend yield

There will always be a strong attraction towards high dividend yields, and at an average dividend yield of 4.7%, the bell is definitely ringing.

I will be keeping a close eye on this figure for the next 12 to 18 months to make sure that they will be able to uphold these dividend payments, and if they do, it will be further proof that these are quality companies.

5. Even analysts remain optimistic

With Bloomberg’s 12-month consensus forecasts for the JSE currently trading at 5.5% expected growth, these five companies seem to have somewhat better prospects with forecasts indicating 9.5% expected growth.

Analysts are less optimistic about Mr Price, indicating negative expected growth, and if we exclude Mr Price from these figures, the average consensus growth for Massmart, TFG, Truworths and Woolworths amounts to an expected average of 14% growth for the next 12 months.

All things considered, the retail sector definitely doesn’t come without its risks. The South African economy is still struggling and the solution isn’t necessarily a quick fix.

I do think, however, that this sector’s prices were negatively influenced by the challenging economic environment and I believe that investors may slowly but surely start to add these shares to their portfolio shopping trolleys.

My personal preference is Woolworths, with TFG as a possible second choice.

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 30 November edition of finweek. Buy and download the magazine here.

massmart  |  tfg  |  retailers  |  woolworths  |  mr price