Market approves of Massmart results
The share price rises as group says cost control helped increase of annual sales
Retail and wholesale group Massmart’s share price surged almost 9% after the group delivered a surprisingly satisfactory set of annual financial results despite battling weak consumer confidence.
The share price closed at R155, despite soft growth in the 52 weeks to December.
Massmart CEO Guy Hayward said the company’s performance was satisfactory given that it had been affected by a weak macroeconomic climate, which had resulted in consumers tightening their belts and a reduction in demand.
Sales in SA for the 52-week period grew a mere 1%, boosted by cost cuts as consumer spending power was reduced by weak economic growth and high personal debt.
When including week 53 (the first week of January) total sales came to R93.7bn, which was 2.7% higher than 2016’s R91.3bn.
“But Christmas shopping started late, hence the significant difference in the 52-and 53-week results,” Hayward said.
Dirk van Vlaanderen, associate portfolio manager at Kagiso Asset Management, said that Massmart had done a good job in navigating a difficult year for the consumer, defending operating profit despite a weak top-line performance.
Massmart has 423 stores trading under the Game, Builders Warehouse, Jumbo, Cambridge Food, Makro and Dion Wired brands across 13 sub-Saharan countries.
Total expenses grew only 1.2% for the 52-week period while comparable expenses were 1.3% lower than 2016.
Van Vlaanderen said the group had displayed exceptional cost control in all areas of the business, particularly labour and rental costs.
“This leaner cost base positions the business well if improving consumer confidence leads to better sales growth in 2018,” he said.
Total headline earnings increased by 14% to R1.5bn.
Portfolio manager at Mergence Investment managers Peter Takaendesa attributed Massmart’s better than expected results for both earnings and dividend growth to the strong cost control.
Although Massmart is hopeful of a recovery in SA, Takaendesa said he believed the market would take a longer-term view on the recovery of the South African economy.
“A trend across the retail sector is that product inflation is coming down and that, together with improving consumer confidence, is starting to drive volume growth.
“So 2017 was about pricing and it looks as though 2018 is going to be more about those who know how to grow volume share,” said Takaendesa.
Although Massmart did not unpack the hike in value-added tax (VAT) on consumers, Ron Klipin, portfolio manager of Cratos Wealth, said this could prove difficult in a tight market.
However, Massmart was expecting an improvement in inflation in the next few months due to the one percentage point increase in VAT as well as some increase in food prices off a low base.
“A 4%-5% once-off increase in soft commodity prices should be beneficial for increasing margins, while greater consumer confidence could result in additional spend on higher margin durables,” Klipin said.
Black Friday sales generated a whopping R1bn in sales for Massmart.
Klipin said the momentum gained in online sales “was evidenced by these reaching 15% of sales on Black Friday with 150 collection points”.
Online sales increased 47%. Massmart plans further investments in e-commerce.