The entry of international players‚ Wal-Mart‚ Zara‚ Cotton On and Topshop will likely result in increased competition and potentially lower returns being generated by local retailers than what has been seen for the past few years‚ Wilhelm Hertzog‚ portfolio manager at RE:CM said on Wednesday, 15 August 2012.
While South African retailers are typically very strong businesses with world class management teams‚ the share prices of these companies currently price in almost no potential for less than perfect long term outcomes.
An example of this is the Datastream SA retail index‚ which is trading on all time high price to book values and P/E ratios one standard deviation above long term average‚ with operating margins at close to all time high levels.
According to RE:CM‚ it currently favours offshore retail shares such as Carrefour‚ the second largest retailer by sales globally‚ and the largest in France.
"European retailers in general are going through a difficult time‚ given the macro-economic environment in the eurozone. As often happens‚ the poor recent results and weak short term prospects for these business have resulted in share prices being driven down to levels that increasingly look like attractive value to us‚" Hertzog said.
Because of the negativity prevailing in Europe‚ it is now possible to buy a high quality business like Carrefour for a substantial discount to just the value of the properties that the company owns‚ with the retail business being assigned no value by the market.
Due to strong bargaining power with suppliers and economies of scale in distribution‚ food retailers with large market shares in the markets in which they operate have historically generated very good returns on capital.
"Carrefour is currently trading at about 0.25 times enterprise value to sales. The comparable metric for similar retail businesses in SA ranges from about 0.5 times for Pick n Pay‚ to more than 1.5 times for Woolworths. On an enterprise value per square meter of trading space basis‚ investors are currently paying just more than US$2‚000 per square meter for Carrefour‚ compared to anywhere from $4‚000 (Pick n Pay and Massmart) to $10‚000 (Woolworths)‚" Hertzog said.
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