Local retailers' share prices surge

Overseas investors buy stock as shoppers stay cautious, writes Adele Shevel. THE share prices of many JSE-listed retailers are powering ahead in spite of a cautious consumer spending outlook.

The surge is being driven largely by an increased proportion of foreign ownership.

A report from financial services group Cadiz this week said South African retailers have re-rated relative to their competitors elsewhere. But Cadiz Securities retail analyst Shamil Ismail cautioned that this may be unwarranted and could be followed by a derating.

He said foreigners prefer to hold shares for short periods as it lowers their currency risk.

South African clothing retailers reported superior returns on equity, which Ismail said was due to aggressive share buy-back programmes and strong earnings growth over the past three years.

Despite the note of caution, foreign ownership of local retailers continues to gain momentum.

Massmart, which has always had a relatively big overseas ownership base of about 40%, now has close to 60% foreign owners. Shoprite's foreign ownership base has shifted from 25% to 35%, Truworths is about 50% and Foschini is between 35% and 40%. Furniture retailer JD Group is about 40%, while competitor Lewis stands at about 30%. Among the food retailers, Pick n Pay and Spar have a smaller proportion of foreign ownership, with Pick n Pay at just less than 10% and Spar at just under 20%. Clothing retailers Mr Price and Woolworths each stand at about 20%.

Most recent interest related to foreign ownership revolves around the prospect of Wal-Mart entering the South African market, which analysts believe would be either through Shoprite or Massmart - though others believe the relatively small size of the South African market could be a deterrent.

Shoprite has a larger footprint in Africa, but Massmart does not have a dominant shareholder which might make it an easier entry point for an overseas buyer.

"South Africa is considered the largest economy and the gateway to Africa. It's about Africa when it comes to Wal-Mart," said BoE analyst Shanay Narsi. Narsi said South African retail companies still trade at about a 20% to 30% discount to emerging-market peers because "less is known about the (local) companies".

A week ago, Pick n Pay's share price was up 46% over the past 12 months. Despite posting mediocre results last week, on Friday the price was still up 32.5% since April last year.

Analysts attribute this to the fact that it continues to pay a strong dividend and that it is a trustworthy brand.

The food retailer is playing catch-up with competitors, notably Shoprite, which continues to deliver strong returns, and has shown the lucrative side of expanding into Africa, said Nedcor retail analyst Syd Vianello.

Pick n Pay is adopting a more cautious approach to Africa while it is still committed to Australia, where it has been for a decade.

Many analysts believe the food retailer should exit Australia, where it does not have the scale needed to compete with the big operators. They doubt the retailer will ever make a substantial return Down Under.

The group has been slow to move into centralised distribution, which makes servicing stores more competitive, said Absa Investments analyst Chris Gilmour.

"Pick n Pay is woefully behind the curve, but they're making up lost ground. The management team is almost starting at the beginning. They're reinventing Pick n Pay; it's not just a makeover.

"Patience is wearing thin among certain investors. But investors believe when it comes right it will do so with a vengeance," said Gilmour.