Whitey on the budget, poor growth and Eskom

Shoprite enjoyed a steamy 42% share price rally from October to end-January, but the fun appears to be over. This week Shoprite announced half-year results to December which showed trading profit up 11.6% and a 9% rise in net income. The market's found the results as appetising as a tin of cold baked beans, selling the stock down 7% this week. CEO Whitey Basson discusses the numbers

Is Nhlanhla Nene's budget a blow to Shoprite, what with tax hikes, and higher fuel and power levies?

I think as far as the Shoprite people are concerned the budget was actually favourable - an increase in pensions, the social grant, etc, and the tax hikes won't reach the average Shoprite [customer], so I'm not really too stressed about that.

I would have liked to see the minister give a bit of guidance as to what he's going to do with the parastatals, crime and corruption. I think there's a lot of scope for South Africa to grow if all the different ministries and parastatals actually get run ... better.

What are you stressed about?

What does stress me out with South Africa is I'm not sure that we can even get the 2% growth [the finance minister] projected there. What I've seen in the minister's budget is a very well-prepared budget, very conservative, but ... I stress, will jobs be created with this budget or not?

As far as Shoprite is concerned, what is worrisome for the company at this point?

There's nothing: the budget is good for Shoprite as it stands, I'm not worried about that. I have a problem with the long-term position of South Africa, vis-à-vis its neighbours in African countries. I think we shouldn't be in a developed world, 2%-plus growth rate - we should be [in] the 4%, 4.5% plus range.

Budget aside, what is the big headache for Shoprite this year? You said in your results commentary that the second half will make "considerable demands" on management.

On the constraint for Shoprite to run a better business, Eskom is probably the major portion of our problems. We are really worried if we look at the loadshedding schedule that's been announced, and how it deviates from day-to -day, hour-to-hour, I am worried that if you have a real ... Code 4, Red Alert or Black Darkness, et cetera, that can have a major constraint, not just on Shoprite but on the whole of South Africa and, in fact, have a major [impact] on the food chain.

What is Shoprite doing to mitigate against blackouts?

I'm not really sure what [more] we can do. We've got nearly R300-million worth of generators, but they're not designed to run for 24 hours a day. And what do I do with my farmers who cannot even [water] their crops? A lettuce needs water every day and it's all pumped ...

We can do very little except sell dry goods ... and stuff that has been pre-produced, but your perishable areas of the business will go to the dogs within 48 hours.

Your shares have been thumped since you came out with results, the market clearly doesn't like what you released. What do you make of it?

I normally don't deal in shares ... I know the price of chickens, not the Shoprite shares, but you can expect that. The market is so far ahead of everybody ... if you look at the Shoprite share price, that has moved like, R30, in three months from down, up, going down again ... I think there's just a helluva lot of forward-buying and stuff like that because really, by South African standards, the results are actually very good.

What about Africa, though? Whereas it was once the promised land, is it now in fact the biggest risk for Shoprite, given the slump in commodity prices, particularly oil?

No, no, no, no, no, no. If you look at the IMF projections for Africa, they're still all double South Africa's 2%. Nigeria is still 4%, 4.5%, Angola even with the oil price, the IMF has given them literally double South Africa's growth [prospects]. Nigeria's a big economy. Yes, [70%] of Nigeria's government revenue comes from oil but it's [still] a big economy for food retailers [with] 150-million people that earn money somehow. So I'm not worried about Africa.

Sure, but Nigeria was a standout performer for Shoprite, is that still going to be the case?

I think it will be a standout performer, but you must remember that in the past six months Nigeria has had Ebola, they've had the oil price coming off the $100 per barrel mark to $55 ... Then there's Boko Haram shooting people and blowing it up but that's not forever and a day.

There've been a lot of negatives but these hopefully are short-term [issues], we really treat it as something we must cope with and learn how to deal with and carry on as normal.

If there is a persistently weak period for Africa, with commodity prices limping along, can you trade through it and still commit to expanding?

We can trade through Nigeria easier than [we can] trade through South Africa: with a 4.5% growth rate and no competition, it's much easier for Shoprite to make money [there] than in a 2% [growth] area where there's a lot of competition.

The analysts are paid to make money for their clients, so they [take the share price] up and down - I'm not taking too much notice of that as an indication of what they think of the future.

You do seem more circumspect in your expansion plans - you say the group will continue its rollout of new stores but at a more cautious pace.

South Africa is substantially overbuilt if you compare that with Africa. Your customers per shopping mall is way, way lower than anywhere else in Africa.

Your trading margin was 5.23%, which was pretty much unchanged. How resilient is that margin given all the problems facing you?

Our trading margin is not the result of us wanting a high trading margin ... it's a result of our selling prices which we are still the cheapest at, and very good cost controls and business controls.

It's not something that I sit in my office and set up against a blackboard and say "that's what I want".