Retailers could have investors smiling again | Fin24
 
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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 http://bit.ly/2zSDraP).

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.  

3. Return on equity

4. Dividend yield

5. Even analysts remain optimistic



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
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