Shoprite Holdings: African Consumer Powerhouse
Shoprite Holdings Ltd., the South Africa-based supermarket chain, is our single largest holding in the retail industry in our Africa investment strategy. This week the company released powerful operating results for the second half of 2016 that stood out in sharp relief against the widespread malaise of the consumer sector in South Africa. We view Shoprite as a best-in-class operator that is poised to benefit handsomely as supermarkets proliferate across African cities in the coming decades.
These strong results, along with a scrapped plan to merge with retailer Steinhoff, combined to bring investors into the stock, sending it up to within striking distance of its all-time highs. The company grew sales by 14%, headline earnings-per-share (HEPS) by 15% and increased its trading margin from 5.24% to 5.48%. It also raised its interim dividend by 15%.
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The company reported record sales of 71 billion rand for 2H16, a sum that eclipsed the sales total for the entire year of 2011. Sales within South Africa were solid, given the challenges of a soft consumer and a very competitive environment. However, it is the company’s progress outside of South Africa that bolsters our confidence that the Shoprite growth story still has many chapters left. At present, sales outside of South Africa account for only 20% of the total, but they are growing at a much faster rate than domestic sales and are poised to surge in the coming years. The company currently operates in fifteen African countries.
Shoprite’s growth trajectory outside of South Africa keeps us bullish about the overall company’s growth prospects for three reasons. First, sales in the rest of Africa are climbing rapidly (32% growth versus 10% in South Africa). Second, Shoprite has less competition outside of South Africa, as there are fewer large supermarket players with a comparable offering. And third, consumer power is both coming off a lower base and growing at a much faster rate in the rest of Africa than in South Africa.
In two of Shoprite’s important ex-South Africa markets, Angola and Nigeria, sales were up 155% and 60%, respectively in the second half of 2016. And this growth was achieved in what is a very difficult time for these two countries, both of which depend heavily on their oil exports. Both countries are short of hard currency, and Shoprite did an admirable job keeping its shelves stocked in the last year, earning itself many new (and hopefully loyal) customers.
Shoprite, in moving up into sub-Saharan Africa, is securing a beachhead in what we expect to be a rapidly-expanding consumer market in the coming years. As a highly skilled operator with excellent supply-chain capabilities, Shoprite has plenty of runway in front of it across the Continent.
Please do not hesitate to call or email me to discuss any aspect of investing in Africa. My email address is peter@africacapitalgroup.com and my phone number is +1.619.435.1701.
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