Investors are shrugging off any danger the forthcoming competition appeal court hearing may pose to the Walmart deal. What could go wrong? Massmart CEO Grant Pattison admits: "I don't know. We are in unprecedented legal territory." But he adds: "I believe logic will prevail."
Investors also shrugged off mixed results for the year to June from the 51%-owned Walmart subsidiary. On the positive side, Massmart lifted sales by 11.6% to R53bn in the face of price deflation in many of its operations. Less inspiring was a 10.3% rise in headline EPS to 615,5c/share after adjustment for costs of R409m (182c/share) incurred in the Walmart deal.
The consensus view of analysts polled by I-Net is that Massmart's headline EPS in the next financial year, ending June 2012, will rise 15.7% to 712c. It's a tall order. The weighted average number of shares in issue will be about 5% higher as a result of the deal, and to achieve the forecast will require headline earnings growth of almost 22% to over R1,5bn.
The view also demands a reversal of Massmart's recent pedestrian profit record. Its headline earnings fell from R1,26bn in June 2008 to R1,14bn in June 2010 and then recovered to R1,25bn in June this year. Over the same period SA's biggest retailer, Shoprite, increased its headline earnings by 63% to R2,57bn.
There is no clarity as to which way consumer spending is heading in the short term. "It's uncertain where we are in terms of consumer demand," says Pattison. "The base [set by] last year's soccer World Cup is confusing all the metrics."
However, logic suggests that with the economy slowing, job losses rising and cost pressure on many fronts, SA retail is unlikely to enjoy particularly robust consumer demand in 2011 and into 2012.
Beyond the current financial year, analysts look to Massmart to grow headline EPS by 25% in the 2013 financial year and 20% in 2014. Summing up the optimism, Nedbank Capital analyst Syd Vianello says: "People expect miracles from Massmart. It won't happen overnight." Pattison cautions that the benefits of having Walmart as a parent will begin to be seen only in two years.
One miracle demanded of Massmart is to become a major force in the local food retail market, where a key element of its strategy is its Cambridge brand, focused on lower-income groups. With the acquisition of Rhino - a KwaZulu Natal-based chain of 16 stores that will be converted to the Cambridge brand - there will be 45 Cambridge stores, generating total annual sales of R6bn, says Pattison.
The target is 100 stores by 2014 and sales of R10bn. Also targeted are 20 Makro stores retailing food, and Foodco food sections in 100 Game stores, Pattison says.
It sets the scene for a battle royal in a market where Massmart's competitors are spending billions to meet the challenge. Shoprite plans to open close to 60 supermarkets in SA in the coming year while Pick n Pay will open 44 and is seeking to regain lost market share.
In the lower-income segment Cambridge will meet Shoprite's Usave brand and Pick n Pay's Boxer and Punch brands head-on. Indicating that competition will be fierce, Shoprite MD Whitey Basson says Usave aims to be about 10% cheaper than rival brands. "Usave has a 10% gross margin," says Basson. "Checkers' is 19%."
Though Walmart fever may still drive Massmart's share price higher, it is hard not to conclude that its rating has run well ahead of its medium-term prospects.
For now, Pick n Pay, on its recovery potential, and a resurgent Woolworths appear to be better bets.
Source: Financial Mail
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