Johannesburg - South African grocers are trading at the lowest premium to the JSE’s benchmark all share index in three years as consumers struggle to repay debt due to unemployment rising while accelerating inflation curbs profit growth.
The JSE food and drug retailers index declined 18 percent this year up until Friday, to trade at 22 times earnings. The all share index had gained 10 percent for a price-to-earnings ratio of 20. That cut the gauge’s premium over the all share to 12 percent on Friday, the lowest since August 24, 2010, after being valued at more than double the benchmark in June last year.
“The consumer environment has become tougher,” Investec Asset Management equity analyst Diane Laas said last week. “The earnings growth outlook for food retailers is looking slower.”
Shoprite Holdings, Africa’s largest food retailer, is battling the most sluggish sales growth in its main South African market in two years as the economy grows at the slowest pace since the 2009 recession.
Unemployment increased to 25.6 percent in the second quarter, the highest in two years, compared with 24.9 percent a year earlier. Inflation breached the upper end of the central bank’s target range for the first time in 15 months in July, cutting into consumers’ disposable income.
Nearly 48 percent of “credit-active” South African consumers, or 9.53 million people, had impaired debt records at the end of June, while about a quarter of 71 million credit accounts were not paid for three months or more, National Credit Regulator data show.
The stock of Shoprite has decreased 20 percent this year to trade at 24 times profit.
Massmart Holdings, the local unit of Walmart, fell to its lowest share price in almost two years last week after saying first-half profit declined.
Shoprite said last week that it was expanding outside its home market, where sales from 153 stores in 16 African countries jumped by 28 percent in the fiscal year to the end of June. A further 20 stores are due to open on the continent by June next year.
The company traded at a premium to the all share index because of its African expansion, 36One Asset Management analyst Jean Pierre Verster said last week.
Pick n Pay Stores, South Africa’s second-largest food retailer, trades at 34 times earnings, the highest on the four- member food and drug index, even after a 16 percent slump in its stock this year.
Pick n Pay planned to cut management jobs to reduce operating costs after annual net income plunged 51 percent, the company said on August 7.
Richard Brasher, the former head of Tesco’s UK unit, was picked as chief executive in February to lead a revival in sales growth.
“Investors are prepared to pay more for an anticipated recovery in the company’s profits,” Verster said.
Brasher said in April that he was “optimistic” the retailer could improve the underlying margins of the business.
At Massmart, sales growth slowed to 8.9 percent in the 26 weeks to June 23 from 15 percent in the six months to December 23 last year, the firm said last week. The stock, which has slumped 19 percent this year, trades at 22 times estimated profit, the highest valuation on the 11-member general retailers index. - Bloomberg