SPAR Management Call

SPAR pre-Close Management Contact – Retain Sell 

Current trading bucking the trend but below our expectations

  • H2 sales growth has not seen the same deterioration as peers and is expected to be in-line with H1 levels (9.6%), although below our forecast 12.5%. Gross margin should be in line with expectations (8%) and H2 cost growth should track sales growth post unwind of abnormal costs in H1. We forecast 641c of dil HEPS but are probably 5% too high.
  • Grocery remains tough and slowed marginally in H2 as lower/middle income consumers came under pressure (upper LSM stores are trading better). Higher transport costs are driving fewer store visits but higher average basket size, and fixed dates for social grant payments are intensifying peak and trough spending patterns, affecting retail production cycles and replenishment. Competition remains keen, although there is no evidence of PIK’s recovery playing out at this stage. Build-IT clawed back ground from H1 and, post labour and transport issues, is seeing high single-digit growth and Liquor continues to trade solidly at mid-teens growth levels.
  • African momentum is ticking-up Three new stores were launched in Mozambique (12 planned for next year), the brand will imminently be launched in Angola and a supply relationship should soon be on stream in Kenya. New stores are also being rolled out in Zambia.
  • No change in franchisee health No abnormal stress is noted amongst the franchisees. One new franchise was acquired and one sold during the period and existing franchisees on balance sheet are moving towards profitability outside of 2 which management will need to exit. Two stores in KZN moved to PIK during H2.

Outlook is more of the same namely 9-10% sales growth, stable margins and cost growth in line with sales. Inflation is expected to remain around the current 6%. Dividend policy will remain at 1.45x and buybacks (R150m expected for FY13) will continue into next year.

Please contact the sales team for the full report: sales@noahcap.com