Upside target: R169.00
Recommended stop-loss: R135.00
Peet Serfontein, Thabiso Mamathuba
Shoprite Holdings, with its combined subsidiaries, is the largest fast-moving consumer goods (FMCG) retail operation on the African continent. The group enjoys a presence in 16 countries across Africa through its various brands including Shoprite, Checkers, Usave, OK, House & Home and Hungry Lion.
Shoprite is the market leader in both South African and African formal retail. The company recently posted an upbeat 1H21 operational update, with a solid performance from RSA Supermarkets on the back of strong top-line growth owing to market share gains. The recently announced sale of the Retail Supermarkets Nigeria is nearing completion, which should bode well for the counter near term.
Technically, a price that is testing the upper range of a declining channel pattern makes the share attractive as an investment option (see the black parallel trendlines on the main chart). This is an early indication that internal strength is developing.
The price remains above its 200-day simple moving average, indicative of a bullish direction.
According to the Relative Strength Index (RSI), the price is overbought at ~R180.00 which leaves some upside potential. This makes our profit target of R169.00 realistic.
The lower panel shows the angle of the trend, and the black line represent the nine-week simple moving average of this angle. A positive angle indicates a bullish trend.
Our entry range is between R135.00 and R145.00. Our upside target is set at R169.00 (+16.5% upside potential).
Time to exit is mid-April 2021 (taking a medium-term stance). Keep the option open to extend the time exit should the price action unfold sideways or reach our profit target in a shorter time.
A price below R135.00 (-6.9% from current levels) remains a major concern for downside potential and is recommended as a stop-loss.
Long-term fundamental view
Shoprite is the clear market leader in both South African and African formal retail.
The group’s fully owned fleet allows for efficiency and margin to be extracted from the supply chain. Full control over distribution also allows for more control from a quality and service perspective.
Centralised distribution is another way through which to extract supply chain efficiency. New capacity has recently been added with the Cilmor DC in Cape Town.
The company recently completed a major IT system upgrade. This should enable the company to regain its competitive edge in South Africa, together with market share.
The strategic push to extend the reach of its upmarket Checkers stores in fresh food is paying off as more stores are converted to the new format.
The company remains sound operationally, boasting a strong balance sheet and high cash generation. Sales growth has recovered following the recent upgrade to its SAP Enterprise, which is expected to result in cost savings and better inventory control.
The company posted a positive six months operational update, with the top- and bottom-line figures being ahead of market expectations.
Sales growth has improved from the 1Q21 update despite the impact of liquor sales restrictions, with the group’s core RSA business growing market share in the Checkers food segment.
While the Supermarkets non-RSA segment remained under pressure in 1H21, the Nigerian business sale is nearing completion, which should be supportive of earnings going forward.
A volatile and uncertain economic and political climate in South Africa and Africa will be the biggest risks going forward, now more so considering the COVID-19 pandemic and lower oil prices.
While defensive to a certain extent (versus other categories), GDP growth and consumer confidence will still be a determinant of growth.