Asset management behemoth Ninety One expects retail majors Shoprite and Woolworths to beat earnings forecast this year and increase their market share, solidifying their already dominant positions.
Rehana Khan, portfolio manager at Ninety One — which owns stakes in both companies — said the two retailers are set to deliver high returns for shareholders this year, as the load-shedding of the past years recede, putting retailers on a strong footing.
Khan said the millions of rand that retail companies have spent in the past few years to keep the lights on is likely to be much lower this year, an outlook that bodes well for margins in the sector.
“There are multiple line items with regards to cost and gross margins in the holdings that we have, be it the likes of Woolworths and Shoprite, where we also think these companies are in a position to take market share in the areas that they play in,” Khan said in a webinar hosted by the company.
“Given that the market has downgraded the forecast so aggressively, it puts them in a position to actually beat those annual forecasts and deliver quite lucrative earnings growth in the year ahead.”
Shoprite, worth about R158bn on JSE, has been head and shoulders above its peers at navigating the challenges brought by rolling power cuts, which captains of industry have described as a “new normal”.
Shoprite’s USave and Pick ‘n Pay’s Boxer stores are fighting it out in the lower end of the market. Woolworths dominates the higher-end market but Shoprite’s Checkers is breathing down its neck.
Shoprite group sales for the 2023 financial year surged 16.9%, surpassing R200bn for the first time. The result was driven by performance in the core Supermarkets RSA segment — and Checkers and Checkers Hyper within that segment — which recorded sales growth of 18%, making Checkers the fastest-growing grocer in the SA premium food segment.
The group market share was up 1.4% in the year under review, representing 52 consecutive months of market share growth.
Woolworths last year announced capital expenditure of R10bn over the next three years as it seeks to bulk up margins.
Adaptability
Investment firm Anchor Capital hailed the adaptability of Shoprite.
“Some retailers were more effective in adapting to the changing conditions, a good example being Shoprite, which had the luxury to spend disproportionately on diesel and effectively capture market share at the expense of Pick n Pay and Spar, which, due to cash flow constraints, did not have the same luxury,” its investment team said in an asset allocation note.
Khan said the broader retail industry would fare much better this year, based on the interest rate outlook and the improving energy situation.
“More than 700,000 jobs were created in the SA economy last year. The consumer wallet therefore is set up for a better 2024 than 2023. The oil price which was a drag on the consumer wallet is starting to ease as well — that is no longer a headwind. Interest rate [cuts] are also coming — that also will ease the burden on the consumer wallet,” she said.
Anchor is playing wait-and-see regarding the mining sector. It said that as an investment house it gravitates towards higher-quality businesses, and uses the mining companies as an example of the type of businesses it tends to avoid in any meaningful size.
“The outcomes in 2023 demonstrated the reasons why. Simply stated, costs have been rising (many of which are dollar-denominated), and the commoditised top lines have come under pricing pressure,” it said.
“Locally, issues with Transnet rail and ports created further headaches for iron ore and coal mines, which could not export their full quota of mined production. We acknowledge the optionality in the basic materials sector, yet we have maintained cautious/underweight positioning, waiting for a turnaround in operating momentum before adding additional exposure.”
Coronation, one of SA’s largest asset managers with more than R600bn in assets under custody, has disinvested from the platinum group metals sector, questioning the long-term prospects of an industry that employs nearly 200,000 people.
Coronation estimates that platinum supply will continue to outstrip demand due to a rise in demand for green metals in response to the emergence of battery-electric vehicles (BEVs).
It said BEVs have been receiving huge government subsidies worldwide, and the pace of growth has been faster than was initially expected. It expects this surge to intensify.
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