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Spar disappoints, Mr Price shines but consumers are hurting

Spar disappoints, Mr Price shines but consumers are hurting
The Finance Ghost
By The Finance Ghost
12 Jun 2022
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As inflationary pressures take hold in Europe, overshadowing Spar’s local performance, investors were left feeling let down this week as the retailer’s share price dropped another 4.5%.

Spar released incredibly important earnings on Wednesday, 8 June. After a nasty sell-off at the end of 2021, punters saw Spar as an interesting opportunity provided the underlying operating pressures could be relieved. Many (including me) put on a long position, hoping the issues in Poland would improve and that the rest of the business would show positive momentum.

Poland did improve, but only slightly. It remains significantly loss-making, with the reduced losses offset by major inflationary pressures in Spar’s other European businesses. Liquor division Tops did well locally and hardware division Build it was remarkably resilient. The core South African grocery business hummed along, as it tends to do.

The issues overseas overshadowed the local result and investors were left feeling disappointed, with the share price dropping another 4.5%. It has lost a quarter of its value in the past year. I got out of the way of this one with a small loss.

An equally important retail result was Mr Price, which reported headline earnings per share (HEPS) growth of 25.9% on a comparable 52-week basis. 

In addition to strategic acquisitions such as Power Fashion and Yuppiechef, the core business is resonating with customers as online sales grew 48.2% and contributed 2.9% of sales. Mr Price is second only to Takealot in online traffic market share among pure-play retailers.

The group’s prospects are interesting, with the R3.3-billion Studio 88 acquisition under way. An extensive store rollout is planned, carrying on where this financial period left off. There’s an underlying concern about consumer spending though, with the group warning that sales in May have been below expectations.

This concern isn’t unique to South Africa. Pepco, a Steinhoff subsidiary, noted in its interim results that western European markets are experiencing lower consumer spending because of inflation in a stagnant wage environment. This is a worrying read-through for retail property funds and consumer-facing businesses.

Dealing in deals


There’s a reason that it’s called a “cautionary” announcement on the JSE. Many don’t act with caution, taking speculative bets on whether a deal may fail on one hand or the price may be increased on the other. There are many ways to play that game and arbitrageurs quickly close the gap between the traded price and the offer price, with an allowance for time value of money.

There can be nasty surprises, as Hulamin shareholders learnt this week. After being a long way down the road with a potential offeror who had presented a satisfactory offer to the board and even completed a due diligence, Hulamin announced that things had fallen over. Having spent several years working in mergers and acquisitions, I can assure you that no deal is done until the cash has hit the bank.

The excuse used is concern about global uncertainty, which is broad enough and plausible. That didn’t cushion the blow for shareholders, as the share price plummeted more than 23% immediately and went on to lose a total of 33% of its value in just a few days.

In other deal news that caused a stir rather than fireworks, it emerged on Thursday, 9 June, that Remgro and MSC Mediterranean Shipping Company (yes, really) have made a play for Mediclinic. 

Remgro already holds 44.6% in Mediclinic and nobody is quite sure why the shipping company is part of this deal. The price of 463 pence presented on 26 May was considered too low by the Mediclinic board. Mediclinic traded 20% higher in the past month, which is a perfect example of people buying the rumour. As for where they heard the rumour, this is one of the great mysteries and frustrations in the market.

Is DStv going the way of the dinosaur?


MultiChoice Group is managing to trade on a dividend yield of about 4.3%, which is surprisingly low for a company that is struggling to grow. Subscriber numbers only grew 5% and the company has noted video entertainment as a threat. Obviously.

The return of live sport in this reporting period possibly helped boost subscriber growth. One thing we know for sure is that it caused a sharp increase in content costs, resulting in free cash flow decreasing 3% year-on-year.

DSTV has a business for as long as most households don’t have access to broadband internet. There’s also a strategic thrust in localised content, which constitutes 47% of total content spend. This is an important differentiator vs international streaming platforms.

Qualifying shareholders get to buy Phuthuma Nathi shares (the MultiChoice South Africa BBBEE scheme) and enjoy a much higher dividend yield from the South African DSTV business, as Phuthuma Nathi trades at such a discount to intrinsic value. 

For those who can’t buy into the BBBEE scheme (like me), I just avoid MultiChoice altogether. A 4.3% dividend yield doesn’t seem like enough for what seems like a sunset industry. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

A version of this story first appeared in our weekly DM168 newspaper, which is available countrywide for R25.



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