THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY [INSER STUDENT’S NAME], A MASTERS IN FINANCE STUDENT
OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN
A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (PLEASE REFER TO THE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)
Page 1/31
MASTERS IN FINANCE
“Ramaphoria” South Africa is experiencing a drastic
increase in consumer and business confidence, as the current
regime leadership change from Jacob Zuma to Cyril Ramaphosa is
being perceived as extremely positive for the countries future.
“Africa Rising” Although Sub Saharan Africa as suffered
lower growth rates since 2014, rising commodity prices are bring a
rebound in growth. In the long run the continent continues to have
plenty of room for growth with a new front growth front being
opened in East Africa.
“South African Solid Cash Generation” Operations in
South Africa are expected to maintain current market share and
stable EBITDA margins, due to Shoprite’s competitive advantage
on pricing, which will result in a constant cash generation.
“Price & Choice“ Shoprite’s competitive pricing gives the
group an edge over its competition while, the variety of store
formats enable the group to take advantage of arising
opportunities, assuring the groups long term prospects.
Company description
Shoprite is the largest Food retailer in the African continent, with a presence in 15 countries and the bulk of its operations in South Africa. The company operates a wide portfolio of store formats in food retail, it also has a smaller operations selling furniture, a franchisee store format and other complementary retail stores.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
FOOD RETAIL 23 MAIO 2018
STUDENT: FILIPE LOURENÇO [email protected]
Betting on the African Shopper
Recommendation: HOLD
Vs Previous Recommend HOLD
Price Target FY18: 24.522 ZAR
Upside / Downside (%)
Price (as of 23-May-18) 23.071 ZAR
Reuters: SHP J.J, Bloomberg: SHP SJ
52-week range (ZAR) 28.190-19.320
Market Cap (ZAR Billion) 9.339.08
Outstanding Shares (m) 591338502
Source:
Source: Bloomberg
(Values in ZAR Millions) 2017 2018E 2019F
Revenues 141 B 156B 175B
EBITDA 9905 10986 12471
Net Profit 4502 5175 6001
EPS 7.61 8.75 10.15
Sales Growth(%) 8.44 10.62 12.46
Capex 4173 5496 5454
ROIC (%) 20.28 19.71 19.75
ROCE (%) 12.74 12.44 12.87
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Table of Contents
Company Overview ................................................................................. 3
Macro-Economic Analysis ...................................................................... 4
South Africa ......................................................................................................... 5
Angola, Nigeria & Zambia ................................................................................. 5
Kenya: Opening a new growth fronties ........................................................... 6
Food Retail Sector Analysis ................................................................... 7
South Africa ......................................................................................................... 7
Comparables ....................................................................................................... 8
Sub-Sahran-Africa .............................................................................................. 9
Shoprite Competitive Strategy ..............................................................11
Maintaining the Bottom of the pyramid while seizing the Top ................... 11
Expansion Going Long Term in Africa .......................................................... 13
Furniture segment ............................................................................................ 14
Forecast ..................................................................................................15
Other Items .............................................................................................19
Valuation .................................................................................................21
Valuation Peers ................................................................................................ 22
Capital structure ............................................................................................... 22
WACC ................................................................................................................ 22
Comparable analysis ....................................................................................... 24
Sensitivity Analysis .......................................................................................... 25
Scenario anlysis ............................................................................................... 25
Financial statements ..............................................................................26
Appendix ................................................................................................28
Disclosures and Disclaimer ..................................................................29
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Company overview
Company overview
Shoprite Holdings LTD is a South African retail group founded in 1979 with a core
focus on food retail and smaller retail operations focusing on complementary
retail and services, furniture and franchise offerings (figure 2). It is the largest
FMCG retailer in the African continent, in 2017 it had sales of 141 Billion ZAR, 33
distribution centres, and 2689 stores spread threw out 15 countries. The group
has a strong presence in South Africa with a 31.9% market share of major
supermarket sales and a clear price advantage over its competitors. In the rest of
SSA (sub-Saharan Africa) it has a fast growing presence, accounting for 19.6%
of supermarket sales, being a first mover among large supermarket chains. The
group has a portfolio of store models (figure 1), with a variety of offers that are
able to serve different income segments and retail markets.
In the food retail segment its brands include, Shoprite Supermarkets the group’s
main store format focused on middle lower income consumer, and the main
format used for its expansion outside South Africa, were it has a different
positioning as an aspirational brand for the growing middle class. A smaller
format Usave focuses on basic goods for lower class consumers. The Checkers
and checkers hyper is a supermarket format focused on upper income consumer.
The supermarket offering is complemented by a pharmacy offering mediRite,
Liquorshop offering alcoholic products, Hungry Lion a fast food chain and
Computicket a provider of ticketing services. These formats represent a much
smaller share of revenues but are essential for cross selling by increasing
shopping in the main supermarket formats.
The group currently has 388 franchised stores with a more adaptable format, also
focusing on food retailing present in South Africa Namibia and Swaziland.
On the furniture segment the group’s main store format is Ok furniture focusing
on a middle income consumer, Ok power express and Ok dreams are smaller
formats which focus on electric appliances and furniture offering. For a higher
income customer House & Home is used as an alternative format.
Other smaller businesses of the Group include Transpharma a wholesale
distributer of pharmaceutical products, checkers food services providing catering
services.
Figure 1: Different Shoprite Brands.
Soucre: Company Information
Figure 2: Percentage of sales by segment
Soucre: Company Information
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Shareholder structure & Payout policy
Shoprite went public in 1986 listing on the Johannesburg Stock exchange (JSE)
and since 2008 it has been part of the JSE top 40 index. The stock is both part of
the top 40 index and highly exposed to the South African and sub-Saharan
African economy, making it a good pick for investors looking for a South African
exposure (figure 3). Currently the largest shareholder of the company is its
founder and Chairman Christoffel Wiese. Christoffel Wiese position has chairman
in the group has become controversial recently since he was also chairman and
major Shareholder of Steinhoff international holdings. Steinhoff international
holdings was planning on merging with Shoprite a merger proposal in which
Christoffel Wiese played a central role. This merger was cancelled due to large
scale financial fraud on Steinhoff’s side putting in to question if Wiese was aware
of such a situation and if he willingly put Shoprites shareholders at risk. Other
major Shareholder includes the South African Government Employees pension
fund, institutional investors both national and international, and a smaller but
relevant shareholder is White Bassoon holding 1,52% of shares who was CEO of
the group for 37 years and retiring in 2016.(figure 4)
The group as consistent pay out policy with an average pay-out of 47.8% of net
income in the last five years (figure 5-6). Managing to maintain this pay-out by
having, stable cash generation, on its South African operations supplying more
than the necessary funds for its value creating expansion opportunities and
leaving a substantial amount to return to shareholders.
Macro-Economic Analysis
SSA (Sub Saharan Africa) as had a robust economic growth since the mid
1990´s with region’s economy growing at an average rate of 6.3% between 2001
and 2013, this was the result of political stability, improving business environment
and rising commodity prices. The two biggest components of this growth in GDP
have been infrastructure spending and private consumption. Private consumption
grew above GDP increasing its share of GDP from 66.9% in 2000-2006 to 70.7 in
2010-2013. The increase of both components was largely the consequence of an
increase in commodity export revenues. Since 2014 this growth trend as gone
down substantially with a drop in commodity prices (figure 7) showing the
economics overreliance on commodity exports. The drop in growth was uneven
being driven by resource intensive economies (figure8). The regions high
population growth, plentiful natural resources and current low base level of GDP
per capita mean that it has the potential to sustain previous high growth rates as
15%
2%3%
27%
53%
SHAREHOLDER BY COUNTRY
other Singapore
UK USA
South Africa
Shareholders Holding 1% or more
Wiese, CH 16,89 Government Employees Pension Fund 11,22
Shoprite Checkers (Pty) Ltd 5,91
Capital Group 4,07
Lazard 3,49
Vanguard 2,46
GIC Private Limited 2,33 Namibian Government Institutions Pension Fund 1,92
Oppenheimer Funds 2,11
BlackRock 1,91
Basson, JW 1,52
T. Rowe Price 1,49
Le Roux, JF 1,41
Government Pension Fund – Norway 1,41
Source: Company information.
Source: Company information.
Source: Company information.
Figure 3: Shareholder by Country
Figure 4: Major Shareholders
Figure 5: Total dividends
Source: Company information.
Figure 6: Payout-Ratio
Figure 5: Total dividends paid to Shareholders
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
PAGE 5/31
long as it is able to maintain the momentum of improving its institutional
environment.1
Currently SSA as a region is having a mild increase in regional growth from a
bottoming in 2016, in the two years it is projected to rise to 3.2% in 2018 and
3.5% in 2019. This improvement in growth is the being driven by currently rising
commodity prices and favourable global financing conditions. A general high debt
overhang combined with high dependence on external financing dims these
projections of economic growth.2 Currently there is a high fiscal deficit average of
4.4 %, a consequence of a decrease in revenues from commodity extraction
which has not been accompanied by a similar drop in government spending.
South Africa
In the last few years the South African economy has suffered anaemic growth,
high and rising unemployment (figure 9), high inequality, electricity shortages, a
deteriorating fiscal position and high level corruption scandals. In 2017 the
government suffered a sovereign credit downgrading to below investment grade.
Although the economic outlook has been bleak there seems to be a light at the
end of the tunnel, which has led to an improvement in business confidence
(figure 10). The current change in regime leadership of the ANC (main ruling
party) from Jacob Zuma to Cyril Ramaphosa is, seen as extremely positive both
internally with business and consumer confidence spiking and externally with a
strengthening of the rand (figure 11) and a rise in the JSE as investors view
positively the regime change. This improvements will be accompanied by a
favourable minerals market that increases the country’s export value.
Angola, Nigeria & Zambia
The groups 3 main markets outside South Africa were severely impacted by the
commodity crash, due to their economies high dependence on commodity
exports. Zambia being dependent on Copper, Angola and Nigeria being
dependent on Oil. The two Oil exporters are expected to recover in 2018 with the
rise in Oil prices, although both countries’ currencies are expected to suffer
further devaluations since the current official rates are not sustainable. Nigeria
will benefit from an improving investment confidence, a slowdown in inflation with
1 AFDB: Southern Africa Economic Outlook 2018 2 Africa Pulse World bank.
Source: Bloomberg
Source: IMF
Figure 9: SA Unemployment
Source: IMF.
Figure 10: SA Business Confidence
Figure 7: Commodity Prices
Figure 8: GDP growth rate by resource
intensity of economy.
Source: IMF
Source: IMF
Source: Bloomberg
Figure 11: USD/ZAR exchange rate
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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some uncertainty expected with elections in the second half of the year3.
Angola´s regime change in 2017 as been seen as positive, with shake up of the
political establishment and a request for non-financial assistance from the IMF to
implement reforms to diversify the economy away from oil. The high demand in
2018 for the countries issuing of Dollar bonds being a positive indicator of
external investor confidence in the country. Zambia’s economy is recovering in
2018 with better cooper prices and more favourable weather conditions
increasing the countries agriculture output, although the countries high debt
levels are worsening and fears of hidden debts are decreasing external investor
confidence in the country. The country’s fragile recovery and the relative high
competition in the food retail sector as means that Shoprite will decrease its
expansion in the country in the mid-term.4
Kenya: Opening a new growth frontier
Unlike the three Economies previously mentioned Kenya and the rest of east
Africa are not resource intensive economies, which have meant a stronger
economic growth since 2014. Kenya’s economy is expected to grow 5.6% in
2018 with 82% of this growth coming from services and 17% from industry. 5 The
nature of East Africa’s economies, makes it a good target for Shoprite’s
expansion as it reduces the company’s revenues exposure, to the commodity
dependent consumer markets outside South Africa. Currently the largest local
players in food retail in east Africa are going through financial difficulties due to
mismanagement, Nakumatt (the largest retailer in East Africa) is filing for
bankruptcy and Uchumi (second largest retailer) is going through a financial
restructuring. The distress situation of local players as motivated international
players to take advantage of the competition vacuum left, with Choppies,
Carrefour, Massmart and Shoprite entering the country. This year the company
plans to open 7 stores taking previous Nakumatt leases, including Nakumatts
largest store in the Westgate mall. Entering in to Kenya improves the prospects
of expansion in to other east African countries, since Kenyan players were also
the biggest players in this markets (figure 12). Possible expansion targets include
expanding Ugandan operations and re-entering Tanzania, were the company
previously sold its operations to Nakumatt.
3 Nigeria: Economic Outlook Top 10 themes for 2018. 4 AFDB Economic Outlook Zambia 5 AFDB economic Outlook Kenya
Figure 12: Nakumatt presence in Africa
Source: Nakumatt information
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Food Retail Sector Analysis
South Africa
The South African food retail sector differs greatly from the rest of sub-Saharan
Africa with the exception of Namibia and Botswana, being a much more mature
sector. The South African food retail sector is closer to developed economies
than to other sub Saharan markets in its characteristics, with modern food retail
taking the major share of the grocery market in the country. In 2017, 72.5% of
packaged food sold in physical stores was sold in modern retailers (Euromonitor)
a level closer to developed markets (figure 13). The market has a relative high
level of product quality expectations and a defined shopping culture current retail
trends in the country are similar to the ones happening in other developed
countries, with an increase in the demand for convenience and an early
appearance of online shopping.6 The modern food retail in the country is
consolidated and dominated by local players. Although the market is more
developed than other SSA countries there is still opportunity for higher growth
levels than in developed economies. Values of consumption of groceries per
capita is relatively low of 772 USD (current exchange) compared to developed
markets (Europe average 2502 USD) as the share of total retail taken by grocery
retail still relatively higher than in this markets (67% v.s ≈ 40%). Grocery store
area per capita is currently at 0.17 bellow developed and many emerging
markets (Figure 14). The growth of the market in the future will not be related to
increases in volume, but instead to the value of the food products consumed as
shoppers change their consumption habits with rising incomes. In the mid-term
term, South African consumer confidence has spiked drastically (figure 15), this
will translate in to increase in spending and a decrease in price sensitivity.
Spazas hold market share
The market share of traditional retailers in South Africa is lower than in other
emerging markets but resilient. In the past modern retail grew above the grocery
market as modern retailers captured market share from traditional retailers. This
momentum has been broken in the last two years; Traditional retailers have
managed to maintain their market share with an increase demand for more
localized stores, due to convenience, more customised offerings and an increase
6 AT kearny: Retail in Africa still the nex Big thing
Source: Euromonitor.
Source: Euromonitor.
Source: Bloomberg.
Figure 13: Packaged food sales by channel in different countries
Source: Euromonitor.
Figure 14: Meters square of Food retail store are per capita
Figure 15: Consumer confidence SA
Modern: > 500 sqm,
centralised chain, with own sourcing of products.
Traditional: < 500 sqm,
independently owned, products supplied by wholesalers.
Source: Euromonitor.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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in commuting cost. The lack of transport costs due to proximity along with the fact
that most traditional retailers do not pay taxes, give these players an advantage
against larger store formats. The Spaza (traditional South Africa corner store)
saw an increase in sales greater than supermarket store formats of 13.4% in
2017.7 This resilience shows that traditional retail is here to stay in the midterm
and that other complementary retail formats beyond supermarkets will be
essential to serve the South African consumer.
LSM evolution
A common measure to analyse the South African consumer is the LSM (living
Standard Measurement) a measurement developed South African Advertising
Research Foundation. This analyses divides consumer in to 10 groups by
ranking their different living conditions, such as housing, access to certain
products and services. The share of the total South African Population taken by
each of these groups, as changed over time, with the groups, 8 to10 (Checkers
focus) and 4 to 7 (Shoprite focus), both increasing their share by about 20%
while group 1 to 4 (Usave focus) dropped its share between 2008 and
2016(figure 16). This measure gives a better idea of demand for certain products
which could not be as well accessed by simply looking at the change in the
nominal values of income. The trend is central for Shoprite’s past and future
expansion strategy and the focus of its different formats (figure 17).
Comparables
The most direct comparable companies to Shoprite’s food retail business include
4 South African retailers (Massmart, Spas, Woolworths and Pick ´n´ Pay) and
one form Botswana (Choppies). The four mentioned South African retailer along
with Shoprite control more than half of the countries food retail market share and
more than two thirds of the modern retail market (figure 18). These companies
are the most comparable to Shoprite, since they operate in the South African
food retail market as direct competitors with some level of expansion in the rest
of Africa.
As it is the case of any comparative analysis, one as to take in to account the key
differences between the company in focus and the comparable chosen. For this
analysis we are only comparing the food retail business which makes up most of
the groups revenues. These companies differ in different ways. Woolworths has
7 Nielsen: Spazas Boost traditional trade surge in South Africa.
Source: SARF
Source: Company information
Source: Euromonitor.
2014 2015 2016 2017
Shoprite 17,3% 17,8% 18,5% 19,0%
Pick `n` Pay 13,1% 13,1% 13,4% 13,5%
SPAR 9,9% 10,0% 10,1% 10,3%
Massmart 8,1% 8,1% 8,1% 7,9%
Woolwoths 6,6% 6,7% 6,9% 6,9%
Source: Euro monitor.
Figure 16: SA Population according to LSM groups
Figure 17: Sales and lSM target
Source: Company information
Figure 18: Market share of Grocery retail market
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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a focus on the most upmarket segment of food retail, with an exposure to
Australia targeting mainly a different consumer segment. Spar and Pick ´n´ pay
targets a middle class consumer with a product offering that is similar to Shoprite,
with Pick´n´pay being the most comparable company. Spar is differentiated in its
structure operating as a partnership of independently owned stores. Choppies
the smaller of the comparable has less exposure to South Africa, with a wide
regional presence. The small player status is changing since it has been growing
aggressively with the acquisition of local chains in other African countries.
Massmart has a much larger component of non-food products and focuses on
wholesale retail (Makro) with 90% of its food sales being resold through
traditional retail formats. The presence of Massmart represents one of the
biggest competitive threat to Shoprite in the long run, since it is 52.4% owned by
Walmart, the world’s largest retail group. Walmart applies a similar competitive
pricing strategy to Shoprite, with a larger sourcing structure outside the continent.
Shoprite margins are currently above most of its competitors both gross and
EBITDA margins, maintaining a good sales growth relative to its already large
market share. The higher gross margins, are achieved through a highly efficient
centralised and integrated supply chain which reduces, the cost of goods sold
below competitors. The comparable which is clearly performing above Shoprite
and other competitors on margins and growth is Woolworths. The higher margins
are mainly due to a large share of revenues coming from clothing retail, but this is
not the full reason as its food retail division has gross margins of 25.1%.8
The higher food retail margins are a result of its focus in the niche high income
differentiation based food retail market (LSM 9 -10), were it the competition is
currently lower than in other segments. This market has grown faster than the
rest of the market, as the share of the total market taken by this niche market,
grows with rising incomes in South Africa, leading consumers to trade up in to
this niche of consumption.
Sub-Saharan-Africa
The rest of Sub-Saharan Africa is characterised by extremely low levels of
modern retail, a highly fragmented market, and extremely low level of grocery
consumption per capita, being the region with the least developed grocery
market in the world. The expansion of modern food retail in developing countries
has been attributed to more competitive pricing, higher convenience, product
diversity and quality. The penetration rate (yearly increase in share of total
8 Woolworths Annual report 2017
Source: IMF.
Figure 19: SSA real GDP per capita except South Africa
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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market) of the modern food retail format is driven by the following factors: The
growth of aggregate demand (increase in population and income per capita). The
level of income with lower income countries showing a higher penetration rate.
The share of working age population, as working individuals need more
convenient shopping, traditional retail tends to be more time consuming as all
products are not necessarily present in the same store. The improvement of
conditions necessary for a modern supply chain (e.g. regulation, infrastructure).9
All the mentioned drivers for the penetration of modern retail are highly positive in
SSA countries, creating the conditions for a high rate of penetration.
The GDP per capita in these markets is either Low-income (bellow 1,025 USD
per capita) or low-middle income (bellow 4,035 USD per capita) (figure 19). In
these markets price will be extremely important factor, with shoppers looking at
value for money trying to maximise their consumption with limited extremely
limited resources and therefore most gains in income will be converted in to the
consumption of food products.10 The growth in both incomes per capita and
population is expected to rise above world average after 2017(figure 20).11 What
is considered today the African middle class is about 35% of the population, (350
million people) compared to 27% in 1980, this number is controversial as it
considers consumers with an income above 2 USD a day with about 80% of this
sample being part of a fragile band with incomes between 2-4 USD.12
Above average increases in both SSA has a population of around 1 billion and is
predicted to reach 2 billion by mid-century (figure 21) with an annual average
growth rate (2.2%) the world’s highest regional rate. This growing population will
be migrating to cities, with urbanization level expected to rise from around 38% to
55% by mid-century (figure 22), with an annual average growth rate of 3.3%. The
high urbanization levels will be beneficial for modern forms of retail, were modern
supply chains are easier to introduce, and due to the high consumer numbers
which provides scale for larger store formats. The segment of working age
population (25-64 years), is the fastest growing segment of the population, with
an increase from 33.3% of the total population in 1980 to 36.5% in 2015.13
Further integration of the African continent both by improvement in infrastructure
and reduction of regional tariffs with the future implementation of the African
9 The expansion of Modern Grocery retailing and trade in Developing Countries, Sharad Tandon, Maurice R. landes,
Andrea Woolverton 2011. 10 The Demand for Food and Calories Shankar Subramanian and Angus Deaton. 1996 11 IMF World Economic Outlook April 2018. 12 The Rise of a Middle Class in East and Southern Africa: Implications for Food System Transformation, David T
Schirley, Thomas Reardon, Michael Dolislager, Jason Snyder. 13 UNFPA: The Demographic Profile of African Countries
Source: UN statistics.
Source: UN statistics.
Figure 20: Population Growth SSA, SSA (urban) and World
Figure 21: SSA Population
Figure 22: SSA Urbanization level
Source: UN statistics.
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Continental Free Trade Area, will substantially benefit Pan African players
allowing for the improvement of supply chain efficiency.
The current total grocery market size for the African continent is estimated to be
about 125 billion USD in 2017.14
Modern retailers in Africa
Currently most modern South African retailers are present on multiple countries
on the continent, with the largest presence after Shoprite (figure 23) being Pick´n
Pay (figure 24). Other modern food retailers present in the continent include
French retailers such as Casino and Carrefour in francophone Africa, and single
country local players. Carrefour has plans to increase its expansion in to Africa
through its middle east Franchise partner Majid Al Futtaim.
Shoprite competitive strategy
Maintaining the bottom of the pyramid while seizing
the top.
Shoprite supermarkets and Usave´s big competitive advantage has been based
on pricing, consistently having the lowest price among food retailers. In February
2018, it had the second lowest prices according to South African consumer
protection group Retail price watch, the first place was taken by a wholesaler
(Makro), a retail format which is not directly comparable(figure 25). The
consistent low prices have made it the supermarket of choice for middle to lower
income groups, which have a higher price sensitivity. According to the 2015
SACSI (South African customer satisfaction index reports) 47% of respondents
said that they would be willing to change their current supermarket for a drop in
price of 5% or less. This price strategy has been particularly successful in recent
year in a weak economic environment with low consumer confidence. The
company measures its price performance by comparing general food inflation to
its internal inflation (price increase of similar food basket), being able to
consistently maintain its internal inflation below the general level (figure 26).
Shoprite has been able to maintain price competitiveness in the sector through
an optimised supply chain and a strong bargaining power against local and
international suppliers. The companies bargaining power comes from the high
14 Shifting Market Frontiers: Africa Rising (Euro monitor International)
Source: Pick ´n` Pay Annual report.
Source: Sotuh Africa Retail price watch.
Source: Company information
nformation.
Source: Sotuh Africa Retail price
watch.
Figure 24: Pick ´n` Pay Locations
Figure 23: Shoprite Locations
Figure 25: Price of top brands basquet in different supermarkets
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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volumes it sells due to its position as the largest supermarket chain in Africa. The
groups Supply chain makes use of large centralised distribution centres, a fully
owned fleet and the latest stock management software, in order to attain high
levels of cost efficiency.
Lately the group has taken on new measures to maintain this price
competitiveness such as new seasonal discount strategies (e.g. Black Friday)
and increasing its private label brands. Shoprite private label brands currently
represents 14% of products compared to global industry average of 18%
(Nielsen). Having a larger private brands portfolio the group gains bargaining
power over producers and therefore lower prices. Currently the group has two
lines of private label brands Ritebrand a budget offering and checker choice a
premium offering.
In order to maintain and grow market share of the South Africa food retail Market
Shoprite will increase its focus on upper income (LSM 8-10) consumers. The
strategy is driven by two factors. These factors are that it has a much lower
market share in this segment, and this segment is expected to grow faster in
relative terms, than the growth of the middle class sector (LSM 4-7). 15 Checker
being positioning for higher income consumers is central to this strategy, in the
past it was differentiated in this sector by fair pricing. Currently it is improving its
offering in order to change the quality perception, focusing on fresh products and
product innovation. This strategy targets the high margins, higher end consumer
niche market, currently dominated by Woolworths. The company reported that
2017´s market share gain equivalent to nearly 1, 5 Billion in rand was attributed
to gaining market share in this segment. According to the sales projections
estimates, the Market Share which Shoprite has of the total Modern food retail
Market, would rise according from 19.4% in 2017 to 22.8% in 2023.
15 PWC: South African retail and consumer products outlook 2012-2016
Higher Sales Volume
More Scale:
-higher supply chain usage.
-More Barganing power.
Lower costs per unit.
Lower price, advantage
over competitors.
Source: Statistics SA and Company information.
Competitive Pricing strategy, Positive
Feedback loop.
Figure 26: Internal Inflation v.s SA Food inflation
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Other segements
In order to counter localized traditional retailers, the group as improved its
franchisee offering which is a store format more able to compete directly with
these traders or convert them in to franchisees. The group is planning on
increasing the expansion of this network (figure 27), improving the conditions
which franchisees receive (fees paid, marketing), to increase the profitability of
Franchisees. This strategy is focused on increasing volume and market share
(that other formats cannot reach) instead of a focus on the margins generated by
this segment. The complementary offers of the group will be essential for cross
selling generating sales in its core food retail business, in taking advantage of the
increase in disposable income in the rest on the continent and increasing
margins as this businesses have higher margins than the core food retail
business.
Expansion: Going long term in Africa
Shoprite has had a presence outside South Africa since 1990. Most of the
expansion has been focused on the Shoprite supermarket store format, more
appropriate for the low income African consumer (figure 28). The expansion
outside South Africa has not been without setbacks, with reversals of country
expansion, however the early presence of Shoprite in this markets, gave the
group valuable know-how to operate in these markets. In a current scenario of
increasing competition, as other modern retail player attempt to expand to the
rest of SSA, Shoprite will have the upper hand over its competitors, due to the
know how it has gained and the distribution infrastructure it has set up across the
region. Since 2014 this division has suffered from sudden currency devaluation
(figure 29) and a steep drop in consumer demand, due to the slow economic
performance in these markets. However it has managed to maintain a positive
like-for-like growth most years except 2015. Nigeria, Angola represent the
majority of the groups’ revenues from outside South Africa, and were economies
particularly hard hit by the drop in crude oil prices.
The difficulties in trading during this period were used by Shoprite has a means
to gain market share, maintaining its supermarkets supplied in countries with
foreign currency restrictions. This was made possible by paying imports with
group funds external to these divisions something which local players are unable
to do, developing local souring and entering in to agro-business joint ventures in
this countries. The import payment strategy has increased the groups risk
exposure to these currencies but on the positive side it has increased market
Figure 27: Franchise Stores
Source: Company information and analyst estimates
Figure 28: Shoprite Supermarkets
Outside South Africa
Source: Company information.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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share and customer loyalty. The group has further invested in the efficiency of its
operations outside South Africa by opening in 2017 two distribution centres
Angola and purchasing one in Nigeria.
The group applies a strategy of continuous search for new markets to enter,
entering the East African market this year. The group is expected to enter new
countries in the mid-term as SAA region, continues to provide future opportunities
for expansion.
Outside Africa the group continues to search for opportunities of expansion
outside the continent in other emerging markets, previously it expanded to India
on a franchisee model in 2004, being unsuccessful. An expansion to Eastern
Europe was contemplated in 2017; however this expansion was dependent on
taking advantage of Steinhoff internationals presence and know how in the
region. Since plans to merge with Steinhoff have been cancelled such an
expansion is highly unlikely.
Furniture segment
The South African Furniture market is extremely competitive putting pressure on
margins of companies operating in the sector. The weak economic performance
of the last few years as meant a low growth in disposable income. Since 2009 the
nominal size of the furniture market has grown at 5,4% annual rate (figure 30) , if
one accounts for inflation there was virtually growth during the period. The
market for Home furnisher in South Africa is expected to have a negative growth
of 1.9% a year from 2017-2022 (Euromonitor international). This scenario could
be slightly improved by the current increase in consumer confidence in South
Africa. The market in the rest of Africa is characterised by a faster growth levels,
as the region is expected to have the fastest growth of disposables income in the
globally in the next decade with expectations of 9% CAGR in disposable income
until 2030 (Euromonitor international) more than twice the rate of real GDP
growth.
Shoprite position itself in this market for both lower and upper income
consumers, with the main focus on lower income consumers “ok Furniture”,
selling competitive pricing products, which include furniture, home furnishing and
home appliances, on cash and credit.
The upper income focus division “House & Home” is going through stagnated
same store sales, which makes the future of the division uncertain. The South
African operations have sold loss making stores and are expected to limit
expansion due to though market conditions, with no expansion plans in the mid-
Source: Euro Monitor.
Figure 30: SA furniture Market.
Figure 29: Nigerian Naira and Angolan Kwanza, exchange rate for ZAR indexed
base year 2014.
Source: Bloomberg.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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term. In the rest of Africa, sales growth has been strong with growth 14.4% in
2017. The group is planning on increasing its expansion in the markets outside
South Africa with a particular focus on Angola to compensate for the loss of
growth in South Africa.
Forecast
Sales Drivers
In order to forecast Shoprite revenues we need identify the main revenue drivers.
Being a retailer Shoprite´s revenues are defined by the amount of sales
generated, in the store area it operates. Therefore sales growth will be defined by
the growth in store area and the growth in sales per area unit (figure 31/32). This
approach in analysing sales has to take in to account that the two mentioned
variables are not independent of each other, and therefore adjustments need to
be made. The increase in store area can affect the sales of the previously
established store, taking market share and therefore cannibalising sales. The
second factor which as to be taken in to account is that new stores will not sell at
the same rate as previously established stores on the first year. New stores take
some time to establish a stable customer base, as customer changes their
previous consumption habits. The rate of sales achieved in the first year
compared to established stores, is known as the stores conversion ratio.
For the case of Shoprite cannibalisation will not have a materially relevant effect.
In the South African Market the current retail store space per capita is 0.17 sqm,
bellow developed markets (average 0.52 sqm) meaning that there is still future
possibility for growth in store area without a strong cannibalisation. The average
past store conversion rate for Shoprite supermarkets in South Africa is about
73%. For markets outside South Africa it is about 100%, since these markets are
underserved by modern retail the format, meaning that customers switch their
consumption at a faster rate. Knowing the conversion rates we can project future
sales by defining the growth rate of the store area and the growth in like-for-
like/same store sales (the rate of sales growth in stores that were operating in the
previous year).
When using the mentioned drivers to forecast sales growth, we make a separate
analysis for the different revenue sources of the group (figure 33).
Figure 31: Supermarket SA growth
composition
Figure 32: Furniture growth composition
Figure 33: Percentage of total revenue by sources
Source: Company information and
analyst estimates.
Source: Analysts estimates.
Source: Analysts estimates.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Sales projections
The growth rate of store area is assumed to stay similar to the previous years as
South Africa has comparatively low levels of store area per capita, the rest of
SSA is extremely underserved by modern retail meaning that there is room to
maintain the current rate of expansion. The expansion forecasted is based on
organic growth. In the past the group grew its store area through an acquisitive
strategy, buying checkers in 1991 and OK bazars in 1997 from SA breweries,
these acquisitions were not made with the sole intent of speeding up expansion
but to also enter new formats and markets in which the group was not present
previously, currently the group has no plans of acquisitive growth planning to
maintain an organic growth expansion strategy.
In South Africa it is assume that checkers the openings will grow at 125% of the
past growth rate and Shoprite openings at 70%. This assumption is made to
reflect the company focusing, its expansion increasingly on its Checkers model
as this market segment is expected to grow faster than Shoprite’s. With rising
incomes current Shoprite shoppers will trade up their shopping to a Checkers
offer (Figure 34).
In order to project like-for-like sales one needs to compare previous growth of the
South African modern food retail market in relation to Shoprite’s sales.
In the past these sales have grown on average 0.95% below the market while
this market has grown 0.92% above GDP. From 2018 to 2022, Euro monitor
projections are used to access the size of the Modern Grocery market in South
Africa (figure 35). These projections are in constant prices; therefore we inflate
the values with the projected CPI as a proxy for food inflation, and maintaining
the same gap going forward of 0.95% below market. From 2023 only GDP
projections are available we project like-for-like sales in relation to GDP
maintaining these gaps in growth (-0.55%). Food inflation in South Africa has
been particularly volatile, since there is an assumption of the same inflation as
CPI for food due to lack of projections, this could substantially affect the
predictions going forward (figure 36).
For the rest of Africa there is no data about past growth of the modern food retail
market, or the grocery market. Shoprite’s previous like-for-like sales growth
outside South Africa in rand terms is extremely volatile with no clear pattern and
no information of like-for-like in local currencies. As mentioned at the current low
levels of income most of per capita gains in income will be converted, mainly to
grocery consumption. The increase in total grocery consumption, along with the
gains in market share of Modern retail, makes it is reasonable to assume that the
modern grocery market is going to growth above nominal GDP, as this is the
Source: Euromonitor.
Source: SA statistics.
Source: Company information and
analysts’ estimates.
Figure 34: Checker stores as a percentage of
store area.
Figure 35: Modern Grocery Market South Africa
Figure 36: CPI & Food Inflation in South Africa
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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case in other more developed emerging markets (e.g South Africa). Since most
modern retail is localized in urban areas we have to take in to account the
increase of urban population above general population growth. With these
limitations we assume Shoprite’s like-for-like sales increase in Rand terms is
equal to real GDP growth in these markets (lower competition will mean that it is
able to gain most of this increase unlike South Africa), plus the increase in urban
population above general population, adding rand inflation to this growth level. A
more accurate prediction would take in to account different currencies sales and
project the specific exchange of these currencies exchange rate against the rand.
Such predictions would lack accuracy and would be impractical, because of the
high volatility of these currencies, and high double digit inflation levels. South
Africa having the lowest inflation, out of the countries were the group operates,
has a moderately high 5,4% inflation rate. Therefore we assume the real increase
in the value of sales and add the rand inflation. The inflation differential between
South Africa and other African countries will influence the exchange rate long-
term trend, adjusting the rand values of sales accordingly. The faster growth of
Supermarkets outside South Africa will mean that the segments percentage of
total revenue will increase from 17.6% in 2017 to 24.3% in 2018(figure 37).
Expenses
The expense structure of the group is composed of cost of sales and operating
expenses which are fixed costs mainly related to operating the store units,
distribution centres, transporting merchandise, administrative costs and in this
particular case operating leasing costs, related to store rentals. The main variable
COGS is most likely to stay flat as it has in the past, since the groups supply
chain is already highly optimised above competitor’s levels, with further gains
being unlikely. The slight decrease of this cost in 2016 is the result of a
restatement of expenses and not an improvement of gross margin (Figure 38).
For most operating expenses the same ratio in relation to sales is maintained,
with the exception of lease expenses and depreciation which is directly
dependent on the number of stores projected and the average past defined
annual escalation of lease payments. Certain items will be largely dependent on
the expansion of stores but the historical increase in operating cost above
inflation(Figure 39), means that estimating such cost based on store area and
inflation would underestimate their future values. Instead the constant ratio of
these expenses in relation to sales is used in order to forecast future values. Cost
which the increased has been particularly pronounced above inflation in previous
years, were security costs, water, maintenance and electricity which suffered the
Source: Company Information.
Source: SA statistics
Source: Company information
Figure 38: Shoprite Gross margin
Figure 39: Modern Grocery Market SA.
Figure 37: Forecast of sales by
segment
Source: Company information and
analysts estimates
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
PAGE 18/31
effects of ESKOM (South Africa Electric public utility) electric production
mismanagement.
EBITDA Margin
Shoprite has managed to maintain an EBITDA margin above 7% in the last 5
years(figure 40). The current margin is above its peer’s average (5.53%) and
above all its direct competitors with the exception of Woolworths which has a
margin above 12%. In the future there will be pressures both upwards and
downwards, we project the margin to remain stable with a slight increase, caused
by a decrease in the cost of operating leases in relation to sales. Possible
upward pressure on margins will be the increase in the share of checkers sales
and the improvement of efficiency in operations outside South Africa with new
DC´s, impacting gross margins in these markets. The Downward pressure will
come from a continuation of the increase in operating expenses above inflation.
In a scenario were the upward pressures are greater than the increase in
Operating expenses, an increase in margin would be capped by competition.
Currently margins are already high compared to both global and local average
(5.53%/5.66%) higher margins would turn the sector extremely attractive,
bringing new entrants in to the market. A similar dynamic is happening already in
the market; with Shoprite increasing its expansion in to the high income market,
which Woolworths dominates, attracted by the high margins in this market. In a
scenario of increasing competition margins would suffer as Shoprite would
convert its margins gains in to lower prices for consumers in order to maintain
market share through price advantage.
Capex
Shoprite´s Capex is divided in to 5 main items, Land Building & leasehold
improvements, Refurbishing, New stores, information technology and other
replacements (figure 42).
Land Buildings & leasehold improvements, include developments of stores in
areas where there are no available parties willing to invest, purchasing of land in
strategic areas for development and expenses with store properties the group
leases. This expense is greatly reduced for Shoprite has it does not own most of
its stores leasing them instead. The other items include equipping new stores,
refurbishing old ones. Investment in intangible assets include investments in
software mainly, in merchandise management systems, central stock ledger
Source: Company information and
analyst estimates.
Figure 40: Shoprite EBITDA margin
Figure 41: Total Supermarket area
Source: Company information and
analyst estimates.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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system, which are essential to maintain the groups supply chain efficiency,
translating in to competitiveness in the cost of its products. These IT investments
are winding down in 2018 with major updates in 2016 and 2017 meaning that
2015 ratios used to project capex going forward.
Other replacements include a variety of items that are not included in the
previous categories, such as office equipment, furniture and equipment in
distribution centres, these values will also be kept at 2015 ratios, due to the
decrease in the rate of expansion of the distribution network.
Capex will be driven mainly by the size and increase of store area (figure 41),
therefore in order to project capex expenses we assume a similar ratio between
capex and the increase in store area or total store area going forward (the
suitable for each item) increasing this rate according to ZAR inflation.
Net working Capital
The groups NWC efficiency has deteriorated in the last few years. Inventory days
have increased from 56 in 2015 to above 60 mainly due to stock clearance
issues, in its operations outside South Africa and short term increase due
stocking of new distribution centres, since the area of distribution centres has
been growing above sales due to the groups push to maintain price
competitiveness. Going forward this position will tend to improve substantially
(Figure 43), as the group decreases the rate at which it is expanding its
distribution network. New distribution centres increase stock once they open, but
in the following periods increase efficiency in stock management decreases
inventory needs of individual stores. For operations outside South Africa, stock
management is expected to improve. Stock clearing issues caused by lack of
reserves are expected to improve with easing of forex restrictions, and the
opening of distribution centres in Angola and Nigeria are going to substantially
increase inventory management efficiency in what accounts to more than half of
sales outside South Africa. This improvement is already being seen with a drop in
stocks in January 2018 in comparison to the previous year. Other networking
capital items are expected to stay as a similar ratio of sales going forward, as
there is no indication of future change in days payable or receivables.
Other Items
Forex volatility and restrictions
Source: Company information and
analyst estimates.
Figure 43: Total Size of inventory in relation to required days of sales
Source: analyst estimates.
Figure 42: Capex by category in ZAR millions
Source: Company information and
analyst estimates.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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With operations in 15 different countries forex volatility tends to have quite a large
impact on the results of Shoprite’s foreign operations in ZAR terms. This volatility
has been quite high in recent years particularly in its 3 largest markets. In order
to hedge the risk of currency volatility the group prepays all its foreign suppliers
and keeps the minimum cash required for its operations in local currencies
outside South Africa converting all excess cash in to USD, since it is an highly
liquid and stable currency.
The group also had to deal with local exchange controls in Angola and Nigeria,
being forced to keep its cash in local currency. The operations in these countries
are in expansion with the local capex needs being greater than the cash
generated; therefore these restrictions do not cause substantial problems in the
allocation of funds. The restrictions however have an impact in the increase of
the group’s exposure to local currency risk. In order to mitigate the risk of
currency devaluation in Angolan Kwanzas the group currently holds 1311 million
ZAR in Angolan Government bonds which are paid in Kwanza with its payments
indexed to the USD. The bonds are a hedging strategy which substantially
exposes the company to Angola Sovereign risk, but the only viable option to
hedge Kwanza currency risk.
Excess cash
Shoprite will tend to have a constant amount of excess cash due to the nature of
the FMCG business, which tend to have a negative cash conversion cycle. This
amount of cash is generated due to the difference between, the numbers of days
required to pay supplier (around 60 days for Shoprite) compared to the number of
days it takes to convert inventories in to cash, when the latter period is smaller
the company generates a negative cash cycle maintaining a constant amount of
excess cash. For Shoprite the effect in 2017 was positive as days of inventory
sales increased to 60 days. The possibility of a temporary increase in inventory
days and other unforeseeable operating cash necessities requires the company
to keep 2.5% of sales as operating cash, 0.5% above the necessity for a retail
company, due to the lack of access to liquidity in SSA markets.
Operating leases
Shoprite does not own the majority of its stores leasing them from lessor partners
(REITS, private investors) instead; such an arrangement means drastically
decreases the company’s capital necessity. These leases give some flexibility to
the company in relating to divesting from certain areas, but with limitations since
Figure 44: Capital employed
Source: Company information and
analyst estimates.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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most lease agreements are made between 1-5 years. The lease commitments
could be compared to debt since they share similar characteristics as fixed tax
deductible financial obligations paid despite performance.
Therefore we analyse the impact of using operating leases instead of acquiring
these properties through debt financing. The current yield on retail real estate in
Africa is on average of 10.2% between a low 9% (South Africa) to 17% (Angola).
We access the value of these retail properties by dividing the lease payments by
the average yield.16 In this case the leverage of the company increases
considerable compared to its peers with the Net Debt/Enterprise value rising,
from a low 2.3% to a ratio of 24.1% above its peer’s average. The group’s ROIC
adjusting its Noplat, according to the increase in depreciation expenses and
removing lease expenses, drops substantially to 15.7%. The WACC also drops
with the increase in financial leverage to 9.99%. In both case the company is
creating value however using leases the company manages to greatly increase
its ROIC.
Valuation
Based on the DCF valuation performed for Shoprite holdings, the forecasted
share price is 251.59 ZAR. This value is accesses by the value of the Enterprise
deducting debt, summing Non-operating assets and summing 2018 dividends
which will be substantial (9% of equity value) as the company adjusts its net debt
to the optimum level, issuing debt and paying the excess cash. The final target
price will be a weighted of the DCF of the base scenario and the negative
scenario (85%/15%), giving us a final value of 245.22 ZAR per share. The current
price and expected dividend yield (2.23% year, past average yield) will represent
a gain of compared to the price estimate FY 2018 of 3.97% which (6.8%
annualised) which would represent a hold recommendation.
Previously the share price of the company had performance in USD above both
its direct competitors and the MSCI world index, since November of 2004 until
April 2018, with a yearly CAGR of 20.19%, considerable bellow the estimated
cost of equity (figure 45).
16 Africa report Knight Frank 2017/2018
2016 2017 2018 2019 2020 2021 2022 2023
ROIC 25.1% 20.8% 19.7% 19.5% 21.8% 23.2% 24.3% 25.0%
ROIC without using operating leases 17.6% 15.7% 15.2% 15.4% 16.3% 16.8% 17.3% 17.6%
Figure 45: Capital gains of stock against MSCI world and direct competitors.
Source: Bloomberg.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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The most correct way to Value Shoprite would be a sum of the parts method,
taking in to account the value of the different segments, since each segment has
a different WACC different capex needs and different growth rates. The company
presents limited information on each segment with no description of the split by
segment in, operating expenses, gross margins, capex and investment in NWC.
Due to the lack of information a DCF analysis is done of the consolidated
accounts, instead of each segment.
Valuatio peers
For a broader comparable analysis, the estimation of equity betas and the
optimum capital structure 12 food retailers were chosen that have a substantial
exposure to emerging markets. The exposure to emerging markets was used as
selection criteria due to similarity of markets aspects such as a higher growth of
the food retail market, lower share of Modern retail in the grocery market, and
less food retail store area per capita. In order to analyse the Furniture division 4
furniture retailers are used in this case the sample available, was much smaller.
Capital sturcutre
Currently Shoprite holds a particularly low Debt to Enterprise value of 2.3%,
being mainly financed with equity; however it does take advantage of operational
leverage due to its extensive use of operating leases to finance its stores. Fort its
peers the average D/EV is around 12%, for its African competitors it is around
7% a consequence of higher costs of debt and access to credit in Southern Africa
compared to other regions of the globe. For valuation purposes we assume an
optimal capital structure equivalent to its African competitors as the groups
financing conditions will be closer to its African competitors.
WACC
The WACC of the company will have to take in to account the cost of capital of
the different segments in which the company operates, since there can be
differences in both the cost of its equity and the optimum capital structure. The
South African food retail segment, the food retail segment in SSA, and other
segments (mainly franchisees) are assumed to have the same WACC (figure 48)
with a different WACC for the furniture segment (figure 47). Therefore our
company WACC will be weighted average according to revenues, with around
3.85% weight for furniture and around for food retail 96.15% (figure46).
Figure 46: WACC Company
Figure 47: WACC Furniture segment
Figure 48: WACC Food retail Segments
WACC
Shoprite
Holdings
Levered Beta 0.96
E/EV 93.2%
Taxes 28.0%
Risk free 6.4%
RE 11.0%
RD 7.9%
WACC 10.7%
WACC
furniture
Levered Beta 0.99
E/EV 99.2%
Taxes 28.0%
Risk free 6.4%
RE 11.2%
RD 7.9%
WACC 11.1%
WACC Food
Retail
Levered Beta 0.96
E/EV 93.0%
Taxes 28.0%
Risk free 6.43%
RE 11.0%
RD 7.9%
WACC 10.7%
Source: Analyst estimate.
Source: Analyst estimate.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Cost of Equity and Risk free
In order to analyse the cost of Equity for Shoprite Holdings we measure the
systematic risk, of Shoprite global comparable emerging market food retailers
and furniture retailers, against the MSCI world index. We define the sector Beta
by regressing the excess dollar returns of the index against the excess dollar
returns of the comparable. We analyse the returns in USD because USA
investors represent the biggest foreign investors in Shoprite with a 27% share of
equity and the USD is the most widely used global reserve currency, therefore
the currency in which the global investor will use to benchmark his returns. Once
we have the Beta of the comparable, we unlevered each beta according to the
each company’s specific capital structure. The average unlevered beta is
releveled according to the optimum regional Equity/Enterprise value ratio. The
levered Beta for food retail segments is 0.9637 while the levered beta for
furniture is 0.9947. The sample used for the regression is, daily returns from
2014 till February 2018. Daily returns were used has regressions have a low P-
value comfortably rejecting the null hypothesis and the sample had the lowest
variation in the beta value. The highest and lowest beta for a 95% confidence
interval varies considerably between 1.12 and 0.8 for the company. Having a
considerable impact on the valuation and changing the current recommendation
in each extreme.
The market risk premium assumed is the excess returns of the MSCI in dollars
over the same period (4.78%). Since we are valuing our results in ZAR (South
African Rands) we need to take in to consideration the difference in inflation in
comparison to the USD, therefore we use a ZAR risk free rate. In order to
calculate the ZAR risk free rate we add the inflation differential to the US 10 year
treasury yield.
Cost of Debt
Shoprite being a company with a relatively low level of debt has publicly traded
bonds, with its debt being composed mainly of unsecured bank loans in ZAR and
USD (the company holds hedging instruments for these loans), with varying
interest rates ranging from 1.82% to 10.78%, according to country, currency and
the conditions on the loans. Previously the group had most of its debt as
convertible bonds (4655 ZAR million, 2016), these bonds were fully converted in
to equity in 2017.
Shoprite Beta
Beta 0.96
Share price 25159
Change in price 0%
Lower (95%)
Beta 0.80
Share price 29731
Change in price 18%
Upper (95%)
Beta 1.12
Share price 21795
Change in price -27%
Figure 49: Levered Betas
Source: Bloomberg. Source: Analyst estimates.
Source: Analyst estimate.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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To evaluate the cost of debt for Shoprite we need to know the current yield
according to the company ratting. The group is not rated by any global credit
rating agency however the local currency Blomberg rating (no major rating
agency gives a rating to the company) is of A1, above the current South African
sovereign rating of Baa3. Due to the high exposure to the country we assume
that there is a sovereign debt ceiling therefore the yield is assumed to be the
same as the South African Government bond. The cost of debt will be the yield
subtracting the credit loss rate (probability of default (1.29%) multiplied by the
loss given default (37%)).17
Terminal value & Perpetual Growth
The DCF valuation as an explicit forecast period from 2018 until 2023, a period
which is reasonable to predict the evolution of the company and which the similar
competition and market dynamics will be maintained, after this period a terminal
valued is considered. The growth of this terminal value will be ZAR inflation since
growth of sales in the South African market sales will trend towards food inflation.
The average ROIC of the three final years was 24.1% meaning that the group will
need an investment rate of 22.74%.
Comparable analysis
To evaluate how Shoprite is being valued in the market, compared to companies
with similar characteristics, we analyse its multiples against comparable
multiples. The two chosen multiples are EV/EBITDA and EV/Sales, as they are
the two most relevant multiples to analyse the valuation of a retail company. On a
fist analysis Shoprite is overvalued compared to its peers having a higher than
average number for both multiples, however we have to consider the differences
in the company that could lead to these differences. For the EV/EBITDA multiple,
there is a need to take in to account the 3 years average growth of sales. This
average is inflated by an outlier from the sample which is Choppies enterprises
with 78.2% growth in sales, if one removes this outlier the growth drops to 8.5%
below the current 8.7% for Shoprite, a higher growth number leads to a higher
multiple all else remaining equal. In the case of EV/Sales multiple Shoprite is
substantially above average (0.8 vs 0.55) one explanation for this is the above
average EBITDA margin (7.03% vs 5.53%) meaning that the company is able to
convert a larger share of its sales to earnings.
17 Moodys corporate Default and recovery rates
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Sensitivity analysis
We analyse the current impact of a change in WACC and terminal value on the
value of the shares. In this analysis we have to take in to account that a change
in the terminal value could have an impact in WACC as both values are affect by
ZAR inflation. The WACC is increased and decreased by an absolute value of up
to 1.5%, and the terminal value by an absolute value of up to 1%. This analysis
shows a high sensitivity of the share value towards the two variables, in red are
the values below the current share price wile in green are above.
Scenario Analysis
The main scenario changes that could greatly affect our analysis would be a
change in the economic performance of the continent or in the social stability of
South Africa. In the case of social instability in South Africa caused by high
income inequality and high unemployment, the impact would be negative but
extremely uncertain. Different political and social changes could happen with
impact on the company’s sales and operations.
A variable that could have the most effect on the economic performance of the
continent is the high and increasing debt overhang (figure 50), creating a
financial fragility which could lead to a continent wide sovereign debt crisis. A
faster than expected increase in US rate hikes, drastically increase lending rates
for foreign finance dependent countries and another steep drop in commodity
prices contracting government revenues are some of the possible triggers.
In order to evaluate the impact of such a scenario would have on the share price,
the GDP growth assumptions are change to be 50% of the base level and the
expansion levels are assumed to be 75% of the base level. The decrease in
expansion would be less substantial as the fall in GDP growth as Shoprite in the
past as used such opportunities in the past to maintain expansion in order to gain
market share. In such a scenario the Share price would be 209.15 a drop in
16.09% compared to the base case scenario.
WACC
25159 9.18% 9.68% 10.18% 10.68% 11.18% 11.68% 12.18%
7.0% 54954 44207 36858 31521 27473 24300 21748
6.5% 46599 38822 33175 28893 25536 22838 20623
6.0% 40873 34902 30374 26826 23974 21633 19679
Terminal Growth 5.5% 36704 31920 28172 25159 22686 20623 18877
5.0% 33533 29576 26395 23785 21608 19765 18186
4.5% 31040 27684 24931 22634 20690 19026 17586
4.0% 29029 26126 23704 21655 19901 18383 17059
Figure 50: Public Debt level 2013 vs
2016
Source: IMF.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Financial Statements
Consolidated Balance Sheet
ZAR million 2015 A 2016 A 2017 A 2018 F 2019 F 2020 F 2021 F 2022 F 2023 F
current Assets
Excess cash 4219 3533 4242 4242 4242 4242 4242 4242 4242
Operating Cash 2842 3251 3525 3899 4385 4933 5582 6332 7194
Trade and other receivables 5028 5572 5608 8454 7246 8150 9223 10463 11887
Inventories 13 321 15 055 17 794 19 053 20 657 22 372 24 617 27 133 29 924
Current income tax assets 44 146 154 135 152 171 194 220 250
Loans and receivables 606 869 1 321 1 461 1 643 1 848 2 092 2 373 2 696
Derivative financial instruments 0 0 1 1 1 1 1 1 1
Total current Assets 26 060 28 426 32 645 37 246 38 326 41 717 45 951 50 763 56 194
Non current Assets
Property, plant and equipment 15 374 16 908 18 407 21 425 23 802 26 288 29 275 33 256 37 913
Intangible assets 1 458 1 857 2 355 2 381 2 645 2 921 3 253 3 695 4 213
Deferred income tax assets 569 698 859 859 859 859 859 859 859
Held-to-maturity investments 0 0 1 311 1 311 1 311 1 311 1 311 1 311 1 311
Equity accounted investments 178 95 27 27 27 27 27 27 27
Assets held for sale 13 17 119 119 119 119 119 119 119
total Non-current Assets 17 592 19 575 23 078 26 122 28 763 31 525 34 843 39 267 44 442
Total assets 43 652 48 001 55 723 63 367 67 090 73 242 80 794 90 031 100 635
Total Equity 18 893 21 139 27 749 18 873 20 186 23 681 27 942 33 351 39 528
0 0 0 0 0 0 0 0 0
Current Liabilities
Borrowings 4 872 5 124 3 274 10 906 10 762 10 569 10 413 10 245 10 067
Bank overdrafts 3 2 965 5 058 10 345 10 208 10 026 9 877 9 718 9 549
Trade and other payables 17 432 16 590 17 414 20 714 23 294 26 203 29 652 33 637 38 215
Current income tax liabilities 960 574 582 883 993 1117 1264 1434 1629
Provisions 457 454 386 386 386 386 386 386 386
total current Liabilities 23 724 25 707 26 714 43 234 45 643 48 301 51 593 55 420 59 847
Non current Liabilities
Fixed escalation operating lease accruals 846 995 1164 1164 1164 1164 1164 1164 1164
Derivative financial instruments 2 32 0 0 0 0 0 0 0
Deferred income tax liabilities 187 128 96 96 96 96 96 96 96
total Non current Liabilities 1 035 1 155 1 260 1 260 1 260 1 260 1 260 1 260 1 260
Total Liabilites 24 759 26 862 27 974 44 494 46 903 49 561 52 853 56 680 61 107
Total Equity and Liabilites 43 652 48 001 55 723 63 367 67 090 73 242 80 794 90 031 100 635
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Consolidated Income Statement
ZAR million 2015 A 2016 A 2017 A 2018 F 2019 F 2020 F 2021 F 2022 F 2023 F
Revenues 113 694 130 028 141 000 155 973 175 401 197 304 223 277 253 286 287 759
COGS (90 180) (99 372) (107 174) (118 877) (133 685) (150 379) (170 174) (193 046) (219 321)
Gross Profit 23514 30656 33826 37095 41716 46925 53103 60240 68439
Share of profit/(loss) of equity accounted
investments -2 -52 4 0 0 0 0 0 0
Other income 3 283 2 387 2 213 2 597 2 925 3 293 3 727 4 228 4 802
Employee benefits (8 507) (9 499) (10 498) (11 613) (13 059) (14 690) (16 624) (18 858) (21 425)
Other operating expenses (7 384) (10 809) (11 821) (13 034) (14 581) (16 363) (18 439) (20 839) (23 574)
Operating leases Expenses (2 990) (3 486) (3 819) (4 061) (4 529) (5 046) (5 637) (6 302) (7 047)
EBITDA 7 914 9 197 9 905 10 986 12 471 14 119 16 130 18 468 21 194
Depreciation Amortization (1 733) (2 025) (2 176) (2 453) (2 812) (3 124) (3 451) (3 843) (4 365)
EBIT 6 181 7 172 7 729 8 533 9 658 10 995 12 680 14 626 16 829
Income tax (1 848) (1 998) (2 180) (2 013) (2 334) (2 716) (3 195) (3 747) (4 371)
Other operating Income after tax ( 387) ( 579) ( 933) 0 0 0 0 0 0
Net Income 3 747 4 271 4 502 5 175 6 001 6 985 8 215 9 635 11 241
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Appendix
Appendix 1
Appendix 2
Appendix 3
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Disclosures and Disclaimers
Research Recommendations
Buy Expected total return (including expected capital gains and expected dividend yield)
of more than 10% over a 12-month period.
Hold Expected total return (including expected capital gains and expected dividend yield)
between 0% and 10% over a 12-month period.
Sell Expected negative total return (including expected capital gains and expected
dividend yield) over a 12-month period.
This report was prepared by Filipe Emanuel Mendes Lourenço, a Master in Finance student of Nova School
of Business & Economics (“Nova SBE”), within the context of the Field Lab – Equity Research.
This report is issued and published exclusively for academic purposes, namely for academic evaluation and
masters graduation purposes, within the context of said Field Lab – Equity Research. It is not to be construed
as an offer or a solicitation of an offer to buy or sell any security or financial instrument.
This report was supervised by a Nova SBE faculty member, acting merely in an academic capacity, who
revised the valuation methodology and the financial model.
Given the exclusive academic purpose of the research notes produced by Nova SBE students, it is Nova SBE
understanding that Nova SBE, the author, the present report and its publishing, are excluded from the
persons and activities requiring previous registration from local regulatory authorities. As such, Nova SBE, its
faculty and the author of this report have not sought or obtained registration with or certification as financial
analyst by any local regulator, in any jurisdiction. In Portugal, the author of this report is not registered with or
qualified under COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS (“CMVM”, the Portuguese Securities Market
Authority) as a financial analyst. No approval for publication or distribution of this report was required and/or
obtained from any local authority, with the exception of CMVM, which regulates the issuance and publication
of equity research reports.
The additional disclaimers also apply:
USA: Pursuant to Section 202 (a) (11) of the Investment Advisers Act of 1940, neither Nova SBE nor the
author of this report are to be qualified as an investment adviser and, thus, registration with the Securities and
Exchange Commission (“SEC”, United States of America’s securities market authority) is not necessary.
Neither the author nor Nova SBE receive any compensation of any kind for the preparation of the reports.
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
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Germany: Pursuant to §34c of the WpHG (Wertpapierhandelsgesetz, i.e., the German Securities Trading
Act), this entity is not required to register with or otherwise notify the Bundesanstalt für
Finanzdienstleistungsaufsicht (“BaFin”, the German Federal Financial Supervisory Authority). It should be
noted that Nova SBE is a fully-owned state university and there is no relation between the student’s equity
research reports and any fund raising programme.
UK: Pursuant to section 22 of the Financial Services and Markets Act 2000 (the “FSMA”), for an activity to be
a regulated activity, it must be carried on “by way of business”. All regulated activities are subject to prior
authorization by the Financial Conduct Authority (“FCA”). However, this report serves an exclusively
academic purpose and, as such, was not prepared by way of business. The author - a Masters’ student - is
the sole and exclusive responsible for the information, estimates and forecasts contained herein, and for
the opinions expressed, which exclusively reflect his/her own judgment at the date of the report. Nova SBE
and its faculty have no single and formal position in relation to the most appropriate valuation method,
estimates or projections used in the report and may not be held liable by the author’s choice of the latter.
The information contained in this research note was compiled by students from public sources believed to be
reliable, but Nova SBE, its faculty, or the students make no representation that it is accurate or complete, and
accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or of its
content.
Students are free to choose the target companies of the research notes. Therefore, Nova SBE may start
covering and/or suspend the coverage of any listed company, at any time, without prior notice. The students
or Nova SBE are not responsible for updating this report, and the opinions and recommendations expressed
herein may change without further notice.
The target company or security of this report may be simultaneously covered by more than one student.
Because each student is free to choose the valuation method, and make his/her own assumptions and
estimates, the resulting projections, price target and recommendations may differ widely, even when referring
to the same security. Moreover, changing market conditions and/or changing subjective opinions may lead to
significantly different valuation results. Other students’ opinions, estimates and recommendations, as well as
the advisor and other faculty members’ opinions may be inconsistent with the views expressed in this report.
Any recipient of this report should understand that statements regarding future prospects and performance
are, by nature, subjective, and may be fallible.
This report does not necessarily mention and/or analyze all possible risks arising from the investment in the
target company and/or security, namely the possible exchange rate risk resulting from the security being
denominated in a currency either than the investor’s currency, among many other risks.
The purpose of publishing this report is merely academic and it is not intended for distribution among private
investors. The information and opinions expressed in this report are not intended to be available to any
person other than Portuguese natural or legal persons or persons domiciled in Portugal. While preparing this
report, students did not have in consideration the specific investment objectives, financial situation or
“SHOPRITE HOLDINGS LTD” COMPANY REPORT
PAGE 31/31
particular needs of any specific person. Investors should seek financial advice regarding the appropriateness
of investing in any security, namely in the security covered by this report.
The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion
about the target company and its securities. He/ She has not received or been promised any direct or indirect
compensation for expressing the opinions or recommendation included in this report.
The content of each report have been shown or made public to restricted parties prior to its publication in
Nova SBE’s website or in Bloomberg Professional, for academic purposes such as its distribution among
faculty members for students’ academic evaluation.
Nova SBE is a state-owned university, mainly financed by state subsidies, students tuition fees and
companies, through donations, or indirectly by hiring educational programs, among other possibilities. Thus,
Nova SBE may have received compensation from the target company during the last 12 months, related to its
fund raising programs, or indirectly through the sale of educational, consulting or research services.
Nevertheless, no compensation eventually received by Nova SBE is in any way related to or dependent on
the opinions expressed in this report. The Nova School of Business and Economics does not deal for or
otherwise offer any investment or intermediation services to market counterparties, private or intermediate
customers.
This report may not be reproduced, distributed or published, in whole or in part, without the explicit previous
consent of its author, unless when used by Nova SBE for academic purposes only. At any time, Nova SBE
may decide to suspend this report reproduction or distribution without further notice. Neither this document
nor any copy of it may be taken, transmitted or distributed, directly or indirectly, in any country either than
Portugal or to any resident outside this country. The dissemination of this document other than in Portugal or
to Portuguese citizens is therefore prohibited and unlawful.