RICARDO SMITH: Tailwinds in our local markets

There was a well-received listing of affordable food retailer Boxer on the JSE. Before this there was another interesting listing from pre-owned vehicle retailer WeBuyCars.

The two listings came against the backdrop of a series of delistings from the JSE, which left investors with fewer options in the market. 

WeBuyCars, listed as Transaction Capital, was looking to unlock value for shareholders and protect the business from potential credit defaults stemming from other parts of it.  

Meanwhile, Boxer has been listed as part of embattled food retailer Pick n Pay’s turnaround strategy to get significant cash flow and reduce its debt levels.

Notwithstanding the circumstances of the listings being less than ideal for the parent companies, the opportunity for investors remains a strong one. 

Boxer has proven to be a resilient business against a tough macroeconomic backdrop; low consumer confidence and spending, elevated food price inflation, high levels of unemployment, rising interest rates and reducing disposable income.

This is mainly due to the business playing in the affordable segment of the market, predominantly distributing household essentials unaffected by economic cycles. It has grown rapidly and plans on doubling its footprint over the next five to 10 years.

Interestingly, Boxer is now seen as more valuable than parent company Pick n Pay by the markets.

Meanwhile, WeBuyCars has benefited from the rising costs of new vehicles for SA consumers as there have been chip shortages in the manufacturing of these, as well as a weakening of the rand, making imported vehicles more expensive.

The concerns over these counters, and most counters that enter the market for the first time, is whether they can maintain their valuations in the long term and even rerate upwards.

Another challenge often faced by these counters is whether they can generate sufficient liquidity for investors not to move the share price against themselves when looking to trade the share. Prime brokers are selected to book-build before the listing, but once the share is listed it must generate its own liquidity in the market from participants. 

Pick n Pay and Transaction Capital are not the only domestic facing counters that have had their fair share of headwinds from the tough economic environment, unreliable electricity supply, logistics and transport challenges, as well as margin pressure and declining sales volumes.

From our perspective, these have presented great buying opportunities in the market for some quality counters, and with recent tailwinds we have already seen some value unlocked through strong, positive returns coupled with forward positive revisions of earnings growth forecasts.

The finance and retail sectors have experienced the most significant benefits from the rate cutting cycle, the easing of load-shedding, increasing policy certainty and low levels of inflation.

The introduction of the two-pot system in the pension fund industry has also provided positive effects for these sectors. The all-share index has reached record levels, despite challenges in the resource sector due to difficulties in the Chinese property market. 

Some of the domestic counters that have done well in our portfolios include retailers Mr Price and The Foschini Group. We have also added our exposure to some of the banks while taking positions in food retailers like Shoprite and Woolworths, which is a combination of food and apparel.

These counters have increased their digital footprint, with online sales growing in double digits and increasing as a percentage of total revenue. Mr Price’s acquisitions of Studio 88 and Yuppiechef have prospered, while The Foschini Group has succeeded by increasing traffic density and managing credit sales carefully. 

Woolworths has a great quality food business, and its offloading of struggling clothing brand David Jones was a positive. However, it is still facing some headwinds in its Australian markets with its Country Road brand, as consumer pressure continues to be strong with consumers opting for more affordable products. Long term though, its current product mix is well diversified, with great quality brands and a decent dividend payout to support total returns as the Australian business conditions improve. 

Shoprite is a quality business with strong diversification across segments of the market, geographies and products. Reducing costs has been essential to maintaining and expanding market share during consumer downturns, resulting in positive earnings growth. 

Market opportunities continue to exist both for established counters and new entrants. While some sideways movement is expected in the short to medium term, double-digit returns are anticipated over the long term. 

• Smith is chief investment officer at Absa Investments.